The "what If’s" of a Big Three Bailout


            The condition of our economy today is the worst it has been in decades.  The recession can be felt in all levels of the market place, some worse than others.  Perhaps one of the most prominent places this recession is taking its toll is in the automotive industry.  While the foreign players of this market (Toyota, Honda, etc.) are only recording minor losses, the Big Three are facing the worst financial situations in the history of these three storied corporations.  General Motors, Ford, and Chrysler are all experiencing huge setbacks in sales, combined with large costs, which have led to substantial and just about irreversible losses.  The CEO for GM, Rick Wagoner, when appearing before Congress about the situation of his company was quoted as saying the situation is a “catastrophic loss.”  Chrysler CEO Robert Nardelli had this to say of a potential bankruptcy of the big three; “2.3 million-to-3 million in lost jobs [at the car makers, dealers, suppliers and associated businesses], $265 billion-to-$400 billion in lost wages and $100 billion-to-$150 billion in lost government [tax] revenue.” 

            It has been estimated that GM’s cash flows won’t last through the end of 2008, and many are skeptical of the lives of the other two Detroit players.  With bankruptcy right around the corner for all three players, they have turned to the government for help.  The “Big Three Bailout” has been the focus of the news for the past couple of weeks as many know. However, many do not know what positive and negative outcomes would result from the bailout.  

The pros associated with the bailout are able to bring stability by keeping the same auto market in the United States. GM, Ford, and Chrysler are seeking a total of $25 billion to help re-tool auto plants, which would hopefully enable them to turn the corner and get out of this recession in the auto industry.  If the government were to grant this relief we would be able to keep competitive prices in the industry.  The biggest issue with the Big Three right now is that they are not producing an overall fleet that is efficient on fuel, thus turning many consumers away in this time of unsteady gas prices.  In order for the Big Three to switch to more efficient vehicles, they would need to re-tool their plants to produce more cost efficient vehicles, which does not come at a cheap cost.  The re-tooling is completely necessary because without it, they would go under. Hundreds of thousands of jobs and revenue would also be lost and would only contribute further to the already declining economy. 

When looking at how consumers would look at the bailout, researchers discovered that eighty percent of consumers would not purchases automobiles from the Big Three if they were to go into bankruptcy. Thus consumers get a feeling of security more with the government’s bailout than if they were to be left to go into bankruptcy. The decrease in the amount of taxes paid by the automakers would be substantial. Not only would the taxes paid directly by the companies decrease but personal income taxes paid by employees would fall as well. It is estimated that the total taxes received by the government would actually decrease by over $40 billion.

Other companies will also be affected by the bailout. Resources used in the construction of vehicles, such as iron framing or copper wiring, would cause those companies to decrease their profits. With less demand from the Big Three companies those companies may even need to decrease their workforces and as a result increase unemployment even more. More unemployment may bring more house foreclosures and our economic standing will only become weaker.

As with all economic dilemmas there are always two perspectives. While there are some beneficial factors that may come with the government’s bailing out the Big Three automobile companies, there are still detrimental reasons why they should not. One of the biggest groups affected by the bailout would be the employees. If the government decides not to bailout the companies, over 240,000 employees directly employed by the company alone will be laid off. The money received will not even be enough to sustain the amount of employees they currently utilize. Compared to foreign automotive companies, the Big Three have almost three times the amount of employees. To compete, they would have to lower costs meaning their labor costs would be one of the first costs to downsize. Many of their unemployed, therefore, would be consumed by the foreign companies. Those employees would then find themselves having to settle for jobs with lower wages and fewer benefits since the foreign companies are not unionized.

            Ford, Chrysler, and General Motors will not miraculously be cured of their problems with the acceptance of the bailout either. With the economic condition diminishing daily, many consumers are finding the best ways to save as much as they can, however they can. Gas prices are one expense that consumers feel they have control over and in which they feel they can save the most. Therefore, the demand for vehicles with low gas mileage will never benefit the Big Three companies when most of the vehicles they sell are not gas efficient. There is no sign of the economy’s downfall turning anytime soon either. Families, who can not afford Big Three automobiles today, will therefore be unable to afford them even if the companies are bailed out. Other families who could afford their cars are saving more which is leading them away from The Big Three signature vehicles, the more expensive trucks and sport utilities vehicles. Even after consumers became more savers than spenders, General Motors, Ford, and Chrysler stand by their gas guzzling trucks and overly expensive SUVs while the own executive spend lavishly themselves. When meeting in the capital to discuss the bailout, each executive took their own private jet on the expense of the company while the plan they came with was not prepared and future initiatives were not even evident. If the government does decide to correct their spending mistakes, who is to say they can even reduce their spending when they show no interest while on the brink of bankruptcy.

            With there being both good and bad points to both sides of the story, the relief lies in the hands of the government. With both sides having strong arguments and reasons for either supporting the company of letting them crash and burn, both have the best interest of the country at heart. The security of the employees, those of the Big Three and other related companies, the consumers and the government welfare itself all are being accounted. One group not being considered is the Big Three chief executive officers and other executive board members. While everyone else is suffering, all of them are living uninterrupted lives. With no plans of making dramatic changes to the demand of the consumers due to higher gas prices or making changes in their own useless spending, the CEOs are the only ones that should not get any sympathy.

With all the opposing information, the government is uncertain as to how to proceed.  Should they shell out a little more relief (a little in the reality that they have already planned out relief of over $700 billion) or should they let the Big Three crash and burn and move forward from that?  What they decide is out of our hands, but we as taxpayers must be prepared to either pay more for our vehicles if the Big Three go under, or pay a little more in taxes for their relief and essentially stabilize an uncertain market.


Source by Runyen, Mountz