Auto bailout political necessity

By DAVID MOON, Moon Capital Management, LLC
December 14, 2008

If you watched or read much news this week, you might have mistaken the hearings on Capital Hill for discussions about saving the U.S. automobile industry. They were not.

They were negotiations about the price of buying the support of the United Auto Workers.

GM, Ford and Chrysler aren't suffering from a lack of sales. GM and Toyota each sell about the same number of cars. This is not the result of the current economic malaise. The drop in sales this year merely exposes what analysts already know: the U.S. operations of American automakers have, for years, been operated solely for the benefit of the unions, not the shareholders.

The average labor cost of 'the Detroit Three' (they are no longer 'the Big Three') is $73 an hour. At Toyota it is $48.

About $17 an hour of Detroit's labor costs are used to pay for medical insurance for 442,000 retirees in North America. Even if you ignore these costs and all costs associated with pensions and the controversial jobs bank program (where people are paid not to work), the average cash wage for a General Motors employee was $37 an hour in 2006.

The average wage of all workers in the U.S. is $28 an hour.

The automakers are asking that taxpayers bailout workers who already earn about a third more than the average U.S. worker. And this ignores the hundreds of thousands of would-be recipients who don't work at all.

Where is the outrage from the 'no tax cuts for the wealthy' crowd?

This is not about treating blue and white collar employees similarly. The AIG bailout was not about its employees. A failure of AIG would have impacted 73 million policyholders and annuity owners.

AIG is a critical cog in the world's financial system. Its collapse would have the effect of throwing sawdust into the world's credit engine, potentially grinding to a halt any industry that relies on borrowed money.

What happens if GM, Ford and Chrysler file for Chapter 11 reorganization bankruptcy?

Alarmists act as if the 17 million cars those three companies sell each year will somehow no longer be needed. Even if auto sales drop 50 percent in this recession, Toyota already operates at an average plant capacity of 100 percent. They can't make an additional 4 or 5 million cars.

The U.S. auto industry will not go away.

For discussion purposes, however, let's assume it did. Those three companies employ 239,500 people in the U.S. We've been told that if the Detroit Three shut down, the total American job loss will be 3 million. I question the validity of the number ' but let's play along.

If the U.S. loses another 3 million jobs (it lost a half million last month), that adds less than 2 percentage points to the unemployment rate. It would put unemployment where it was in 1982-1983, and throughout various shorter periods in 1975, 1976 and 1984. While that's certainly terrible if you're among that 2 percent, it is not of catastrophic economic proportions.

But when elections are regularly being decided by hundreds, or sometimes dozens of votes, 3 million voters is of massive political proportions.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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