The consequences of failure
On top of the disaster of the banks and financial institutions, the three remaining American automobile manufacturers are all reporting huge losses and are on the verge of collapse. As a result of a year of high gasoline prices, followed by consumers afraid for their jobs and unwilling to buy, the storage lots at the factories and all their dealers are flooded with unsold cars, large and small, especially large vans and SUVs.
There is currently a debate whether the government should help the automobile industry. The case is made by some that private industry should be allowed to fail. However failure of the three remaing American car manufacturers would start a catastrophic sequence of events.
Dozens of suppliers, dealerships, transportation companies and numerous other businesses would lose their main source of revenue, many would be driven into bankruptcy. Within weeks the number of unemployed would increase by two to three million, on top of the seven million already out of work. This would certainly drive the country into deeper and longer lasting recession.
There is a precedent for such a rescue operation.
In 1979 the government of Jimmy Carter provided millions of dollars in loan guarantees to the Chrysler Corporation, which was then on the verge of bankruptcy. This move was heavily criticized by Republican Congressional leaders, and by some Democrats.
However, under the leadership of Lee Iacoca the company recovered and for over 20 years was very profitable, and repaid the taxpayers with billions in tax revenue that would otherwise have been lost. This was the success story of government backing a company in trouble.
Whom to blame?
The American automobile manufacturers are blamed by the critics and the media for their misfortunes. They have been criticized for building large gas guzzling cars and SUVs. However it should be noted that all three of them also built small economical cars. Unfortunately, Americans, used to cheap gasoline, have always preferred large, powerful vehicles. In fact the Japanese and Koreans who initially gained their foothold in the American market with small cars laden with gadgets, were only able to achieve large volumes after they, too, produced larger vehicles with higher horsepower. In fact most of them introduced SUVs and large vans in the 1990s to compete against the very succesful and popular Chrysler and General Motors products. With the single exception of Volkswagen, none of the European lower horse-power cars were ever popular in the United States.
Unfortunately the American manufacturers are also burdened with high wages enforced by the unions, millions of retired employees all living on fully funded pensions and high health insurance premiums for both current workers and retirees. Their competitors, particularly Japanese and Korean, are not saddled with these burdens.
What needs to be done?
Of course a rescue will not reopen assembly lines already closed down. It is essential that they be changed over to produce new, smaller, fuel efficient models. Notably General Motors has already announced new lines for the 2009 year, fuel efficient and some capable of running on alternative fuels. They have also demonstrated prototypes of electric cars to be in production for the 2010 year. The media have praised all these new models. Incidentally for alternative fuel powered cars to be viable, the oil companies must make the fuels available at their service stations. So any rescue operation for the automobile companies must be accomanied by government pressure on the oil companies. The latter, after several quarters of sky-high profits, are certainly financially capable of making that investment.