I don’t know about you, but my jaw literally hit the floor when the chief executives of Detroit’s “Big Three” begged for a taxpayer-funded bailout.   Never mind that General Motors Corp (GM), Ford Motor Co. (F) and Chrysler LLC are now seeking an aggregate $34 billion – which is up 36% from the $25 billion the Big Three was seeking just two weeks ago – or that they “drove” to Capitol Hill in a caravan of new hybrids so shiny they could’ve made the Keystone Cops green with envy.

And now that negotiations are under way to “advance” the three U.S. automakers $15 billion from an existing loan program, I don’t know whether to laugh … or to cry, since the total amount actually needed may be north of $150 billion. [Click here for an update on the Big Three Bailout].

The bottom line: Detroit doesn’t need a bailout.

It needs a shakeout.

How to Really Assess the Big Three’s Health

Nothing drove that point home more than when Ford CEO Alan R. Mulally who, after admitting “big mistakes,” attempted to sway Congressional members by saying that “we’re really focused now.”

I may not be the brightest bulb in the bunch here, but it seems to me I’ve heard this same mea culpa before – several times. Indeed, wasn’t that what the Big Three said:

• Back in the 70s, after Japanese-made cars that were better made and more economical started grabbing huge swaths of U.S. market share.
• Back in the 80s when U.S. quality began to suffer badly.
• And again back in the 90s when they tossed their lot in with SUVs and trucks.

But I really have to question whether GM, Ford and Chrysler were “really focused” after supposedly beating back each of these challenges, since the Big Three has seen its market share drop from more than 70% then to less than 50% today.

They’re so “focused” I can’t stand it. And I can only wonder what they’ll say when Chinese automakers hit our shores in the next few years, rolling out cars that sell for 30% less than it costs Detroit to make cars for.

Even at their new salaries of $1 a year, the Big Three’s top leaders are overpaid in my book – but I digress.

The so-called Big Three are nowhere near the anchor of American industry that Detroit would have us believe. And the arguments they’re using are superficial – at best. Maybe that’s good enough to bamboozle some people, but I believe that the American public is smarter than that. I can’t speak for our elected leaders who seem hell bent for leather on sticking band-aids on all our serious problems, but that, too, is another story for another time.

Essentially, the carmakers’ case boils down to this: Each of the Big Three – GM, Ford and Chrysler – contribute billions of dollars to the U.S. economy, and directly or indirectly employ three million Americans. Thus, by allowing any or all of the automakers to fail, lawmakers would be making a major economic misstep.

That might be true, but not for the reasons the automakers have stated.

The Big Three are manufacturers. You don’t measure their success or failure by how much they purchase. You measure it by how much they sell, whether their market share is rising or falling, and what customers are saying about the quality and functionality of the finished product.

Economics 101

That brings us to the basics of supply and demand. If you recall your freshman-level Economics 101 course, “supply” is the total amount of goods and services  (in this case cars and related support services) available for purchase. Demand is the amount of a particular good or services that a consumer or consumers will want to purchase at a given price.

Demand curves are normally downward sloping because consumers typically buy less of an item as its price increases. Similarly, supply curves are upward sloping because producers are willing to supply increasing amounts of their wares at increasingly higher prices. A bit of an oversimplification, perhaps, but it makes the general point.

In their rush to portray their industry as an economic linchpin and supplier of key future technologies – not to mention as a “victim” of the worst financial crisis since The Great Depression – the U.S. automakers are forgetting that their failure will not bring about a total destruction of demand. History is literally littered with failed companies. Demand for cars won’t fall off because the Big Three go under anymore than folks would stop buying beer if Annheuser-Busch Cos. Inc. (the maker of Budweiser that’s now Annheuser-Busch InBev NV) were to collapse and disappear.

What’s far more likely to happen is that Japan’s Honda Motor Co. (ADR: HMC) and Toyota Motor Co. (ADR: TM), India’s Tata Motors Ltd. (ADR: TTM), Germany’s Daimler AG (DAI) and Bayerische Motoren Werke AG (BMW), China’s Chery Automobile Co. Ltd. and Geely Automobile Holdings Ltd., and other companies from around the world will happily fill the void.

In fact, I’m certain that these companies will not only absorb key elements of the purchasing chain, but the workers, too. History shows that industry consolidation is actually a positive influence for the remaining companies and their workers. History also demonstrates that during periods of industry consolidation, there really isn’t anything other than short-term loss in business activity.

In short, if the demand is there, other firms will move in.

What Detroit is actually seeking is a bailout that preserves the status quo, and that implicitly rewards 40 years of inept management, bad decisions and poor quality. But to my way thinking, it makes no sense whatsoever to throw $34 billion at businesses that are losing $6 billion a month.

Like the other federal bailouts that I’ve opposed (as a proponent of free markets and the Austrian school of economics, I believe that bailouts are fundamentally wrong), a taxpayer-funded bailout of the U.S. auto sector would do nothing to improve Detroit’s competitive position. Instead, the capital would serve as little more than a punitive tax on such successful companies as Toyota and Honda, just to name two of the most obvious that would suffer. It would also allow Detroit to come back for more money after they blow through whatever we give them now. In the end, that will hurt both the consumer and the taxpayer – in most cases, one and the same.

Congressional sources are saying that that before the Big Three gets a cent, they would each have to make concessions similar to those extracted from the U.S. financial-services sector. Not only would the automakers have to eradicate their dividends and guarantee repayment, they’d also have to willingly submit to government control, just in case things didn’t play out as planned.

Maybe I’m the only one who sees a problem with this but such a change would mean that the same people who have been running the U.S. Postal Service would not be in charge of both Wall Street and one of our major manufacturing industries.

No thank you.

There are still plenty of strong automobile companies operating in the U.S. market that are able to offer of successful products that range from ultra-plain utilitarian models to all sorts of luxury vehicles, with to large-scale trucks in between.

And if the Big Three were to fail, still more auto firms will come to the United States, as their many foreign predecessors did in the years before.

So here’s to the natural order of things and, hopefully, a levelheaded Congress that will let the markets take their natural course and force a shakeout – and not a bailout.

Last 5 posts by Keith Fitz-Gerald

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