Should we bail out the U.S. auto industry?

November 19, 9:49 AMEconomic Policy ExaminerJoseph Hight

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The 2011 Electric Chevy Volt - a model you could see if GM survives.

This is a tough one.  I wish I could duck the question, but as an economist interested in public policy, I need to take a stand. So here goes.

Yes.  Too much is at stake, too many lost jobs – one estimate is 2.5 million lost jobs in 2009 (another put the number at 3 million)- if there were a 50 percent reduction in U.S. auto maker production.

In an economy with a 6.5 percent unemployment rate and rising, it is too great a risk for the government to sit idly by while an additional 2.5 million jobs disappear.  But a bailout needs to be fashioned with care, so that the competitiveness of the U.S. auto industry is improved over the long term.

First, we must use part of the $700 billion bailout package to provide bridge loans to enable the auto companies to meet current expenses in order for them to avoid bankruptcy, but only on the condition that auto company management and the United Auto Worker leadership agree to meet with the top government officials, both in the executive branch and in Congress to fashion a strategy for a restructuring of the industry.

And here is the deal that will need to be struck.  The UAW will need to get its members to accept substantial cuts in pay and benefits – far better than no job at all.  The government will need to pass a national health care plan for the nation that will also relieve the auto makers of a substantial part of its cost for health care to its workers and retirees.  And the government will need to pursue a policy of stabilizing gas prices using the gasoline tax, first keeping gas prices at the pump from rising until we get through the current crisis, but gradually increasing them over time and keeping them stable by varying the gas tax, so as to encourage consumers to want fuel efficient autos.  Then the auto companies can count on and plan for an increasing demand for such vehicles, without being seesawed by wild swings in gas prices.

That is the deal that will have to be struck, and there must be teeth in the agreement so all parties stick to it.

Otherwise, let the industry go.  Let’s suffer the consequences now, because if such a deal is not made, America will lose the industry anyway.  We will still get automobiles, but they won’t be made by American companies.  And we will recover from the lost jobs, but only after we go through an awful bout of misery and despair.

The U.S. big three are not the only auto makers in distress.  Check this out on Honda in Alabama.