Debate Outline (con side)

Con: Should the United States government have bailed out the automobile industry?

Introduction

A. In 2009, the .“Big Three” (GM, Chrysler, and ford) were facing fmancial struggles. They were fuced with a decision: either try and work through their problem on their own by securing loans, or to go to the government for help. Of the Big Three, only Ford declined government assistance, having already secured a line ofcredit in 2006 by using all of their assets as collateral. GM and Chrysler filed for a managed Chapter 11 bankruptcy that was funded primarily through the U.S. Treasury using taxpayer money. This modified version ofChapter 11 bankruptcy that was implemented by the U.S. government appeared to have allowed these automakers to survive for the time being, but it came at the expense ofthe taxpayers and it did not address all ofthe problems that caused the Big Three’s issues in the first place.

I. The Big Three’s poor managerial choices created their financial problems, and the taxpayers’ money shouldn’t be bailing them out.

A. GM, Chrysler, and ford continued to focus on and mass produce large trucks and SUVs because of their higher profit margins despite a growing concern over increasing fuel prices between 2002-2007.

1. Research done by Thomas Klier of the Federal Reserve Bank of Chicago indicates that during the span of 2002-2007, “about 40 percent of the decrease in U.S. market share has been caused by the recent increase in the price of gaso line.” 2. More specifically, research done by Meghan Busse and F brian Zettlemeyer of Northwestern University and Christopher Knittle of UC Berkeley showed that through the period of 1999-2006, “a$1 increein goIinepricewiII decree the market share of cars in the least fuel efficient quartile (< 17.7 MPG) by 11.5%.... that a $1 increase in gasoline price will increase the market share of cars inthemofu effidentquatile(>24.3MR3) by 15.1%”

B. They allowed legacy costs to build by continuing to give out large pension plans when foreign auto makers were switching to more realistically defined contribution plans (4OlKs) back in the $Os.

1. The average per-hour base salary ofa U.S. auto worker and a foreign auto worker were about the same ($28/hour in 2007) but each worker actually cost $73.21/hour compared to $44.17/hour of Japanese competitors, with the difference being the additional benefits promised.

C. U.S. autornakers should have switched to defined contribution plans (4OlKs) in order to stay competitive and keep costs sustainable.

1. GM didn’t officially freeze their pension plans until February of2012. a. This meant that they would no longer contribute to the pension plans of workers who were promised them upon employment. Those employees would now receive 4OlKs (defined contribution plans), a change that should have been made decades ago to avoid current financial struggles.

II. There was no market failure and the U.S. auto makei should have filed for traditional Chapter 11 bankruptcy.

A. foreign automakers such as Toyota changed the nature ofthe automotive retail industry in the United States. The defined contribution plans and focus on fuel efficient cars gave them and their foreign counterparts a competitive advantage over American automakers.

1. There was no market fuilure, as the Big Three had the opportunity to alter their gamep Ian

a. If there is no market failure, then there should be no government intervention.

2. Since GM went public with their shares in November 2010, their stock price has dropped 13.07% while Toyota’s has risen 40.65% over that same span.

B. AtraditionaiChapter 11 would have forced GM and Chrysler to downsize their operations, which would have slowed the over-spending that was going on and allowed them to restructure their business modeL

III. Bailing out the U.S. automakers would cause unintended future consequences to the way American business is conducted.

A. When the U.S. government bailed out the auto industry, they gave them the notion that they were “too big to fail.”

I. When a government bails out a specific company or industry, it gives other companies the idea that they will step in and bail them out for taking on risky projects/investments. 2. Creditors will be less willing to lend money to large, struggling industries in the future if the government continues to bail these companies out of the ir debt obligations.

Reference List:

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Busse, M. R., Knittel, C. R., & Zettelmeyer F. (200$). Fain at the pump: How gasoline prices affect automobile purchasing. Retrieved from Yale University, Department of Economics: htt ://www.econ. va Ie.ecl u/scm mars/an m icro/amO8/husse-O8 1 023 .nd F

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Klier, I., & Linn, J. (2008). The price of gasoline and the demand for fuel efficiency: Evidence from monthly new vehicles sales data. (2008). American Economic Journal: Economic Policy, 2(3): 134-53.

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Sherk, J., & Zywicki, T. (2012). Auto bailout or UAW bailout? Taxpayer losses came from subsidizing union compensation. The Heritage Foundation. Retrieved from http ://www. hcritaae.oru/research!reports/2012/06/auto-bai lout-or-tiaw-ba ilout-paçr losses-came-from-suhsidizina-union-cotpçnsation# ftn4

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Zachary, A. G. (2012, September 06). Auto bailout was not unmitigated success. The Washington Post. Retrieved from http ://artic Ies.wash ingtonpc)St.col11/20 I 2-09- 06/business/35497827 I auto—hai lout—auto— industry- gm—ancl—chrvs Icr—dealers hips