The CEO’s of Ford, GM, and Chrysler have enjoyed two days of questioning on Capitol Hill this week as part of a “fact finding” mission by Congress to determine if the three largest American Automotive companies should receive a $25+ Billion bailout package. This bailout is a life-support system through the down economy to keep the companies afloat for a few more months. A drop in sales, a lack of cash on hand, and a national credit crunch formed a perfect storm over the three companies that were already failing to compete domestically with foreign automotive companies, some of which who have built production plants in our nation. Better cars and lower labor costs put the Big Three in a tough position where they had to compromise quality for lower price, and the customers know it.

How did the three companies arrive at this point? I can think of a few. For starters, a sense of complacency existed within the US industry. This isn’t to say that the companies failed to develop new products or try to compete. What I am saying is that they felt that foreign manufacturers were not going to compete on the US Auto manufacturers level domestically. Just a few decades ago, 90% of the cars sold in the US came from the Big Three. So the companies felt that they could charge more for the product and the consumers would buy it. And when the foreign auto manufacturers began to enter into the US market with lower costs, the US manufacturers lowered their price by decreasing basic options to make up the difference.

The labor contracts made with the United Automobile Workers union have also had a hand in the financial crunch facing the auto manufacturers. With labor contracts roughly twice as high as rates being paid to US workers for Toyota, the increased costs must be covered somehow. On top of this, there are extensive benefit packages under the labor contracts that also are incorporated into the costs of new vehicles.

Low fuel prices in the US also added to the current situation. For years, unleaded gas in the US was under $1.00/gallon, meaning there was no real incentive for the manufacturers to develop more fuel-efficient vehicles. Even when gas passed $1.00/gallon, the “gas guzzling” SUV’s started to become popular in our country. One would have to wonder if it were for fuel efficiency standards being passed by Congress over the years if there would have been any serious development in this area by the manufacturers. But that is only in the US.

Overseas operations for the auto manufacturers are fairing better. With cheaper labor, different fuel efficiency standards, and partnerships with European and Asian companies, the Big Three have been able to expand their operations and tap growing markets. Additionally, with fuel normally costing twice as much in many overseas markets compared to the US, foreign produced cars by the Big Three are more fuel efficient than in the US. Under the Corporate Average Fuel Efficiency (CAFE) standards, these foreign produced cars would exceed the domestic standards if the models were imported.  Unfortunately for the US auto manufacturers, there is a history of the foreign-made models not selling well domestically. On the other hand, the Asian manufacturers have been able to sell their models in the US, and with their 30+ mpg fuel efficiency, they easily exceed the CAFE standards where as the US manufacturers tend to end up paying civil penalties (up to the tune of $500 Million) whereas the Asian manufacturers have yet to pay any penalties.

So what are the US manufacturers suppose to do? In your Microeconomic class, a generic company facing a lack of cash and high overhead expenses would typically file for Chapter 11 bankruptcy protection. This would allow the company to restructure the operations, have their debts reduced or eliminated, have contracts voided or renegotiated, and create a plan to resurface from bankruptcy as a more viable operation. In 2008, on the other hand, the first option seems to be to ask for a bailout by the government. This would be a quick injection of cash to sustain operations until the company becomes more profitable. This wouldn’t be a first for the automotive industry as Chrysler sought and received funding from the government back in 1980 (who later repaid the funds with interest).

While Congress debates what approach to take, I have one of my own that I would like to recommend. 

1. Bankruptcy: The auto manufacturer must file for Chapter 11 bankruptcy to be eligible for $10 Billion in US funding. Without bankruptcy, the pressure to make significant change within the business model would not exist, and therefore the potential for a change in course would not exist.
2. Model line reduction: The auto manufacturer must choose one van, one truck, one coupe, and two sedan models they wish to produce, and structure their operations around those five models. Of the sedans, one model must have a fuel efficiency of at least 30-mpg.
3. Overhead: Non-essential plants will be shut down or leased to another company.
4. UAW: All labor contracts will be voided through the courts. The company will then have the option to renegotiate contracts with the UAW or to hire non-union personnel. If contracts are renegotiated, Congress must approve the contracts and the rates are to be in line with industry standards. Additionally, contracts will be for only two years in length to ensure the company has the flexibility to reduced the number of union positions as the positions become obsolete. 
5. Pensions:  Existing pensions for retired employees will be taken over by the Pension Guarantee Fund.  Pensions for existing employees will be capped at current levels and become the responsibility of the union.  From the time of the bailout, future pension benefits will be replaced with 401(k) plans.

