Questioning Authority: Mike Robinson on the Detroit Bailout

Congress is holding hearings this week on whether to give Detroit automobile manufacturers the $25 billion they seek to bail them out of the severe liquidity crisis they’re facing. Questioning Authority checked in with economics professor Michael Robinson for his quick take on what’s at stake.

QA: To what extent have Ford, Chrysler, and G.M. brought their present woes on themselves, and to what extent are external factors beyond their control responsible?

MR: Well, they made a lot of big SUVs and trucks to avoid EPA car mileage standards and--wow--the price of gas went up to over four dollars a gallon and no one bought them anymore. Who would have thought that would have happened? Oh yeah, it happened in the 70s and we bailed out Chrysler the first time. And yeah, I bought my first high-mileage Toyota Corolla in 1979.

Oil peaked in late summer 2008 and then SUV sales went down. I am sure some of Detroit’s problems have to do with the overall financial crisis, but not much, I would say. Toyota car sales were down 14 percent in October; Ford SUVs were down 50 percent.

Green Car Congress (see link below) has a lot on this subject. Basically, it’s not really a car thing.

QA: Michigan governor Jennifer Granholm has said that the auto industry supports one out of ten jobs in the U.S. Is this statistic accurate? What will the repercussions be if G.M. and the others fail or significantly contract operations?

MR: Personally, I think that it would end up being really good for Honda and Toyota and other foreign automobile manufacturers who are continuing to open plants in the U.S. A June 22, 2005 article published in the International Herald Tribune (see link below) indicates that in 2005 one-fourth of U.S. auto workers worked for foreign companies. If one of the U.S. companies were to fail, the foreign auto makers would get more than one-quarter of U.S. auto workers. I don't mean to be unsympathetic to the workers. I think all workers should have transitional assistance when companies fail (to no fault of the workers), but to give badly run companies money to stay in business in the name of helping the workers doesn't make sense. The New York Times blog Economix (see link below) offers more detailed information.

QA: The Bush administration has said “no” to Detroit’s pleas for help. Obama said he would support some form of assistance. Is this a good idea? Why or why not?

MR: I don't know what Obama actually supports. But if the automakers need a loan--which they normally would have been able to get without the financial crisis--I could see giving them a loan, but not a bailout.

QA: G.M.’s CEO Rick Wagoner says his company is losing $2 billion a month and will not be able to pay its operating expenses by the end of the year without financial assistance. According to the New York Times, Wagoner received $24 million per year in 2006 and 2007 in salary, stock option grants, and other forms of compensation. He says he has no intention of stepping down. Is it time for a change of leadership? And a leaner pay package?

MR: I think telling companies how much to spend on CEOs is like telling the Yankees they can't spend x dollars on a center fielder. Any company should be able to do what it wants. If stockholders don't like it they can sell their stock. Where does micromanaging end? Should we tell them not to make SUVs? Isn't global warming worse than overpaid CEOs?

Related Links:

Green Car Congress

International Herald Tribune

New York Times

Michael Robinson - Faculty Profile

Department of Economics