Lexington, KY - With jobs being important news in this time of recession, much of the discussion of the potential bailout of the auto industry focuses on probable job losses in that sector of the economy. Fear of job loss is natural, and it's important to be concerned about the health of our economy in this regard. But we seem to be quickly losing sight of where jobs come from and how to promote job growth (or at least stave off their decline), and lapsing into feel-good but misguided reasoning.
A lot of this ill-advised logic is captured by a quote from General Motors announcing the termination of its flight operations: "... GM is immediately ceasing all corporate aircraft operations, unfortunately impacting approximately 50 hourly and salaried employees." (reported by Time in partnership with CNN on December 4). Was the main reason for corporate aircraft operations in the first place to employ more people? If that's the correct mode of thinking, firms ought to be hiring one group of folks to dig ditches, and another to fill them in. You get lots of people employed that way. But putting it in such stark terms illustrates how silly the above quote is. Jobs are there to create goods and services of value, not just for handing out paychecks. A paycheck stands for money, and money stands for purchasing power over goods and services. Goods and services that people want must be produced by workers in order for there to be something for the paycheck to buy.
A similar logic applies to all of GM's (and other Detroit automakers') jobs: the jobs are not there to employ people, but to produce something of value. While it seems that each of these automakers does produce some good automobiles, consumers have indicated that, for the most part, this is not true ... value is not being created. The large-scale rejection of Detroit-made autos implies that it does not make sense to have jobs producing these products.
That doesn't mean all is lost for autoworkers. There are plenty of other goods and services that the public wants. Figuring out what they are is not that easy, though. In the market-based economy of the United States, this is accomplished by firms continuously experimenting with new brands, new features, new goods and new production methods. The successful ones pay off and thrive and the failures die off. Jobs follow the successes. This generates a lot of job creation and destruction; in a typical quarter, the U.S. economy destroys about 7.5% of its jobs but creates about 8.2% new ones. Though seemingly messy, this process pays off by generating jobs that "signify" valuable goods and services.
Bankruptcy, restructurings, and refinancing can be important parts of this process. Use and control of unsuccessful business operations need to change in order that something of value is produced and meaningful jobs created. Each of the above can play a role in this. Most bankruptcies are the Chapter 11 variety, where the firm continues to operate (often with a debtor-in-possession loan) while negotiation proceeds among claimants on the firm's assets; restructuring the company and its plans occurs; and new financing arrangements are made. A bankruptcy court oversees the negotiation of claims, while those providing financing monitor and evaluate the changes in business plans. Some assets may be divested and acquired by others to put to different uses.
In times of economic slowdown, there is a lot of uncertainty about how much and on what consumers wish to spend their money. Thus, it is especially important that the above-described process occurs quickly and efficiently so that jobs can be saved and redirected. Unfortunately, many of the current U.S. government auto industry bailout proposals do not promote this end. They seem to be an odd combination of status quo and political correctness. The proposals all aim to salvage the (former) Big Three as viable corporations. The goal should be to allow a restructuring so that good jobs emerge. This might mean a buyout or acquisition, with the assets redeployed in more productive uses. The names GM, Chrysler and Ford, while important in American business history, are not sacred and should not be treated as such ... especially if they don't make viable products!
Other parts of the proposal extract promises for the feel-good projects: more investment in electric cars, hybrids, and high-mileage vehicles. But what if they turn out to be no good and people don't buy them? It looks good politically, but turns into a waste of taxpayer money and jobs that fail to create value.
Permeating through all this is Congress taking on the dual role of bankruptcy court and bank: supervising new financial arrangements, providing the financing, and determining and overseeing investment and divestiture plans. Does anyone really think this will result in jobs producing goods and services that the consumer really wants? I, for one, do not. By the way, there are similar concerns about recent proposals by the president-elect's office, regarding spending on infrastructure and green investments. It sounds good, but which particular investments will be undertaken? It will come down to the federal government trying to pick winners ... and that doesn't work. If you need convincing, the most recent evidence is government promotion of affordable housing and backing of subprime mortgages that lead to the failure of Fannie Mae and Freddie Mac and other financial institutions.
It's important, then, especially in this time of recession, to facilitate the private sector's making adjustments to redirect assets and generate good jobs. This is done by encouraging and facilitating the market-based process of firms determining the best uses of their assets and workers. The present automakers' bailout proposals seem to impede it ... and they run the long-term risk of having a government auto assembler, producing cars (and jobs) of questionable value, all financed by the taxpayer.
John Garen is department chair and Gatton Endowed Professor of Economics at the University of Kentucky.