Nov 20 2008

Students debate the proposed bailout of the US automobile industry

Published by at 9:12 pm under AP Economics,IB Economics,Protection

Should the US bail-out their car industry? – Welker’s Wikinomics Page

Web 2.0 never ceases to amaze me. Over at our class wiki, Zurich International School students regularly debate economic issues that relate to the topics we are studying in IB and AP Economics. The latest hot topic of debate was started by an 11th grade Brazilian student, Mark, who posed the following question:

Should the US bail-out their car industry?
Monday, 4:04 PM EST

In America, everyone believes that the American car companies like GM, Ford and Chrysler, which are nearly bankrupt, should be bailed-out by the government, to save their national pride. In this week’s “The Economist” magazine, they argue that bailing-out the car industry would be a grave mistake. Firstly, they argue that it would “open an invitation” to other companies to apply for aid to survive the recession. Banks qualify for this help because the economy depends on them; the car industry in the US failing would not be so disastrous. Secondly, they argue that the car industry is shifting from the saturated (full, at its peak) markets to the fast-growing emerging markets. This means, even if the car businesses fail in America, they would still have opportunities in other countries. In Brazil for example, Fiat has a plant where they produce 800,000 cars each year… that is a new car coming off the production line each 20 seconds! And they are not slowing the production; the plant continues operating with three shifts a day!

So, should the US government bail-out GM, Ford and Chrysler, save many lost jobs, and one of their nation’s prides, or should they be influenced not to, by economists that predict it would not help the economy at all?

I love to see students take an interest in the issues dominating our news that tie so closely to the topics we study in our principles classes at the AP and IB levels. The debates are interesting, insightful, and conflicting yet valid viewpoints on controversial issues.

If you’re interested in the economic issues dominating our news and want to join the debate, join the Discussion Forum at Welker’s Wikinomics Wiki and share your points of view.

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

25 responses so far

25 Responses to “Students debate the proposed bailout of the US automobile industry”

  1. the weakonomiston 21 Nov 2008 at 12:05 am

    I'm on the anti-bailout boat sailing the high seas. These companies have been bailed out before, and they have received numorous loans in the past. We recently gave them billions to develop fuel efficient cars. The Big 2.5 has shown they are stuck in an old business model, bullied by the UAW, and are so big and fat they've grown to expect the government to bail them out. They were always going to fail because they never bothered to develop cars for the future. The recession and oil spike just killed them faster.

    Of note is the fact that these pigs are flying to and from Washington in private plans.

  2. Matteoon 21 Nov 2008 at 7:44 am

    To pose the question like the Economist did, in terms of bail-out yes-bail-out no does not take into consideration all sides of the problem.

    The automotive sector in USA represents about 5% of total GDP with 2,9 million workers. The system includes not only by car producers with 54 plants in North America, also 4'000 firms of suppliers delivering parts and subassemblies to the plants and financial firms funding consumers when buying a new car. Shut down Detroit (GM, Ford and Chrysler) would mean to increase the rate of national unemployment up to about 10% (Time, November 24). When talking about bail-out in the car sector, we should better recall the bail-out of Chrysler in the 1980s: the rigth mix between help from the government and new aggressive sale strategy, with an impressive launch of new models, made the bail-out a succesfull business case. Now, the bankrupcy of the entire sector would hit US economy. Negative externalities would not be represented only by unemployment, increasing social costs to retrain at least part of the staff and workers, moving them to healthy firms (Toyota), but also by a loss of know-how and expertise. The USA government should intervene and impose strict conditions in terms of products, costs and performance: new products with a low environmental impact not only in terms of CO2 emissions but also in terms of materials to recycle at the end of the life of the products would mean cost reduction coming form reuse of components and subassemblies. This means "rethinking" the whole manufacturing process from the idea of the model to the launch in the market, from after sales activities to the recycling of the products. This means "change" in management and the way companies are run. All that resulting in better if not cheaper cars, lower environmental impact and more skilled workers and staff. The problem is not only economic (free market yes-free market no): there is a lot of social in it. The actual american management style would be also challanged. A more rational and comprehensive view of doing business is necessary.

