Govt. Grinds Gears in Auto Industry Conundrum

Nov. 11, 2008— -- With stocks for GM and Ford in a tailspin, the combined worth of the two companies is less than the value of Auto Zone, a parts retailer. But after Congress rode to Wall Street's rescue, can the government just say no to American automakers that are sinking?

"I believe in creative destruction. Out of the ashes of an industry something else will emerge," said Roben Farzad, senior writer at Business Week.

Teetering on the brink of collapse, the big three automakers -- General Motors, Ford and Chrysler -- made an urgent plea to Congress for more funds last week, requesting $50 billion on top of an approved $25 billion loan for energy-efficient technology.

On Tuesday, House Speaker Nancy Pelosi said she will ask a lame-duck session of Congress to pass an emergency bill so that automakers can get a share of the $700 billion economic rescue package.

While the bailout could cost taxpayers up to $75 billion, David Cole, director of the Center for Automotive Research, said it's the best way to prevent sustained damage to the economy.

"The cost of keeping the industry going is a lot less than the cost of failure," Cole said.

The Center for Automotive Research estimates that the failure of a major U.S. automaker could cost the American economy $125 billion in lost annual income, and $50 billion in lost tax revenue, totaling $175 billion in the first year alone.

"If you lose one of the big guys, a GM or a Ford, that can cascade down to the supplier base and really bring the industry down," Cole said. "The cleanup of the mess of this industry would be much, much greater than the cost of keeping the industry functioning."

The ripple effect of a major collapse affects dealers to part makers to ad agencies, and would result in severe job losses across the board; the industry alone employs more than 2 million Americans.

But skeptics ask: What's to ensure that car companies, who are burning through more than $2 billion in cash per month, won't blow the bailout money?

Some argue that bailing out the car companies puts the government on a slippery slope, having to rescue all industries; if you bail out car companies, opponents say, what's stopping the government from rescuing U.S. steel companies or airlines, which have also suffered formidable losses?

"Where are we going to draw the line? We don't have all these blank checks to write out to every industry that's hurting because, certainly, everyone is hurting," Farzad said. "There's the issue of fairness."

Critics also wonder if the government should save companies that have made costly mistakes, such as depending on gas guzzlers and agreeing to bloated union contracts.

"GM is paying really the overdue tab for decades of mismanagement and bad relations with labor," said Farzad.

Others disagree; Cole says it doesn't make sense to punish automakers.

"Regardless of who is to blame, forgetting about that, what's in the best interest of our economy?" Cole said. "What's going to cost less for you and me as taxpayers?"

American automakers argue that they too are victims of the credit crisis and desperately need a cash infusion to stop the bleeding.

"If we did not have a credit crisis today, this industry would not be in any way shape or form asking for this kind of financial support," said Cole.

Companies say that a bailout would offer short-term support until the arrival of their new, more fuel efficient fleet of cars, which are expected to be more popular.

"Capitalism is brutal and these shifts that happen once, twice every generation are never friendly," Farzad said. "Ultimately, the government has a decision to make; it's at a fork in the road."

With lingering questions, the government remains caught in a conundrum: The U.S. auto industry may be too big and important to fail, yet even a bailout does not guarantee success or quell concerned taxpayers' fears about where their money is going.