I've been chatting with a few friends (including my best friend, Dan) about the request by Detroit's Big 3 (GM, Ford and Chrysler) for a bailout.  This is one of those issues where research leads to more research, questions lead to more questions, and the complexity of the problem (and the many iterations of its solutions) hurts the brain.

Dan shaped the bailout question in broad terms, "Is there value to having a vibrant, U.S. based automobile manufacturing sector?"

Given that just under 2% of our work force is employed by either the auto manufacturers or their suppliers, and that the profitability (or not) of the D3 (as I will affectionately refer to GM, Ford and Chrysler in the balance of this blog) is capable of moving our GDP in statistically significant increments, my answer is yes.  There is significant value to having the aforementioned sector in our economy. 

Which, as I mentioned, begs a new question.  Is a bailout the most effective and efficient way of achieving that goal?

Answering that question is where things start to get really sticky and complex.  Here's what I know so far:

1.  According to the Center for Automotive Research, if the D3 fail completely, the country will lose 3 million jobs in the first year.  Only 240,000 of those jobs will be auto workers, per se.  The rest of the job losses will come from "supplier shock" in a ripple effect across parts manufacturers, auto industry suppliers and the businesses that supply their raw materials.

2.  According to CAR's same report, the economic cost to the government in terms of lost revenue (tax, Social Security contributions) and expenditure (unemployment benefits) would be $156 billion over three years.

A partial failure, reducing the D3 by 50% would be less catastrophic, resulting in job losses of 2.5 million and government costs of $108 billion.

3.  The causes of the current crises involve a complex interaction of (at minimum) the following situations:

a)  The current economic crisis (high unemployment, wealth lost in the stock market, tight credit markets) left car sales at their lowest levels in two decades last quarter.

b)  The D3 was content to ride an SUV/Truck demand bubble, appearing to believe that Americans would always want their vehicles super-sized.  In this way, they were much like those who believed that real estate prices would always rise.

c)  The United Auto Worker's union--a powerful beast indeed--has not budged on compensation issues to any significant degree; essentially bleeding their parent companies with a highly paid workforce that is resistant to change.  (Auto workers at Chrysler and Ford make about $63,000 per year in cash.  Tool and Die workers are closer to $72,000.  Retirement benefits average about half that compensation level.)

d)  Increasing fuel prices and a growing awareness of both environmental concerns and the negatives of our dependence on foreign oil have contributed to the shift in demand from gas guzzlers to gas sippers.

I'm still grappling with the pros and cons of a D3 bailout.  Here's what I've got so far:

Pro:

1.  Bailing out these guys should save the major portion of 3 million jobs in the short term.

2.  The cost of the bailout (taking Obama's proposed $50 billion as the figure rather than congress or Bush's $25 billion figure) is likely to be less than the cost to government if the D3 fail.

3.  The 1980 Chrysler bailout "worked," saving 2/3 of workers' jobs at the time and eventually returning a profit of $311 million to the government on a $1.2 billion investment/bailout.

4.  In an economy already headed for a deep recession, we don't need another huge hit to employment, consumer confidence and production.  (The niggling fear in the back of my mind is that the failure of the D3 would change the "r-word" to the "d-word," tipping the scales into depression.

Con:

1.  The D3, their leadership and the UAW got into this mess through a lack of foresight about changing demand trends, by not investing in flexible plants that could switch more easily with shifts in demand, by being greedy and protectionist about wages and benefits, and by being tone deaf about environmental concerns.  Such a catastrophic lack of leadership among management and the union should not be rewarded (or perpetuated) by a bailout.  The bailout proposals as they stand have not requirements for making sure that substantive changes are made to the way the D3 conduct their business.

2.  Failing business models should be allowed to fail unless by their failure they will create a systemic failure.  This will be a hard hit, but it's not on the same scale as the (hopefully) averted financial sector meltdown.

3.  We've got too much on our bailout plate already with the $700 billion already pledged to shore up financial institutions and restore credit markets.

4.  There's no guarantee that $25 billion or even $50 billion will be enough.  GM's monthly "burn rate" is $2 billion.  Ford's is in the neighborhood of $2.5 billion.  At that rate, they'd have to entirely retool in under a year. 

Bottom line?  I'm still on the fence on this one.  In order for me to be for any bailout, there would have to be substantial strings attached.  In the interest of some semblance of blog brevity, I'll get into details on what I think those should be on Monday.

In the meantime, I'm looking forward to folks pointing out pros and cons I might have missed.  And I'm glad I'm not Obama right now.

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