  3. Robin Thekemuriyilon 21 Nov 2008 at 8:32 am

    I agree with the person above me. I don't think the US government should bailout the US automobile industry. The US automobile industry is clearly sunset industry. Sunset industries are industries that are in decline because they cannot compete with the foreign market. The "Big 3" in America aren't able to compete well against the foreign competition anymore. One key thing about sunset industry is that it cannot be protected forever. The person above me mentions that they have received bailout before, but it hasn't helped them because they are at the verge of bankruptcy again.

    I understand the negative side to not bailing them out right now, in the short run millions of jobs in and outside of America will be lost. And American will lose the reputation it had for the Big 3. But if the US Auto industry is bailed out now, the problem will return again with higher consequences. The loss of national pride is not an economical argument for a bailout.

    Bailing out would be a mistake, because the Big 3 will receive a subsidy, but it’s called a "low interest loan". And as we know subsidies are a misallocation of resources. It will go against the principles of free trade. If the US Auto Industry did get a bailout, then other industry will start demanding bailouts in their sectors.

    Instead of bailing the Big 3, they should use money to invest in cleaner technology. Toyota and Honda are two firms that have being investing in alternative source of energy for cars, and both of these firms have increases in revenue.

    “At the head of the line of sustainable auto companies stands Toyota. In its 2008 fiscal year, it earned a remarkable $17.1 billion world-wide and assembled 1.66 million motor vehicles in North America. Toyota has production facilities in seven states and R&D facilities in three others. Honda, another sustainable auto company, operates in five states and earned $6 billion in net income in 2008. In contrast, General Motors lost $38.7 billion last year.”

    We already see signs that this has lead to benefits for the firm that have invested in this area. We see that firms who have invested in the green technology are the ones who have an increase in revenue. Instead of the bailout American should try to become efficient it this new green bubble. This will generate employment for the ones who lost the job. Therefore not getting a subsidy will be better for America and the World Output.

  4. Myrtheon 21 Nov 2008 at 5:06 pm

    I think that Robin has made an excellent example. Yes millions of people will lose their jobs, but if the world economy keeps going at this rate, it will eventually happen anyways. Trying to protect it now, will only mean that this car industry will go under within a couple of years. Instead, like Robin, I feel that the American car industry should focus on something, closely related, but an industry that is still at its infant stages. That of green cars.

    If American invests in the developing of cars who use an alternate source of energy the long term effect would be more green cars and more jobs created. The short term effect however would mean that America needs to invest in reeducation and such to be able to employ the people who will now lose their jobs.

    I believe that if the American government tries to protect this industry it will sooner or later realize that this industry is not a 'want' for the American consumer, with oil prices rocket high. Consumers are looking for cars that use an alternate source of energy. It would be a waste of time and money if this industry would be protected by the government.

  5. Merion 21 Nov 2008 at 7:41 pm

    After I read the article I was going to come here and say exactly what Robin said above. That the American car industry is a sunset industry and it will keep. Subsidizing the car industry will only slow down the decline but it will happen eventually. It is misallocating resources and creates dead weight loss and there are other countries that can produce cars with lower opportunity cost.

    Of course the US doesn't want to cause unemployment but it will also happen. They will have to find a way to provide more jobs and educate the people who lost their jobs because of the decline.

    I like Myrthe's idea of America investing on alternative energy sources in cars. This will be needed in the future and it will provide new jobs for the Americans. Maybe they should move from producing cars to researching new technology and let those countries produce cars that can do it more efficiently.

  6. celineon 21 Nov 2008 at 8:16 pm

    well there are obviously two sides to the story, if America doesn not bail the car industy out, then not only a lot of jobs in th U.S. will be lost, but all around the world. For example Germany, which has every 6 person work in the extended "car industy."

    i agree with Myrthe that America should find something else to invest its money in to, something that has a future and will create more jobs.

