The U.S. Government has spent billions of dollars bailing out financial companies like AIG. They see this as a necessary step to stabilize the financial system. The question is should other industries like the automotive sector be bailed out?
General Motors and Ford in particular are having a difficult time as of late. They were on the decline before the economic crisis losing market share to Toyota. Their costs far exceeded other companies thus they are not as competitive. When the economic crisis hit and the consumer started to struggle the Big 3 continued their decline. General Motors has stated they are running out of cash quickly, it is anticipated they may run out of cash in the New Year. Raising money will be difficult since no one will lend them money; raising capital through a stock offering is highly unlikely since the shares are almost worthless. One of two things will happen to GM, they will either file for chapter 11 bankruptcy or the government will come up with a bail out package for them.
The only problem with a bail out for the auto companies is that it does not keep them competitive with companies like Toyota. General Motors and Ford do not have a cost advantage their workers get paid very well and have great benefits compared to the average American worker. A bailout would only help the auto companies in the near term, the long term implications are unknown. What we do know is that without major change, the U.S. auto industry will not survive over the long haul.
Some will argue that a bail out is necessary because if these companies fail it would be catastrophic the manufacturing sector and the economy. General Motors buys $31 billion in auto parts and has over 2100 suppliers, there would be a tremendous amount of job loss if these companies failed. The suppliers among other spin off jobs would be lost and place the economy in further danger of deep recession.
I don’t have a problem with helping out the auto sector however there needs to be plenty of strings attached if there is a bail out. For one companies like GM need to restructure their business model and bring about major change and that unfortunetely means more layoffs, scaling back wages and benefits to bring their costs in-line. Without these changes GM and Ford will likely fail and that will not be good for anyone.