Thursday, November 20, 2008

Bailing Out the Auto Makers

The latest buzz in the news is that added to the bailout of the financial industry, the auto makers now want a piece of the pie.  In fact, they want a rather large piece, asking for $25 billion in loans from the federal government.  In the grand scheme of things, this amount only equals about 3.5% of the total $700 billion bailout that Congress has already approved, but for those of us who live in reality, $25 billion is a lot of money.

The main question that needs to be answered is, do the auto manufacturers deserve our help? Should we add them to the growing list of industries that need money to keep from shutting their doors?  Political talk show host Stephanie Miller feels they do, and she states it openly on her program every morning.  Her reasoning is that the health benefits of the workers are in jeopardy. She and her team expound daily on the need for the government to help out these people.

I have to disagree with her on this.  I think bailing out this industry is not in the best interest of America because this industry should be in the financial position to help itself, and if it's not, then we shouldn't be rewarding an industry that bankrupts itself out of its own greed, arrogance and ignorance.

Allow me to explain my position by looking at the city of Detroit, Michigan.  Detroit has traditionally been the home of the auto industry, so it seems to me to be a good place to start.  For this discussion, I am looking at the three automobile manufacturers who recently sent their CEOs to Washington to ask Congress for money; GM, Ford and Chrysler.  The CEOs are Rick Wagoner (GM), Alan Mulally (Ford) and Robert Nardelli (Chrysler).

According to, the median household income in Detroit in 2007 was $28,097, below the state level of $47,950.  As a comparison, the median household income in Los Angeles for the same period was $47,781 and for California it was $59,948.  Detroit, then has a rather low household income when comparing it to the rest of Michigan, or to my area.

Using these numbers, the median worker in Detroit is earning $13.50 per hour, assuming they work full-time (2,080 hours per year) and are not earning overtime wages.  Higher than the minimum wage, certainly.  Using an assumption from the housing industry, that houses should cost four times the annual median income, would mean that the median price of a home in Detroit should be no more than $112,388.  The median home price for 2007 was $88,800, which means that a salary of $28,097 is a livable wage.  (As a comparison, the median home price in Los Angeles for 2007 was over $660,000).  $13.50 an hour may not sound like a lot of money (and it's truly not), but it would allow the average person to purchase a home and enjoy the benefits of a being a homeowner in Detroit.

According the Los Angeles Times, the average autoworker for the three automakers named above earns $73 per hour.  Assuming this person works full-time for a year without overtime, they would earn $151,840 per year.  The UAW (United Auto Workers) has negotiated a two-tier payment system where persons employed in the industry who do not actually work on automobiles earn considerably less; $27 per hour, or $56,160 annually.  Note that in either case these workers earn well above the median average for Detroit.

What do the workers do with this money?  Apparently, they spend it.  Pundits like Stephanie Miller are calling for the government to bail out these people because their health benefits are in jeopardy, but my question is, why can't they afford to bail themselves out?  With a salary of over $150,000 they should certainly be able to put money away for emergencies such as this.  Added to this, while they were earning these wages, what were they doing to prepare for their futures?  The majority of jobs in the auto industry don't require a college education, but many industries do.  At a salary of $150,000 annually, why weren't they attending college in the evenings to earn a degree?

Now we (the American taxpayers) are being asked to bailout an industry that has paid higher than average wages to people who have not done anything to earn them.  I don't see the logic in this.  I do agree that CEO compensation is insane, and that legislation to curb such earnings would be beneficial to our country.  I think that CEO and other executives should cap their salaries at five times the wages of the lowest paid person within their company.  I also believe that this cap should extend to any perks that come with the job, not only on the salary itself.  This would mean that if the lowest paid person earns $27 per hour, the highest-paid executive would make roughly $280,800 per year.  That's a far cry from the millions they currently make, but I'm sure most people would agree that one can live quite comfortably on a quarter of a million dollars annually.

It should be noted that the salaries paid in Detroit are not necessarily indicative of the remainder of the industry.  Toyota pays an average of $48 per hour, which equates to $99,840, still more than enough money to live on.  Toyota is not asking the government to bail them out, so before Stephanie Miller and her ilk jump on a bandwagon, perhaps she should investigate the cause of this dilemma.  Greedy unions, over-paid executives and a lack of personal betterment are not reasons for the rest of us to incur further debt.