    Furthermore, i believe that the theory of the survival of the fitest is a good way of showing that we are undertaking an evolution in consumer behaveoir. The companies that cant make it through this crisis, will definitly not make it through the next one, so why wast taxpayers money on a lost cause?

  7. Miguelon 21 Nov 2008 at 9:40 pm

    I don't think America should bail out its auto industry. Everyone above me have all addressed the pros and cons of this argument. But another reason why America should not bail out their auto industry is because, once the big 3 firms close their factories in America, other car companies can come in to the US to build their cars there, instead of doing it overseas. Firms like Honda have already started to do this, as it is cheaper to build cars in the US and selling them to Americans instead of building them overseas and then shipping them to the US.

    I don't think American's taxpayers money should not go into this bail out plan. The American auto industry is being inefficient and America should reallocate their resources in to another source of production.

  8. Maddi Diamondon 21 Nov 2008 at 9:43 pm

    celine's last paragraph perfectly describes my opinion of the US auto-industry debate. The principle of comparative advantage is in danger, and when the US bail out their auto-industries (which i am sure they will, due to their current economic crisis, and the massive job losses which will be associated to the failure of these industries), nothing good will arise as a result.

    Of course by this point there is not much new material left to add to the discussion, but these are what I see as reasons why the US should consider letting these obviously inefficient, dying industries rest in peace.

    Firstly, like many have already said, these industries are doomed to fail even if they get through this economic crisis, because they are simply not efficient enough to compete with the world’s car manufacturers.

    And this is why the government should not waste valuable (especially in these times of recession) tax payer money to actually better the US in the long run, such as investing in strong, competitive industries which will bring the US revenue, or of course, re training to workers who are unemployed due to the car industries’ failure, and subsidies to strong industries to provide them with more work.

    Bailing out the US car industries will only lead other US industries to believe that if they were to fail, they too will be bailed out, and will lead to over-zealous, irresponsible action by other companies, in a time when the US really cant afford mistakes!

  9. Oliveron 21 Nov 2008 at 11:22 pm

    I believe that the US should not bail out its automobile industry because of two reasons. Firstly the us automobile industry is loosing a large amount of money each day, and it is a waste of money to. Secondly the US automobile industry cannot keep up with its foreign competition.

  10. Lisa Gon 21 Nov 2008 at 11:35 pm

    I agree with people that are against the bailout, which is pretty much, everyone on the blog. Like said before, the government should not bail out the auto mobile industry in Us because, from an economic point of view, it is very inefficient and cost more than it produces. The auto mobiles produce in the states are inefficient in and of then self, they need large amount of gas (about 15 liters of petrol for 100 km) where as European and Asian cars only need about 6 liter of petrol per 100 km. So the cars that are produced are economically wasteful for the consumers as they cost very much, using more petrol then other normal cars and are not considered to be very safe (in terms of a car crash). Not only are the car inefficient, but so are the automobiles factories in the US. They have been struggling for many years, I think about 30 year, but have not becomes more efficient, even though they should have become more efficient. The car industry in the US has not had much foreign competition from other countries, as the cost of transporting cars over sea is very expensive. Therefore, US consumers have only bought US produced cars. These inefficient industries should not be bail out, they are awast of money from both government and consumer. Even though, if the bailout is not passed, 3 million people will lose their jobs, and the global car market will be influenced in a negative way, there will be an overall gain for the global car industry in the long run (inefficient industries not longer exist, allow the resources they used to follow in to other industries or other car industries where they will be used not effectively). The world will suffer more in this recession if the car industry is not bailed out in the US, but in the long run the cost is smaller and the gain is larger.

  11. Benji Rosenon 24 Nov 2008 at 7:29 pm

    Though the argument (presented by everyone on this blog so far) against the bailout is strong from an economic stand point, there is a side to this argument your all forgetting. The argument is that an industry that is inefficient should be dropped and the resources put towards more profitable ventures. A business that is failing is not worth bailing out since it will continue to be a drag on the economy.

