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US Auto Bailout: Pros and Cons

December 9th, 2008 Posted in In-Depth Analysis Bookmark and Share

As Congress comes closer to finalizing a bailout for the American auto industry, one can’t help but wonder what the ups and downs of such a bailout include. While I can’t possibly detail every aspect of this bailout, especially considering that its long-term effects cannot possibly be known, the goal here is to simply point out the obvious pros and cons and open a general discussion.

The US auto industry – in regards to this bailout this is represented by GM, Chrysler, and Ford – has historically been protected by the US government. The reason being that it is one of the primary manufacturing industries in the United States and without protection, it may collapse; this collapse may then ripple across the entire manufacturing sector of the US economy thereby reducing its competitiveness worldwide. As such, a bailout by the government does not seem too out of place. But let us consider a few pros and cons for contemplation’s sake.

Pro #1: Being one of the largest manufacturing industries in the US, the collapse of these auto giants would not only damage the US economic competitiveness worldwide, increase unemployment, and weaken the US Dollar, but it may also destroy entire communities throughout the “foundry” region of the US (roughly Michigan through Pennsylvania) by eliminating its economic foundation. The most obvious Pro from this auto bailout is the protection of the people living in this region.

Con #1: By bailing out massive manufacturing organizations which could have prevented their own demise with effective planning, as well as pushing for the necessary research and development needed to produce more fuel efficient vehicles, the US government is potentially rewarding bad business practice. By doing so the US government runs the risk of prolonging the delay of the necessary restructuring of this faulty, inefficient industry.

Pro #2: By supporting an industry whose survival carries a heavy impact throughout the manufacturing sector of the world’s most influential economy, the US is ensuring that it maintains a competitive economic edge. During this time of financial crisis the last thing any country needs is the collapse of one of its largest industries. No matter how corrupt these auto giants may be at their highest levels, an industry collapse of this magnitude will cripple any country experiencing a recession as deep and as wide as this one.

Con #2: On the flip-side of the point above, times of financial crisis are typically the period in which industries are tested. If such an industry does face a serious risk of collapsing, maybe there is a reason for it. If this bailout comes out of hand as simply an infusion of liquidity then the US government is running a high risk of encouraging a business model in one of its major industries which has proven to be ineffective during times of economic recession. Without a stipulation which requires a restructuring of these industries, the bailout will only be adding to the problem, not fixing it.

Pro #3: As global economic recessions progress further, a dog-eat-dog market evolves gradually in which each country takes steps to strengthen its own economy without focusing on what is happening elsewhere. This introspection typically results in measures taken which may only appear rational inside that country’s borders. The auto bailout carries with it the idea that a collapsing manufacturing industry will send a shockwave throughout the economy and weaken the national currency. Since the US Dollar is one of the primary reserve currencies around the world, a weakened USD will not only affect the US economy’s buying power, but devalue world reserves and drive the global recession even deeper. While seemingly irrational to some observers, the intention behind this bailout may indeed be nobler than many skeptics believe; despite being self-serving to US interests (a stronger USD obviously maintains a stronger US economy).

Con #3: Some analysts blame the automotive industries for the slow progress in the development of alternative energies since they would be the primary industry affected by such a shift. Large gasoline-consuming SUVs and trucks – one of the largest profit-earning products of these companies – would become less relevant to the auto industry if restrictions on carbon emissions are reduced or if fuel efficiency becomes an issue. The arguments are growing that maybe it’s time to let these companies die so a new wave of automotive innovation can take over. The downside, which almost no one is willing to witness, is the resultant short-term period of economic collapse and hardship which will inevitably follow. None of the politicians living in the American northeast are willing to let the people of their districts lose jobs, no matter how beneficial it may be to the rest of the world in the very long-term.

Conclusion: You can’t help but say to yourself, “When will things change?” The manufacturing sector of the US economy is one of its foundation blocks. The US government cannot in good conscience allow such large organizations to fail. The resultant economic devastation to the US northeast would be monumental. The number of unemployed people would soar and the Dollar would considerably weaken. But the auto industry has been in need of serious reform since the early 1980s and the US is years behind in the development of more fuel efficient vehicles. Moreover, as mentioned in the last point, no one is willing to witness the short-term period of economic anarchy which would ensue after a collapse of these manufacturing industries. It may be for this reason alone that the US auto bailout is perceived and presented as a necessity despite the obvious negative results.

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