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Bail Out the Big Three and Revitalize the Economy

by John Paul Rossi --


The other week, the appeal of the Big Three’’s executives for a $25 billion taxpayer bailout for their desperately ailing firms failed. Neither the fractious lame duck Congress, nor the Bush administration were willing to help.

Unfortunately, Detroit needs to be rescued because the bankruptcy of any of the Big Three will significantly worsen the current financial crises and push the economy further down the road toward a full blown depression.

A federal rescue plan offers Congress and the incoming Obama administration the opportunity to produce an aid template that will not only attack the country’’s recession, but also address some of the nation’’s greatest challenges –– providing good jobs, increasing American energy independence, protecting the environment, and re-establishing a sense of fairness and justice in government economic policy.

American taxpayers are rightfully outraged about their money going to rescue companies run by arrogant, over-paid, and coddled executives –– something that many Congressional leaders do not seem to comprehend. Unlike the current Bush-Paulson program of throwing billions to overpaid bankers and financiers without question, any federal aid for Detroit needs to make significant demands on the companies in return for any assistance.

Sadly, the current Congressional proposals for an auto bailout do none of these things. Nor do they change the short-sighted business practices that got Detroit into this mess in the first place.

A properly designed federal rescue of the Big Three can contribute to economic recovery by creating jobs and increasing demand for goods in the U.S.

It can save American jobs by requiring that Detroit end further outsourcing of jobs, vehicles, and parts production for the duration of federal aid.

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It can create new jobs by setting auto maker and government investment targets for the re-tooling of American auto plants with the latest production technology.

Today, most of Detroit’s factories are outdated. The result is that it costs the Big Three more to manufacture motor vehicles than their Japanese competitors operating U.S. factories. Investment in factory modernization will create jobs among the auto makers, their suppliers, contractors, and equipment manufacturers. It will also make their plants more cost-effective and lay the foundation for more efficient and profitable production in the future.

One of the reasons the Big Three are on the verge of bankruptcy is that they do not have fuel efficient vehicles that customers now want.To make sure that they have competitive offerings in the future, any rescue must to impose tough and increasing 20 year targets for fuel efficiency beyond current U.S. standards.

Part of the auto makers’ problem with fuel efficiency is that they have not made adequate investments in new automotive technology. To insure a more competitive industry, the rescue legislation has to require that the companies get the best off-the-shelf fuel efficiency and pollution reduction technologies into new vehicle models. It also needs to set 20 year targets for federal and Detroit commitments to increase research and development spending on motor vehicle efficiency and the reduction of emissions of greenhouse gases and other pollutants.

The main reason for the auto makers’’ current dire predicament is that their executives and boards bet their firms’’ survival on big, gas swilling SUVs. This was a terrible bet and the executives and directors who made these decisions need to be held accountable. This is particularly true of General Motors. Its current CEO, Richard Wagoner, and his pliable board need to go before the company receives any taxpayer assistance. Without accountability of this sort the Big Three’s management will not change, and any federal rescue effort of GM will be doomed to failure.

Executive pay also needs to be cut. GM rewarded Wagoner with $15.7 million in 2007 for running the company into bankruptcy, while Ford’’s CEO Alan Mulally took home $21.7 million. Americans are outraged that these executives have the gall to ask for taxpayer help without making any sacrifices themselves (Chrysler was the exception to this). Any bailout needs to require significant reductions in compensation for top executives as well as the suspension of all bonuses, golden parachutes, and dividends while the Big Three receive government aid. Only with shared sacrifices of this sort will an auto bailout will be politically sustainable.

A federal government bailout structured in these ways will provide a model for both federal assistance to business and an economic recovery policy that working Americans can support. It will create jobs and generate growth; provide consumers with better, more fuel efficient motor vehicles; lessen American oil dependence; and help limit global warming. It will also yield a better managed and more productive American automotive industry that can compete long into the future.


John Paul Rossi

Dr. John Paul Rossi is an Associate Professor of History at Penn State Erie, The Behrend College. He writes on business and economic history and is co-author of Entrepreneurship and Innovation in Automobile Insurance: Samuel P. Black, Jr. and the Rise of Erie Insurance, 1923-1961.