    But, there is also some economic and political value in America not outsourcing all of their products. For example, the American people will send 700 billion dollars out of the country this year alone (according to a blog by mr Hauet). Outsourcing most of the products americans use is bad for the economy and any chance that the car industry in america could improve and help get the money flow back into the U.S economy with successes like the one in Brazil. With over a hundred billion dollars flowing out of the country in paying for the iraq war, it would seem like that cash flow is very one way and having commodities to sell the world seems quite important for a nation in that situation.

    I agree, America is rubbish at making cars and in the short term, it makes sense economically to let an unsuccessful part of the economy wither away and die… yet in the long term, keeping an industry alive that was born in america would be a good choice. We cant predict how the American car industry will develop and if they will ever contend seriously in the world market. But their is an opportunity for the american people to finance this part of their industry, and give them a chance to learn from this failure and rebuild this industry. I agree with Lisa, the gain would be to the global automobile industry. But to build on her argument, she didn't quite make clear that though it would benefit the global automobile industry, it would damage the American economy, which is much more important to the taxpayer then the efficiency of global markets.

  12. Henry Smithon 25 Nov 2008 at 10:57 am

    I do not think that the big three should be bailed out. It was poor business decisions on the companies' part that caused their downturn. Another factor is the economy and that people are being more conservative in their purchases. The companies were struggling before the recession though. They made poor business decisions because they made some cars that a lot of people didn't want to buy and invested a lot in the production of those cars. Also, they do not compete well with foreign auto companies because the cars that GM, Ford, and Chrysler make are thousands of dollars more than the foreign cars. If there is less demand, there can be less profit and that is the case with the big three. The big three sell less and charge more for their products than foreign cars. If the big three is bailed out, they may rely on a bailout in the future if they are doing poorly. It was their fault that they are in this position, and they shouldn't rely on people's tax money to pay for their mistakes.

  13. John Rawdaddyon 25 Nov 2008 at 11:17 am

    This will be one of the first times the U.S. will have to make a decision on whether or not to bail out a big business or to let it go to shambles. In my opinion, I would not bail out the “Big Three”. It is not the government’s problem that these big name businesses allowed their financial situation to get in this position. If you are a business owner you should have seen this problem coming and the fact they didn’t goes to show that they do not deserve the money due to the lack of ability to run their business. I would also like to bring up the point that the way the government handles this situation sets the standard for how they are expected to deal with other issues that fall under this category. If they give “The Beg Three” this surplus of money, then later when another business asks for the same amount the expectation will be that they give them the money.

  14. Sean McConnellon 25 Nov 2008 at 11:23 am

    In the U.S. today, many people believe the "Big 3" auto makers should be bailed out our government to avoid bankruptcy. I agree with this statement completely because there are almost 1 million jobs at stake and people are always complaining about how we are not spending enough money and that is why we are in a recession. Losing 1 million jobs wouldn't help our spending ability. We all think back to the economic basics but this situation is about efficientcy and those things. This is about people being able to live and send there children to school someday, so that maybe they won't have to work low income jobs. One other problem is why do the people with the lowest income and the ones, who need money the most always have to take the hit for the big guys, who have made all of the mistakes in the first place. That is my main problem with the large corporations because you have the hardest working and most trustworthey person losing his or her job. This goes to show that life is truly not fair but I do believe our economy needs to be altered greatly by our next president because the rich keep getting richer and the poor keep getting poorer.

  15. Mark Shermanon 25 Nov 2008 at 11:56 am

    I feel that the government should bail out the auto industry. The reason I feel this way is because if the auto industry in our country goes down, then what is left of our economy will also begin to go down too. The auto industry is a major part of the foundation of our economy. If they were to go under many jobs would be lost. These jobs lost wouldn’t only be from the car companies themselves; but from many other industries in our country. Although I am for the bailout, I think it should come with a few stipulations. I feel that the Executives of the Big Three should bring their resignations with them to Capitol Hill when they go before Congress to ask for money. These greedy CEO’s need to be held accountable for poor business decisions they have made in the past few years.

