Bailout for Detroit?

It seems to me that one overwhelming fact must be understood in answering the question. The "Big Three" are not the only manufacturers of cars and trucks in this country, but they are the only ones asking for government money. Manufacturers of other vehicles are doing quite well, thank you very much. They are not asking for a bailout even in the face of the same economic downturn being used by Detroit to justify the need for the bailout.

In providing funds to Detroit, the government would be acting in the role of lender of last resort. The first question that any lender of last resort must ask in determining whether to make such loan is whether the debtor suffers from a temporary cash flow problem that makes it illiquid or whether it is essentially insolvent. In looking at Detroit's request, one must determine whether the economic downturn has created a temporary cash flow problem for an otherwise sound business model or whether the business model itself renders Detroit as ultimately insolvent.

Evidence indicates that total labor costs the Big Three are approximately $73 per hour compared to other auto manufacturers in the US with costs of only about $48 per hour. This suggests that Detroit cannot compete with other manufacturers in the long term. Unless fundamental changes are made to the business model, any funds provided to Detroit will simply delay the inevitable bankruptcy or restructuring needed to allow it to compete.

Let us be clear. These cost disparities do not arise from the differences in wages between American and foreign labor. American workers happily accept a total labor payment of $48 per hour even as Detroit incurs a labor cost of $73 per hour. Foreign owned auto manufacturers operate profitably paying that labor cost. One can only conclude that Detroit must reduce its labor costs to the $48 per hour level in order to continue in business. Until it does so, any funds provided by the government will effectively act as a subsidy to keep an insolvent company in operation.