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Should Chrysler and GM Get More Money?

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Wednesday, February 18, 2009; 3:10 PM

Yesterday General Motors Corp. and Chrysler LLC submitted restructuring plans to the government along with requests for additional federal aid. We asked economists and auto-industry experts if the companies should get more taxpayer money and, if so, under what conditions. Below are responses from Mark Zandi, Andrew M. Grossman, Peter Passell, Daniel J. Weiss, Kimberly Rodriguez, Matthew DeBord, Dennis Virag and Gary Burtless.

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MARK ZANDI

Chief economist at Moody's Economy.com

Taxpayers shouldn't give up on GM and Chrysler -- at least not yet.

The auto companies and their stakeholders appear to be moving in the right direction, albeit slowly. Taxpayers should make sure both firms have enough cash to make it to the end of March, when their viability plans are scheduled to be finalized.

Between now and then, policymakers should visibly prepare for the automakers' bankruptcies, which would increase pressure on the companies and their stakeholders to make the changes necessary to avoid bankruptcy. Washington should make sure the automakers are able to obtain the financing they will need in order to restructure and avoid liquidation. Backing the automakers' warranties could also stem any decline in vehicle sales after one or both file for bankruptcy.

Testifying in the Senate in early December, I argued that the ultimate cost to taxpayers of the domestic the auto industry's collapse would run between $75 and $125 billion, whether or not the automakers actually end up in bankruptcy. This cost estimate still holds. It also remains true that taxpayers will get the best return on their money if bankruptcy is avoided. However, the best way to avoid bankruptcy is for policymakers to plan seriously as if that is exactly where the automakers are headed.

ANDREW M. GROSSMAN

Senior legal policy analyst at the Heritage Foundation

In a summary of its restructuring plan, GM promises a return to profitability in two years via a "comprehensive" transformation of its business. To achieve that, the plan calls for "considerable sacrifice from all stakeholders," including bondholders, employees, labor unions and dealers.

But the company has been unable to strike necessary deals with United Autoworkers and with the holders of its long-term debt. And cutting ties with dealers, a key part of restructuring sales operations, could take years and cost billions of dollars, due to restrictive franchise laws at the state level.

GM doesn't rule out requests for additional taxpayer dollars -- which it may require, depending on market conditions and the pace at which it can cut costs and reorganize. The same is true of Chrysler.

Meanwhile, the government's initial package of "loans" to GM and Chrysler, totaling $17 billion, are unlikely to be paid back.

There's no reason to throw good money after bad. Doing so, at this point, would be plain irresponsible. If GM or Chrysler can sink or swim -- and there's reason to think they have a lot of potential -- they should be allowed to do so on their own.

PETER PASSELL

Senior fellow at the Milken Institute

Chrysler and GM made the right noises yesterday to justify one more hefty meal at the federal trough -- they both claim they're going to cut capacity sharply and demand major concessions from various stakeholders to slow the hemorrhaging of cash.

GM and Chrysler have no doubt greatly exaggerated the net decline in jobs and income that would follow from their failure. But the less tangible adverse impact of bankruptcy, measured in consumers' reluctance to spend and corporate America's reluctance to invest, is very hard to predict. And the real cost of federal outlays for the auto bailout in the midst of this deep recession isn't very large. Most of the money will, after all, end up in the pockets of semi-skilled workers who would otherwise have been unemployed. Think of the bailout, then, as an addendum to the stimulus package.

DANIEL J. WEISS

Senior fellow and director of climate strategy at the Center for American Progress

The future of the American auto industry -- and our economy and security -- rests on production of super-fuel-efficient vehicles. Under GM's latest plan, in 2012 the average fuel economy of its cars will be 33.7 miles per gallon. GM also plans to produce the first American plug-in hybrid electric car.

Chrysler's plan is less specific. It "will continue to improve overall fuel economy" with smaller cars and alternative fuels.

