Should we bail out the automakers?

An old college friend of mine, who is at least as far to the left as I am to the right, recently emailed me this Thomas Friedman column with the title "it freaks me out when I agree with this guy". While there are some things in the column I disagree with, there are also some things I agree with.

My initial reaction to the idea of bailing out the car manufacturers was "hell no". The libertarian in me - the same part of me that finds nothing wrong with payday lenders and advocates legalizing the sale of human organs - thinks businesses should stand or fail on their own merits.

But this post from VariFrank got me thinking more about it. He doesn't see a problem with the car companies declaring bankruptcy - after all, lots of other companies have emerged from bankruptcy, like United Air Lines. The problem with this line of thinking is that car companies are different from retailers or airlines. They sell a product that people spend a large portion of their salaries on, one of the biggest purchases they make. They have to consider things like resale value, if the company will be around to honor the warranty, if they will be able to buy spare parts for it. If GM or Ford or Chrysler go into bankruptcy, they are done. Dead. Never coming back. Because nobody wants to plunk down an amount of money with 4 zeros on the end on something that there is a significant chance will be worthless.

So how did the automakers get where they are? I blame three things:

1 & 2) a combination of bad luck and bad decisions. Yes, car companies have long been focused on making gas using trucks. But this wasn't completely irrational - those trucks, until a few months ago, were selling like hotcakes (possibly better, because I've never actually seen anyone buy a hotcake) and were hugely profitable. Yes, Honda and Toyota have long made great, small cars. But they started out in the small-car business because that's what people in Japan wanted, not because they had some magical insight about gas prices thirty years hence but rather because that's what sold in their home market. Sure, you can pat Toyota on the head for making the Prius, but they also make SIX SUV's (RAV4, 4Runner, Highlander, Sequoia, Land Cruiser, and FJ Cruiser), and two pickups, both of which keep getting bigger every thime they redesign them. Detroit has made some decent small cars, but nobody buys them - and it didn't make sense for them to push them when they could sell an SUV or pickup and make 3x the profit.

But Detroit has also made a bunch of stupid moves. I've complained a few times in this blog how short-sited I think it is that Ford has neglected for years and is dropping after next year the Ranger, their small pickup (I own an '06), after next year - even though a small, cheap, gas-efficient pickup seems like a great niche product. They have introduced tons of cars that make people wonder what they were thinking like the Pontiac Aztek (although I admit, I loved the idea of a tent in the back). But more than that, their cars often seem like they would be great, if they paid attention to a few more details. I drove a rented Chevy Cobalt to Indiana and back in the spring, and was actually a really good car, but it had a bunch of small annoyances - a radio so complicated I needed to consult the owner's manual, despite having a Master's degree and several IT certifications, cupholders that couldn't hold a large McDonald's cup and were blocked when I plugged my GPS into the power socket. And then there is reliability - before the Ranger, I owned a (Mexican-built) PT Cruiser that suffered every electrical gremlin known to man, ranging from a burned out gauge cluster to a dead transmission controller to an airbag light that would come on when it rained.

3. The unions. They have added a ton of costs to the domestic car companies. They have a gold-plated healthcare plan that almost anyone would envy - no copays, free prescriptions, and it carries on after retirement. (Megan McCardle has a good pose here about why Friedman's claim that the auto makers should have argued for universal healthcare is wrong). They have stipulations that require workers be paid for not working, make it hard to promote people based on merit or fire people who deserve it, and generally make it unprofitable to make cars.

So where do I stand? I'm starting to be more sympathetic to the idea of a bailout, but I agree with Friedman (something I don't find myself saying often) that it would need to include massive changes to union and dealer agreements, be run by people with actual business experience, and be privatized as quickly as possible. The thing is that just giving them cash doesn't solve any of the 3 problems I've mentioned above - it won't fix the high costs of the union, it won't make them make better product, and it won't help their bad timing. If anything, it might make all of those things worse - because the government won't want the bad publicity of coming down on the unions, and because if the companies know they will be bailed out, they have less incentive to get products right. If it could be structured like WSJ proposal that Friedman sites, I'd be for it. But I'm not confidant that that could happen.

As far as Friedman's idea to include a requirement to make all the cars run on cellulose ethanol - no. Tying their future to one particular technology is exactly what the government shouldn't do.