Paul Nitze: Guest Opinion | AspenTimes.com

Paul Nitze: Guest Opinion

Paul Nitze
The Aspen Times
Aspen CO, Colorado

Detroit has fired the American imagination for a long time now. My favorite spots from the golden age of American advertising, the 40 years spanning World War II, are the car ads. You know the aesthetic ” the convertible with the top down, the square-jawed guy behind the wheel, the blonde in sunglasses and a scarf by his side. The cars were fast, the ride was smooth, and the future was as open as the road.

If it delivered for the customer, the auto industry was a godsend for its workers. I count myself among the beneficiaries of that legacy of high wages, fat pensions and full benefits. My grandfather was an executive at Studebaker, now a distant memory, but once a major carmaker. That job allowed him to afford a big house in South Bend, Ind., to send both of his daughters to boarding school and college, and to retire in comfort in Florida. But he was in upper management; the real miracle is how well the industry did by the people on the assembly line.

Over the years, the United Auto Workers became the most-feared and most-loved union in the country, depending on which side of the table you were on. It negotiated compensation packages, including benefits, that paid twice what similarly skilled workers made in other industries. This was all abetted by the federal government, which long ago foisted health-care costs on U.S. corporations.

That business model stopped making sense more than 30 years ago, when foreign manufacturers started making better cars, and labor costs at the carmakers spiraled out of control. Our manufacturing sector peaked in 1979, and has shed more than five million jobs in the years since. Yet even as production of nearly every species of consumer goods moved offshore, we’ve been so thoroughly seduced by that vision of the American automobile and the freedom it enables, that we refuse to let the industry die.

It would be one thing if propping up Detroit were a wash for the economy. We’ve known for a couple of hundred years now, since David Ricardo put pen to paper, that our economy does best when we’re producing only what we’re especially skilled at. In practice, it never works out like that. Legacy industries survive longer than they should, and government often plays a role in prolonging their existence.

Yet the costs of saving this industry have been shocking. The Big Three have pumped more than $400 billion in capital into their businesses during the past two decades, and depending on how you add up the numbers, between half and all of that money has been a pure loss on investment. Imagine if that money had been spent on information technology, renewable energy or any number of other growth industries. More importantly, imagine if Michigan had already gone through the wrenching economic transformation that effected the textile states in the 1980s, and now had the same economic prospects as North Carolina.

Voters across the country should be screaming bloody murder at the prospect an auto industry bailout. Unfortunately, Democrats in Congress and President-elect Obama have indicated they will step in with enough cash to keep the Big Three sputtering along for another decade or so. For the moment, we have the lame-duck presidency of George W. Bush to thank for stopping them, but even the current White House has softened its stance of late.

I have my doubts that even a tidal wave of popular opposition can stop the bailout. There are simply too many powerful lawmakers in Washington beholden to the UAW and the auto industry. But what a popular outcry can do is put the bailout on hold until January. That will accomplish two things. First, it may force the two weakest auto companies, Chrysler and General Motors, into Chapter 11. Keep in mind that Chapter 11 does not mean those companies go out of business; rather, it means they undergo the radical restructuring they desperately need.

Second, and more likely, it means the terms of the bailout will be stiffer than they would be otherwise. Despite news reports over the weekend of “tougher terms” for Detroit, this remains window dressing on what is, in essence, a blank check to the industry. At a minimum, we need to ensure that existing equity shareholders get wiped out, that senior management at the Big Three are forced out, and that union labor contracts are scrapped and renegotiated.

These are extremely tough economic times. If they weren’t, the domestic auto industry would not be facing extinction. While I feel a tug from my inner Keynesian, telling me that if we don’t bail out the Big Three we will face a deeper recession than we would otherwise, there are much more productive ways to pump money into the economy. We have been making substandard cars and trucks in this country for too long. It’s long past time to put people to work doing something else.


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