I was having lunch with a colleague the other day and the conversation turned to the economy. He spoke of some recent analysis of the number of jobs that would be lost if the Big Three failed.  He recounted not just the employees of the auto companies themselves, but the employees of their suppliers, advertising firms that produce car ads, and on and on.  His final tally was well over 1 million jobs lost.  He concluded by saying it would make the current financial crisis a walk in the park.

Getting enough exercise?

Does that mean that we are all going to start walking?  Not that that would be a bad idea, we could all stand to lose some pounds, but for someone who has a 23 mile one-way commute with no option for mass transit, it’s just not going to happen.  So what do we do?  Well, one of several scenarios is going to happen.

Scenario 1:  The Big Three Close Their Doors

If this scenario came about, what would we do?  We would go buy Toyotas, Nissans, Hondas, Volkswagons, etc.  Those companies would have to scale up to fill the void caused by the Big Three closing their doors.  That demand would need people.  So a significant number, but by no means all, of the laid off workers from Detroit would move south to North Carolina, Alabama, and other points south, and join these auto companies at their U.S. plants.

Likewise the suppliers would form new alliances to supply these car companies, as would all the other ancillary companies that currently support Detroit.  Would jobs be lost?  Yes.  Would it be anywhere near the number of jobs my friend projected?  No.

Scenario 2: The Big Three Reinvent Themselves

The liberty of the car companies to reinvent themselves is constrained by government regulations.  Surprise!  If the Big Three have any hope of reinventing themselves, they have to have the freedom to do so.  Start by eliminating the CAFE standards.  CAFE, which stands for Corporate Average Fuel Economy, is the mileage standards dictated by the government that the auto companies must comply with or face heavy fines, draining more money from the Big Three’s coffers.  So for every car that the Big Three build that may get 20 mpg, they may have to build and sell perhaps 3 that get 30 mpg, in order to meet the standard.  But what if they can make money on the 20 mpg car, but they lose money on every 30 mpg model?  What if the reason they can’t make money is because of their labor costs per vehicle, their pension costs per vehicle, their health care costs per vehicle, when added up are too high compared to their foreign competitors.  They are basically forced by the government to make an unprofitable product.

Why not abandon the CAFE standards?  Let Detroit build the cars and trucks that they can make at a profit.  Let the foreign manufactures make cars that they can make at a profit, including high mileage cars.  Let the American people have the freedom to choose which they want.  As the price of gasoline climbs as it did, and will again, people will want to buy high mileage cars, hybrids, electric cars, but they will also want to buy SUVs, luxury cars and light trucks.  Why does a particular manufacturer have to produce all kinds?  When has government ever made the right call on what products to produce? (Hint:  think of all the five-year plans and Great Leap Forwards from the Communist world).

Scenario 3: The Government Bails Out the Big Three

The government prints up a bundle of cash, $25 billion or more, gives it to the auto companies and hands the IOU to you and me.  The new Democratic Congress and Administration will toe the line for their backers in the environmental movement and demand higher CAFE standards for the auto companies in the interest of addressing: our dependence on foreign oil; green house gases; and helping consumers.  This will put increased pressure on the Big Three to make more unprofitable products and we will find ourselves back in the same place a few years hence.  More liberties will be vaporized as the government appoints a czar to oversee the auto companies to be sure they are building the right products, that management is not getting paid too much money, and well let’s face it, they would basically be nationalizing the auto companies.  Management talent would dry up, and socialism would make greater inroads into the U.S. economy.

The Best Scenario

The Big Three file for bankruptcy, if that is what they need to do.  The stockholders would probably be wiped out, the management team would be replaced, and this will let them re-negotiate their labor agreements.  Congress and the new Administration realize that people will want to purchase cars with higher mileage as the price of gas climbs regardless of any government requirement.  There is no justifiable reason that any particular auto company has to build a particular car because the government says so.  Achieving this state of enlightenment, Congress repeals the CAFE standards.  With the liberty to manage the company to make a profit rather than meet the constraints of a bevy of interest groups, a more energized management team takes the reins, and returns the Big Three to competitiveness.

Drawing a line in the Sand

If we don’t take a stand here and now, every company that wants a cash cushion will be working the halls of Congress to get their hands on your money.  There is not enough to go around.  In addition, many of the problems we are facing were created by government initiatives.  The mortgage mess was not the result of not enough regulation but by government programs that compelled lenders to give loans to people who could not afford them.  Detroit’s problems are a result of CAFE standards. and onerous union contracts.  Since government created many of thse problems why do we think that government knows how to fix them?  What we need to do is tell them to back off and let the free market work.