These changes will free financial resources for the company to restructure.  It isn’t a guarantee that the companies will be able to fully recover, but it will spark the change needed to at least keep them solvent.  But a bailout isn’t a necessity until existing business options are attempted.  Let’s not try to shortcut the process because of a sharp economic downturn.  Additionally, Congress needs to address existing federal regulations and guidelines in place, such as CAFÉ, to see if they need to be revised or removed, giving the companies additional flexibility to compete and prosper.

Recommended articles:
NeoLibertarian at Large – “Four Little Piggies At The Bailout Trough”
Killer Buffalo – “General Motors and the Free Market: Why bankruptcy is in order”
US News & World Reports - “What Will Happen If We Don’t Bail Out the Auto Industry?”
Houston Chronicle – “Letters: Should we bail out Big 3?”
The Moderate Voice – “Don’t Bailout The Big 3″
CNN Money – “Detroit bailout: 7 key questions”
Seeking Alpha – “Should We Really Bail Out the Big Three Automakers with $73.20 Per Hour Labor?”
CNN Money – “Ford chief denies claims of mismanagement”
CNN Money – “Heated debate over auto bailout”
CNN Money – “How to fix the Big Three”
New York Times – “Let Detroit Go Bankrupt”
Wall Street Journal – “Auto Makers’ Rescue Drive Stalls”
Financial Times – “America must now wean itself off cheap petrol”
NHSTA – “CAFE Overview – Frequently Asked Questions”
Left Lane – “Domestic automakers accept 35 mpg CAFE fuel standard”
CNN Money – “Retired from GM: One worker’s fears”

I came across the following on Yahoo News, and you might be surprised:

US elected officials scored abysmally on a test measuring their civic knowledge, with an average grade of just 44 percent, the group that organized the exam said Thursday.

Ordinary citizens did not fare much better, scoring just 49 percent correct on the 33 exam questions compiled by the Intercollegiate Studies Institute (ISI).

“It is disturbing enough that the general public failed ISI’s civic literacy test, but when you consider the even more dismal scores of elected officials, you have to be concerned,” said Josiah Bunting, chairman of the National Civic Literacy Board at ISI.

“How can political leaders make informed decisions if they don’t understand the American experience?” he added.

The exam questions covered American history, the workings of the US government and economics.

So, I decided to take the quiz.  It covers many aspects of government and philosophies.  Of the 33 questions asked, I missed four:  questions 10, 13, 14, and 27.  With my score of 87.88%, I am twice as smart as the elected officials mentioned in the article.  How smart are you?  Take the quiz and post your results below!

This is just coming through Yahoo’s news service.  Attorney General Michael Mukasey collapsed this evening while giving a speech to the Federalist Society.  Reports is that he started to slur his words, then collapsed and lost consciousness.  I would hate to speculate what the cause was, but to me (and not reported in the new source), it sounds like he had a stroke.  Please pray for Mr. Mukasey and a speedy recovery.

Our friends over at The BoBo Files have a request.  He is raising funds for Project Valour-IT; a campaign to provide laptops with voice-recognition software to soldiers who suffered hand injuries.  I view this to be a very practical and beneficial cause, so I wanted to bring this to your attention.  I do not see a goal displayed in his post, but as of today, the team he is a member of has raised $4,988.27.  The last day to contribute is November 27, 2008, so do not delay.  If you are in a financial position where you can afford a few dollars, please visit his the teams donation site and help support our troops.

Thank you.

This is a feel-good story that I came across today.  Posted on the NFL website:

How did Dallas quarterback Tony Romo spend his free time this week? He went to the movies. But his date was not Jessica Simpson. It was a homeless man. According to the Dallas Morning News, Romo paid for a homeless man to see Role Models, and then sat with him through the movie.

The homeless man, who gave his name only as “Doc,” was cashing in change at a Dallas movie theater when Romo walked up to the counter and bought Doc a ticket. Romo then invited Doc to sit with him and a friend inside the theater. (When Doc warned Romo that he hadn’t showered in a few days, the QB replied, “Don’t worry about that, I’m used to the locker room.”)

While I am a New York Giants fan, I tip my hat to Tony Romo for his act of kindness. 

While we might not be in a position to take complete strangers to the movies, there are acts of kindness that we can do every day, even if it is as small as opening the door for someone or being less aggressive on the road. If you can show financial kindness, providing funds or foods to your local food bank or church makes a big impact on your community, especially as we head into the holiday seasons.