No End in Sight

Back in October, I disclosed my deep-rooted doubts in the success of the $700 billion “Emergency Economic Stabilization Act” and my fear of an ever increasing instance of government bailouts for any and all companies or industries that held favor with Congress and the President.

Unfortunately, I’ve been proven right.

In September Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson said they would comply with Congressional demands for transparency in the run up to passage of the Troubled Asset Relief Program. But as Bloomberg [1] reported Monday, “the Federal Reserve is refusing to identify the recipients of almost $2 trillion (emphasis added) of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.”

I feel as if I am talking to a wall when I expound on details like these. We truly are an ADD society, for shame. Where is the outrage? Has everyone already forgotten about the largest government intervention in the U.S. economy, ever? This is not the Fed’s money, folks. The Federal Reserve has no assets; that $2 trillion (with a ‘T’, mind you) was borrowed or printed, meaning WE paid it. The evil that are central banks is a topic for another day, so let me move on to a more pressing subject.

In case anyone failed to notice, which is understandable with the impending coronation of our dear leader Obama, General Motors, Ford, and Chrysler have all petitioned Congress for another infusion of taxpayer funds to save them from failing. It was only September of this year they were given $25 billion and they are back again, this time asking for another $25 billion.[2]

The Detroit automakers are certain that this time, finally, they can turn things around and become profitable. $25 billion just was not enough, but $50 billion should do it. House and Senate majority leaders Nancy Pelosi and Harry Reid recently sent a letter to Paulson insisting that “a healthy automobile manufacturing sector is essential to the restoration of financial market stability, the overall health of our economy, and the livelihood of the automobile sector’s workforce.”[3]

From an economic standpoint, Pelosi and Reid’s statement cannot in good faith be taken seriously. It is patently inaccurate but unfortunately, people are uninterested in economics and will stop reading. From a philosophical standpoint however, I may be able to retain interest just long enough to make a few points.

Let’s consider the impact of GM ceasing to exist – highly unlikely even if they declare bankruptcy. Hypothetically, GM would close its doors and all 266,000 workers[4] would be unemployed, never to find work again, or so GM would have the public believe. GM maintains that it is really in the best interest of the country and economy to continue to support their failing business model.

The basis of GM’s claim is essentially that they are too big or too important to fail due to their massive labor force. But how massive is their labor force relative to other American companies? Some perspective: Target, AT&T, General Electric, IBM, Home Depot, McDonald’s, Citigroup, Kroger, Sears, and Wal-Mart all employ a larger workforce. It is also worth noting that United Technologies and Verizon all employ nearly as many workers as GM.[5]

It must be asked then, should the government bail out this entire dozen of companies? And if so, at what cost? If GM is too big to fail, then surely Wal-Mart with their nearly 2.1 million employees is more important than the automaker. I highly doubt Wal-Mart would be received with such sympathy by Congress or the American people if they were the ones looking for a government hand out. By GM’s argument however, Wal-Mart is 7 times more worthy.

The same situation applies to Ford. While Toby Keith’s favorite truck maker has not been as vocal or whiny as GM, they have asked for their share of the “free” money as well. However, Exxon Mobil has 139,000 less employees than Ford, but everyone wants to tax Exxon’s “obscene profits.” If GM’s logic is to be applied here as well, the auto makers should be facing more than twice the marginal tax rate of the oil companies. I mean, it’s only fair right? GM is big enough, they can handle it.

Am I being unfair to the Detroit automakers? Not at all, because competition is harsh and I do not like being robbed to support failure. Yes, they employ a lot of people and there are a lot of companies and workers indirectly dependent upon them who supply parts and service for the Big Three. But it should be clear by now that the current ownership and management of these companies are not able to keep them profitable in the face of what consumers want and what their foreign competitors are more successfully able to deliver.

It is incredibly unethical to distribute tax dollars to private companies that cannot survive on their own. But most importantly, the Detroit three do not have the luxury (if it can be called that) of claiming their troubles are an industry-wide problem. If that was the case, Honda, Toyota, Volkswagen, and the rest would all be in Washington looking for their bailout.

If the Detroit automakers cannot make it on their own, then the buying public is basically saying that they think their product is not as good as their rivals’. Falling profits and losses are meant to be a signal in the market to inform producers that they are doing something wrong. They may be making the wrong product, or in ways that are too costly in terms of what they can sell it for, or they are not keeping up with the innovations and improvements being introduced by competitors.

Falling profits and losses are meant to be a wake-up call: Start getting it right, or you should not and will not be in business. Bailouts in general and this planned multi-billion dollar bailout for the Big Automakers will only prevent those market signals from working as they are supposed to in a free society. Even if the government gives GM a check every week, there will come a time when no amount of government money will be enough to save them.

1 (return) Bloomberg: Fed Defies Transparency Aim in Refusal to Disclose
2 (return) New York Times: G.M. Says U.S. Cash Is Its Best Hope
3 (return) The Street: Pelosi, Reid Want to Widen Bailout to Detroit
4 (return) General Motors company profile
5 (return) Fortune 500 for 2008

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