But some conditionality for new bridge loans is important. California's vehicle greenhouse-gas pollution standards, which 13 other states also adopted, are opposed by the auto industry. To receive additional loans, Chrysler and GM should not attempt to block these standards should the Obama administration approve the California program.

Both companies also rely on a separate loan program to retool their factories for efficient vehicle production. Despite congressional approval, the Department of Energy has not issued them. This could starve GM and Chrysler of funds to produce super-efficient vehicles.

Together, the bridge and retooling loans can stabilize GM and Chrysler, save jobs and reduce oil use.

KIMBERLY RODRIGUEZ

Global automotive practice co-leader at Grant Thornton LLP

The automakers, suppliers and dealers who have talked about the millions of people employed directly or indirectly by the Detroit Three aren't exaggerating, and the amount of research and development dollars the industry spends rivals such investments made by the Pentagon in the defense industry.

Honda, Hyundai, Toyota, Mercedes-Benz, BMW, Nissan and other foreign automakers building vehicles here stand to lose if GM, Ford or Chrysler were to fail. They share the same supply base and many of the same dealers. If one company fails, it will trigger a domino effect of uncontrolled bankruptcies in the supply base and throughout the dealer body that will hurt everyone. And bankruptcy, for anyone familiar with the process, is long, unbelievably expensive and subject to tremendous uncertainty.

GM, especially, took a positive first step in detailing aggressive structural cost changes in the plan it filed yesterday. Now it is up to the newly appointed federal automotive task force to ensure that labor and debt holders come to the table in an equally aggressive way.

MATTHEW DEBORD

Writer on the auto industry for Slate's The Big Money and The Huffington Post

The federal loans given to GM and Chrysler last year were comically inadequate, so it is no surprise the companies are asking for more. But the taxpayers need more in exchange for their money. At some juncture, life support needs to morph into a vision of future health. That means a genuine commitment to increased fuel-economy standards┬┐something the Big Three have always fought┬┐on a brisk timetable.

GM and Chrysler are talking about restructuring as a means to return to profitability by 2011, at which point they will begin to pay back their loans. The public should see what kinds of vehicles are being planned through 2015, a departure from the top-secret nature that has traditionally dominated the domestic auto industry. The next generation of cars is being conceived right now, so this is a critical time to learn what's going to be on the road and how fuel-efficient it's going to be. Call it intellectual-property nationalization. But we're all on the hook for billions now, and we have right to know what we're buying.

DENNIS VIRAG

President of The Automotive Consulting Group, Inc.

Love it or hate it, a strong domestic automotive industry is a cornerstone of a vibrant economy. Looking back, GM, Ford and Chrysler provided millions of well-paying jobs.

If GM were to declare Chapter 11, it would set the broad automotive industry into turmoil. Auto sales would erode further, falling to the 7 to 8 million range, forcing further production cuts and more plant closings. Soon liquidation would become the only viable option. The sale of Big Three assets would be difficult, at best, since companies would not be interested in purchasing extra capacity. Job losses would be permanent. With no domestic competition, foreign automakers would limit their US-based production and increase imports to meet future demand, causing further trade imbalance.

To prevent such an outcome, the federal government should grant loan requests to support American manufacturing and to have a long-term, positive economic impact: jobs.

GARY BURTLESS

Senior fellow at the Brookings Institution

Without the government help GM and Chrysler obtained last December, the two companies would already be shutting down all their plants. Even with government help, the companies will need to shrink dramatically and lay off tens of thousands of workers.

In the long run, the companies' fortunes depend on a rebound in demand for cars. If the current sales slump continues or worsens over the next couple of years, more than one major automaker will disappear.

In the short run, the only evidence the automakers can offer about their future viability is information on their success in cost cutting. The viability plans submitted yesterday by GM and Chrysler promise to slash production costs: GM will shrink employment by almost one-fifth and eliminate three of its nameplates, including Saturn and Hummer. Blue- and white-collar workers, retirees, and creditors will have to make major concessions to achieve the cost savings necessary to make the companies viable. If GM and Chrysler can demonstrate major progress in this area, they deserve public help.


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