December 5, 2008

December 5, 2008 | Commentary on Political Thought

Why We Should Not Bail Out Detroit

Now that the Christmas season is in full swing, it seems like everyone is busy working on their wish list for Santa Claus. Among them are our nation's automakers, looking to lawmakers on Capitol Hill for a $25 billion dollar loan they hope will make this a merry Christmas.

But do automakers really need a bailout? A close look reveals the answer is no.

Last month, the CEO's of the three major (General Motors, Ford and Chrysler) American carmakers jetted to Washington to ask for help. They failed to make a good case, so lawmakers asked them to go back to the drawing board and come back after Thanksgiving with a better plan.

Perhaps sensing the giving spirit of the holiday season, the CEOs returned this week to Capitol Hill, hoping for a better ending than their last meeting.

To automakers, it's lawmakers who oppose the financial assistance who are the real Grinches. According to the CEO's testimony, the slumping economy has hit automakers particularly hard.

Pointing to their grim financial records, the executives poured on a heart-wrenching story of how their cash-strapped companies are in dire straits and close to bankruptcy. And to be sure, the facts confirm the bleak outlook facing automakers, underscoring just how bad it is for this manufacturing sector.

But a more thorough look at how the "Big Three" (Chrysler, Ford and General Motors) got to this point reveals why the automakers themselves are largely responsible for their failures. As my colleagues James Gattuso and Nick Loris point out in a recent paper, the industry made a number of poor decisions well before the recent economic downturn, beginning with their dependence on gas-guzzling Sport Utility Vehicles (SUVs) for profits.

While profitable in the short term, these same automakers are coping with the reality that consumers want more fuel-efficient vehicles in light of fluctuating gas prices and heightened concern for the environment.

Of course, there are other reasons Detroit is facing this predicament. The fact that automakers are on the hook for expensive health care and pension packages is also a major problem, but one that a bailout wouldn't address anyway.

The basic premise is simple: Automakers in Detroit have been reluctant to embrace the changing landscape facing their industry for some time now, and reality is finally sinking in.

When President-elect Obama is sworn in on Jan. 20, he will inherit an approximate $10 trillion total outstanding debt in one of the most turbulent economic times our country has faced in a long time. Rather than reward poor decision-making, lawmakers on Capitol Hill have a real opportunity to lay down an important marker for companies looking to the federal government for assistance.

If lawmakers do approve the proposed financial rescue package, automakers will see little incentive to retool their business model and will only delay the inevitable. A sounder approach would allow some of the automakers to file for bankruptcy and re-structure and re-organize their contracts while reducing or consolidating debt.

Sometimes the best step to a full recovery is accepting reality. No one wants to be a Grinch at Christmas, but the federal government shouldn't be in the business of promoting bad behavior.

Israel Ortega is a Senior Media Services Associate at The Heritage Foundation.

About the Author

Israel Ortega Contributor, The Foundry
Accounting

Related Issues: Political Thought

First appeared in the  El Diario La Prensa