Auto Company Bailouts I: Should Congress Agree to Auto Company Bailouts?

Part One: Labor

The Big Three automakers have humiliated themselves by sending their head guys to Washington to beg Congress for financial assistance. And, in their viewpoints, bankruptcy would be a disaster for the entire US economy. So, I guess you have figured out by now that I’m against the bailout.

I’m all about fundamentals, and I hate seeing people rearranging deck chairs on the Titanic. That analogy means that a person can be busy doing unimportant things while issues of survival are at stake.

The Big Three’s CEOs are threatening the politicians with massive job losses if the automakers go bankrupt. And talking about “jobs” is an uninformed opinion showing a gross lack of understanding about economics and business.

Labor costs are only one of the costs of producing any product or service. For the sake of simplicity let’s list the other costs as overhead, materials and profit.

If you hold down all four costs, you’ll likely have a competitive product. If you allow any one of the four costs to grow uncontrollably, you’ll become less competitive.

Labor cost must be contained so that the product is priced competitively. Labor costs are determined by many factors, like: (a) demand for the product, (b) supply of workers skilled enough and willing to perform the labor, and (c) productivity, which is the calculation of work output over time.

But people look at “jobs” differently. They talk of “living wage,” and a “minimum wage.” Both concepts have been confused with labor costs.

My understanding of the “living wage” concept is the amount of money a person needs to meet their financial obligations. But look at how fuzzy that term can be. The “living wage” for an 18-year-old boy will likely be different than that of a 40-year-old man. One may have meager expenses, and one may have much higher expenses.

So, a “living wage” should be the money earned from the number of hours any person has to spend to meet their financial obligations. A “living wage” only occurs when the value of your hours spent working meets or exceeds your financial obligations. Consequently, if your skills are only worth $5.00 per hour, you’ll have to spend more hours working than the person whose skills are worth $50.00 per hour.

You are an individual with the same number of hours in your day as any other person. How you spend your daily hours is your choice. You can trade your hours with an employer for wages. Your level of individual training is directly proportionate to the amount of money you can earn from an employer to do a particular job.

So, if you are only capable of flipping hamburgers in a fast food restaurant, your earnings will be low, because the labor cost of producing hamburgers (the product) is low. However, if you are more educated and have special skills, you could work as a more skilled employee, providing your labor for production of a product that has a higher labor cost.

America auto workers are arguably the least competitive auto-making labor force in the world today. Union contracts, health care costs and pension benefits have made American auto labor costs very uncompetitive. That’s why the very companies asking for a bail-out have assembly plants outside the United States, in places like Mexico and Canada.

I do not begrudge the auto workers for negotiating labor contracts that provide the maximum in wages and benefits. I simply take the stand that the labor costs for American automobiles have become too high, and have helped make American-made vehicles less competitive.

Companies that cannot compete in the marketplace for ANY REASON should be allowed to fail.

The American automakers do not seem to be able to renegotiate their labor contracts with the unions to lower the labor costs. But the bankruptcy laws provide for reorganization of a business, which would include renegotiating union contracts.

Providing the Big Three with billions of dollars in loans only prolongs their demise, because in their present situations, they cannot lower their labor costs.

Therefore, I take the position that the American automakers should be forced into Chapter 11 bankruptcy at once. From there, the creditors and the bankruptcy court can decide if a company can be reorganized into a profitable business, or if it should be liquidated, which is the Chapter 7 bankruptcy.

The federal bankruptcy laws are designed precisely for companies that are uncompetitive in the marketplace. And The Big Three automakers are not too big to go bankrupt.

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