Saturday, November 15, 2008

Pelosi’s Pooch Punt on the Auto Bailout

As noted earlier, this is only going to postpone failure of the “Big 3”, not fix anything.

There’s nothing in this package that even suggests that it won’t make things worse, not better.

For a “temporary” cash infusion, we’re supposed to believe:

a) that the automakers will meet increasingly aggressive fuel economy standards. This can only be done by producing small, relatively unsafe, cars with crummy performance that most people don’t want to buy.

That’s a recipe for market success.

b) the real structural problem is excessive executive compensation. Certainly, the management of the “Big 3” doesn’t exactly inspire confidence, but government mandated pay caps are only likely to lead to an exodus of management talent.

c) the industry develop “advanced vehicles”, whatever that means. Actually, it means whatever reflects Congress’ current whim, car buyers be damned.

No program can fix these problems until it deals with the UAW. As Prof. Bainbridge notes, the UAW isn’t the only problem, but it is a huge one. No company can out pay the competition by 52% and stay in the ball game. You just can’t wring that much incremental productivity out of the workforce.

That’s one reason why GM and the others went to market with big vehicles – the labor cost differential on a Suburban vs. a Cavalier wasn’t as great as the market price differential.

Against the UAW, executive compensation is a nice class-warfare headline grabber, but as a structural problem in the auto industry, it’s pretty trivial.

If the union comes out of this unscathed, we’ll simply replay this scenario in the next 5 years or so, probably at a much higher price tag.