  16. Brendan McNultyon 25 Nov 2008 at 12:36 pm

    Without a doubt the U.S should bail out the American car industries. It is a main point in today’s society that our unemployment rate is dropping. Just in Philadelphia people are losing their jobs from cutbacks because of our economic recession. If it is happening in Philadelphia, then it is obviously happening in every city in America. To add on top of that, people expect the government to allow 300,000 job losses just from the car industries. That will obviously increase Americas unemployment rate and result in more of a financial fix for Americans. The government bailed out the banks and attempted to help them dig out of their financial struggle. I understand that America should not allow free trade and just give these automobile CEO’s money to get them out of their debt. As long as they are just loans from the government that these car industries can prove they will be able to pay back, there should not be a problem in helping them out. Our government pays over 5 billion dollars to fund the war in Iraq, which I agree with, but there is obviously money to back up our automobile companies and spare hundreds of thousands American peoples jobs. One could also look at the comparative advantage of the money used on the bailout. Why not use it on health care? Allow me to break it into a smaller scale. In 2007, the city of Detroit was rated the most dangerous and “worst” city in America. People could easily find a comparative advantage for giving up , for example, one their professional sports teams and using that money to raise awareness and police population to fight crime. They could save many lives and clean up the streets. There is a perfect comparative advantage involving the heath and safety of Americans to benefit them that is being used on sports entertainment. There are other teams that the plays could play for and make a living. Granted, that example is a little off base, but the point is, one can find a comparative advantage for just about anything involving money that could be a bigger benefit. If that was the case, no one would be poor, everyone could afford health insurance, and people would live much better lives. Reason being, that people make a big deal about helping out fellow Americans, so why don’t we accept the bailout and help out all the people who have worked hard to get an education and receive a good job for a car industry.

  17. Havard McCurdyon 25 Nov 2008 at 1:47 pm

    The U.S. government should not bailout the Big Three. First off Japan can make more cars faster and cheaper. The Big Three need to figure out how to be more efficient to save themselves. They will keep losing money even if they do get bailed out because of their prices and costs, so the bailout will just waste money and keep the companies around longer. There is over- allocation of resources and the resources are inefficient. If the car industry gets smaller the resources will reallocate and will help us with comparative advantage in other industries, making our economy more even and stronger. Also as Andrew Carnegie once said, " It is the survival of the fittest," so whoever can't keep up will fall behind. Small companies aren't being bailed out. So why should larger companies?

  18. Joe Kozon 25 Nov 2008 at 1:58 pm

    The government should not bailout the “Big Three.” Their CEOs made horrible decisions with great opportunity costs in not making more fuel-efficient cars. Instead of making what the buyers demanded in small cars, the “Big Three” decided to continue to make large SUVs that get horrible gas mileage. They invested large amounts of money into making these cars even while the cars continued not to be bought. Even if the companies were bailed out, they would eventually decline anyway. The American car companies cannot compete with the foreign car industries. Foreign cars are much cheaper that American made cars. In order to make a profit, the “Big Three” decided to increase the price of their cars, thinking this would even out the low demand for them. This had the opposite effect than the one desired. Demand for the cars continued to decrease instead of increasing. The foreign car industries decided to decrease the price of their cars at this same time. Therefore, the demand for these foreign cars increased, which meant they made a larger profit.

    America is in a recession and few people are looking to buy an SUV, even though gas prices are currently declining. Therefore, if the “Big Three” are bailed out, these companies will make more poor decisions because they will continue to try to put more SUVs on the road. This means more taxpayers’ money being wasted on poor decisions made by CEOs. In addition, even if the “Big Three” are bailed out, they will have to be bailed out again in the not so distant future because the same mistakes will be made. Not to mention they cannot compete with the foreign car industry.

