The Economics of the Auto Industry
By Arnold Kling
President-elect Obama held a press conference yesterday. He said, in part,
The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil.
I would like to see the administration do everything it can to accelerate the retooling assistance that Congress has already enacted. In addition, I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States of America.
The market is telling the American auto industry that it has too much capacity. It needs to shrink.
A big reason that the auto industry is in trouble financially is that many of its current and past workers have retirement benefits (including medical care) that are defined benefits. That is, the benefits are promised regardless of whether enough money was contributed to provide for them.
Under these circumstances, if the industry shrinks, it may not be able to cover the fixed costs represented by those defined benefits. In that case, the market is telling the auto companies to declare bankruptcy, with the proceeds from the sale of the auto plants going to creditors, including pension beneficiaries.
Instead, of course, would those of us who have had our own retirement plans disrupted by the decline in the stock market step in as taxpayers to bail out the auto worker beneficiaries?
Yes we can!!