CRP Blog

Saturday, December 27, 2008

Bailout? How Washington Hurts the Auto Industry

As the new Congress convenes in a few weeks, attention will return to the federal bailout of the Big Three American automakers. As our representatives begin to debate the merits of a bailout in the context of the future of the American auto industry, it's worth noting just how the federal government has put this giant American industry at a disadvantage.

If a bailout is to come (it appears likely), should it not be coupled with changes to federal law to do less damage to the industry that is being rescued?

Let's keep in mind that American workers do just fine building cars. If that wasn't the case, then BMW, Toyota, Mercedes, Honda, and other foreign-based companies would not have built manufacturing facilities here.

If the federal government wants to see a prosperous American auto industry, which of course we all do, then let's recognize the role the federal government has played in harming the industry in the first place.

One problem goes all the way back to World War II, when federal wage controls (imagine that, the federal government dictated how much a company could pay a worker) created an incentive for companies to attract new workers through generous benefits packages that were considered outside of the scope of the wage controls. Over time, benefits became so bloated that today GM is paying for the health care of a million people. Think about that.

Meanwhile, the Big Three are struggling to increase productivity despite a labor contract with the Untied Auto Workers Union that can be measured in pounds - 22, to be exact. You can just imagine what kind of silliness is in there.

Speaking of the UAW, it's no coincidence that the foreign automakers prefer to build their plants in states where compulsory unionism is prohibited. Mercedes is in Alabama. BMW is in South Carolina, and so on. Given how union contracts have put the Big Three at such a competitive disadvantage, the foreign manufacturers sought to avoid the same constraints.

On top of union work rules and benefits that are way out of line with their competitors, the auto industry is forced to contend with federal fuel economy standards that too often result in manufacturers building lighter and underpowered cars that are less safe.

Good people can debate the merits of whether the federal government should bail out an industry which it has helped to put at a competitive disadvantage. Yet an important part of that debate should contribute to an understanding of how much damage has been done by federal policy in the first place.

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