NCPA - National Center for Policy Analysis


December 9, 2008

Instead of a federal bailout for Detroit's Big Three automakers, there may be a pragmatic solution, one that takes some of the apocalypse-now threat of major economic decline out of play, says Lawrence Kudlow, host of CNBC's Kudlow & Company.  Sen. Bob Corker (R-Tenn.) and others have proposed a federal oversight board that would in effect become a bankruptcy court. Strict conditions would be imposed on the carmakers, especially regarding compensation -- the single-biggest reason for Detroit's decades-long decline.

Corker wants Detroit to have the exact same compensation levels as the Japanese transplants in the non-union Southern states.  This would mean:

  • Moving hourly labor costs down from roughly $70 to $48.
  • Reopening the UAW contracts that have created the huge pay-gap between Toyota and GM.
  • Putting an end to excessive pension and health care benefits.

According to Professor Mark Perry of the University of Michigan:

  • GM health care benefits add $1,500 to the price of every vehicle, while pension costs add another $700 per car; that will have to end.
  • The lucrative jobs bank that pays laid-off workers 95 percent of their compensation also will have to stop.
  • And bondholders will have to be satisfied with a complete renegotiation of GM's $62 billion in debt, including the union retiree health care fund that is under-funded by $30 billion.

There still will be considerable job losses for downsized Detroit carmakers, says Kudlow:

  • They'll have to cut a huge chunk of their dealer networks.
  • Domestic brands will have to be sharply reduced.
  • But essentially, as would be the case under Chapter 11 bankruptcy, the federal government will provide short-term financing while Detroit goes through its radical restructuring.

It looks like bankruptcy lite, and it will completely change the direction of the former Big Three, says Kudlow.

It's probably too much to ask, but tough federal action under the aegis of oversight-board enforcement also should relieve the CAFE fuel standards that have plagued U.S. automakers.  At the very least, worldwide standards should be substituted for domestic ones.  Making expensive small green cars is an unprofitable business says Kudlow.

Ironically, with oil and retail gasoline prices plunging, it's not unreasonable to expect something of an auto-sales recovery.  Gas prices have dropped all the way to $1.75 from over $4. This tax cut will help revive the whole economy, along with auto sales, says Kudlow.

Source: Lawrence Kudlow, "It's time for supply-side tax cuts,", December 06, 2008.


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