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Recently, one of the biggest automakers in the United States, General Motors, sent representatives to Washington, D. C. to convince Capitol Hill and the White House of the importance of keeping the auto industry rolling to the tune of a $25 billion dollar bail out plan (Jonathan Cohn 1). But the Detroit flagship, along with the two other ships in the fleet, Ford and Chrysler, may be headed for some high headwinds on their trip to the port of Capitol Hill (Cohn 1). The winds of opposition, so to speak, come from many directions (Cohn 1).
The Liberals in the government harp on the Big Three’s stance on the issue of their production of the “gas-guzzling” machines (Cohn 1). Conservatives on the other hand are critical of the auto industry’s propensity to shell out enormous benefit plans for their workers (Cohn). Also, many people remember the times that they would prefer domestically-made automobiles over foreign brands (Cohn 1). But not these same people would rather go for a foreign brand in a heartbeat, citing the sloppy production output of the Big Three (Cohn 1).
So what gives with the dilemma of the auto industry? What should the government do? Many do recognize that the quagmire that the auto industry finds itself in is indeed a cause of sadness and dejection (Cohn). But in the same breath, they squarely lay the blame at the feet of the Big Three and the United Auto Workers Union (Cohn 1). But the question is not to help Detroit to get on with its journey toward acceptability (Cohn 1). It should rather be seen as a shot to help it continue on its journey (Cohn 1).
But many still are of the belief that letting the Big Three sink into bankruptcy is no major concern (Cohn 1). In their estimation, if a company files for bankruptcy, the assumption is that company will not necessarily just fold up and disappear from the corporate map (Cohn 1). If the company, in this case General Motors or any of the automakers, files for bankruptcy under Chapter 11, that means that the company is still visible, meaning that the company has time to fix its financial books while still operating under protection by the banks from its creditors (Cohn 1).
But in the case of GM, the company must find ways to operate without the use of the Debtor-In-Possession, or DIP, credit (Cohn 1). It is only then that GM can build automobiles, since they can avail of the DIP in acquiring parts for the manufacture of their cars (Cohn 1). But since the DIP that was available in the market virtually dried up in the midst of the global financial crunch that hit the U. S. finance markets, there is no credit left for GM to avail of (Cohn 1).
This is why many are of the belief that GM, like the other automakers, would fall into the other classification of bankruptcy, in the form of a Chapter 7 (Cohn 1). Differentiated from Chapter 11 bankruptcy, wherein the company can still operate while availing of credit lines to remedy its financial burden, a company under Chapter 7 would have to completely liquidate its assets and holdings (Cohn 1). In that scenario, GM would have to close down completely, shutting down employment for more than 100,000 workers it still has on its payrolls (Cohn 1).
The domino effect from the eventual closure of the plants of GM would inevitably spread throughout the economy, and the spread will be fats and devastating (Cohn 1). This would mean that the laid off workers would stop in their expenditures and other facets of the economy would likewise feel the pinch (Cohn 1). From restaurants to hotels, to other establishments, all would be hit one way or another (Cohn 1). Then the local governments and eventually the state would see a reduced figure in their income ledgers (Cohn 1). The debate must come out of the “what ifs” to what can be done.
The lawmakers have finally set down definable parameters to the current debate on the proposed bail out proposal for the auto industry (Charles Krauthammer 1). But in this scenario, the Democrats in the arena are pushing forcefully to enact the bail out plan for the auto industry, with the White House providing the stiff headwind (Krauthammer 1). Where does the line fall on the entities that should be able to avail of the plan and who doesn’t? There is a “philosophical” line that divides the two parties (Krauthammer 1).
The White House, in justifying the $ 700 billion bail out of the financial sector, is of the belief that like a utility, the finance sector cannot be allowed to go under (Krauthammer). Hence, the financial sector that provides credit lines to the utilities must be afforded that line to ensure its continued operations (Krauthammer 1). Democrats, on the other hand, want to expand that coverage to other sectors in the market, calling this a stop gap measure so that the contagion of the economic fallout will not spread to other sectors of the economy, halting its spread to the housing and business echelons (Krauthammer 1).
The Democrats are willing even to go so far as to propose that the auto industry be nationalized so that the industry can cope with the demands of the market, at the same time saving the estimated 5 million jobs connected to the industry (Krauthammer 2). Spending versus cutting down: The Keynes key In the article by Krauthammer (2004), the argument lies in that the Federal government should step in to avoid the industry from ultimately collapsing (Krauthammer 2).
In effect, the Federal government would burden itself with some of the obligations of the auto industry that it would have to bear eventually in the case that the auto industry does fall (Cohn 3). But to critics, the act of the Federal government in acceding to the demands of the auto industry might just blur the lines on where the bail out plans should stop. It is expected that the finances for the bail out plan will just eventually end up with parties with connections to the powers in Washington (Krauthammer 1).
In the article of Jonathan Cohn (2008), however, the ambit of the government should be to let the natural economic order to just take place-which the government should let decrepit and inefficient companies just fall by the wayside to be replaced by stronger and more innovative companies (Cohn 2). To make the example more concrete, if the government kowtows to the demands of Detroit for them to avail of the bailout, then the government would have precedent to stop other inefficient and obsolete businesses from taking advantage of the bail out (Cohn 2).
This is on top of the views of the critics that even if the companies were run inefficiently, the government would “reward” them for doing so by letting them avail of the bailout (Cohn 2). In the political landscape, the issue of economics is twined with politics (Chapter 18). The propensity of voters to come out for the candidate that will promise wealth and prosperity has become a common feature in today’s electoral process (Chapter 18). If a policy would threaten one means of generating wealth, it is likely that the policy’s life span will be greatly shortened (Chapter 18).
But how does the theory of British economist John Maynard Keynes come into the picture (Chapter 18)? Keynes advocates that the avowed purpose of government should be the generation of wealth, spending on public works and other items with the intent of creating shorter time frames for the duration of the period of recession (Chapter 18). To Keynes, the way to bring down the growth rates of economic activity would be to impose new taxes, or in this case, to stop the spending growth pattern of the auto industry (Chapter 18).
In support of the view of Keynes, the article of Cohn would be more similar in its discussion of the dilemma of the auto industry. By deciding to stop the Big Three from availing of the bail out plan, the government can focus what little resources that it can muster to promote other activities to prime the economy (Cohn 2).
Chapter 18. “Political economy”. Cohn, Jonathan. “Panic in Detroit”. New Republic 14 November 2008 Washington D. C. pp. 1-3 Krauthammer, Charles. “The encroaching command economy”. 14 November, 2008 New York National Review Online pp. 1-2