  19. JK Poirieron 25 Nov 2008 at 2:01 pm

    I think it is such a tough decision whether or not to bailout the car industry because so many jobs are at stake, but in the end i think it would be a bad idea to bail out GM, Ford, and Chrysler. In an ideal capitalist society, businesses fail all the time, it is survival of the fittest, and that is reality. The car companies looking for bailout money are union companies, which means they have to pay their union workers more money. This drives their costs up, and is why other companies such as foreign companies do not need to be bailed out. I think it is a bad idea to bail them out because if they crash and burn, new companies will come along and start a company with cheaper expenses, and will not need any kind of bailout. That is just the way capitalism works. Also, I think if we were to give them the 25 billion dollars, they would be right back here in a few years looking for more money because they would not have fixed anything. Giving them the money will not fix their company, it will just give them more time to stall.

  20. Pat Oateson 25 Nov 2008 at 2:14 pm

    I do not believe that the Federal Government should bail out the Big Three auto companies. It is a fact that foreign-owned car makers, like Toyota, Honda, and Volkswagen can produce high quality cars and earn a respectable profit in North America. They use American workers, and buy materials from the same suppliers as the Big Three. Therefore, one needs to ask why the Big Three can’t do the same? The answer is that the Big Three is heavily unionized with very high labor cost and legacy cost. It also is obvious that management has been unable to change their business model to deliver high quality, fuel-efficient cars to today’s consumer. A federal bailout would only perpetuate the status quo, and ultimately lead to bankruptcy after billions of dollars are wasted. A bankruptcy today does not mean the companies go out of existence. They could continue to operate and make the changes necessary to be a strong competitor for many years to come.

  21. Chris Higginson 25 Nov 2008 at 9:51 pm

    I think the government should bailout GM, Ford, and Chrysler because millions of jobs are on the line. If these three industries go out of business then steel companies and parts companies would also drop because cars are their main customer. This would in affect would start a trickle down process that will result in over $10 million jobs lost in total. Economists predict the worst is yet to happen and how will these workers survive without an income. The unemployment percentage would skyrocket to a record high well over 10-12%. This bailout would help break the fall a little for the next couple years. However, I do believe they shouldn't get off easy. In return forthe $25 billion the CEO's of these big three should be forced to give up their private jets. If I were going to ask the government for money I wouldn't show up in a jet, but rather a coach seat on a commercial airline and arriving in a taxi, while looking exhausted and dirty from working so hard to get out of this mess. I want to ensure the government that I'm putting in long hours at the office trying to help myself, but consequently all three CEO's left from Detroit and arrived in Washington D.C. at the same time. THEY COULDN'T JETPOOL!

  22. JMieleon 25 Nov 2008 at 10:02 pm

    I believe that the "Big 3"should not be granted the proposed $25 billion bailout to save their companies and re-structure for the future. In terms of the economic principle of comparative advantage, the U.S shouldn’t be trying to increase the market of their car industry. They should leave that to countries such as Japan and Germany, so that we can focus on other goods that we can produce with less opportunity cost. Also, the concept of Economic Darwinism makes perfect sense in this situation. Rather then trying to save one of our industries and signal to the world that we don’t stand for free trade, we should let the old markets “die out” naturally, without any aid. Lastly, it doesn’t make sense to reward a failing company with taxpayer’s money when the company hasn’t/won’t learn from their mistakes. This makes it seem like the government picks who does well and who fails in the economy.

  23. Markuson 19 Dec 2008 at 6:32 am

    Bailing out the the Big 3 goes against basic priniciples of a free market economy. If they failed to make money they were obviously not efficient enough and should therefore not survive in the market. A bailout would send false signals to the companies to keep producing cars, when demand is so low. Jobs will be saved, but most likely only temporarily. With the bailout the government is forcing the companies to make sure they undergo several changes, making more fuel efficient cars for example. However with low gas prices demand for such cars will most likely be very low. This is what happens when the government intervenes too much in the market, it becomes inefficient.

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