Monday, February 23, 2009

Canadian Auto Bailout

General Motors and Chrysler are asking for $10 billion in aid from Canada. This sounds like a big number, but it’s hard to put into context without some analysis. Millions, billions, and trillions can all sound the same until you think it through.

This aid package amounts to about $300 for every Canadian, including children. If the government agrees to this bailout, you can imagine $300 flying out of your pocket and going to GM and Chrysler. This money would be transferred from all of us to benefit the auto workers.

According to the Canadian Auto Workers (CAW), 33,000 of their members work for GM, Chrysler, and Ford. Out of these, about 12,000 work for GM, and 11,000 work for Chrysler. So, the GM and Chrysler bailout would support 23,000 employees.

This amounts to about $430,000 per employee! This doesn’t tell the whole story, though. There are other jobs that depend on the auto sector. The CAW claims that “there are approximately 7 jobs created for every one job in the auto sector.”

If we take this figure at face value, the $430,000 must feed a total of 8 people. Let’s say that the auto worker’s share is $150,000, and the other 7 workers’ shares are $40,000 each. This is a lot of money, and it’s just this round of bailouts. The auto companies will eventually be back for more. As I’ve demonstrated before, North American auto makers make inferior cars, which makes them uncompetitive.

Rather than pay for this enormous bailout, it would be less expensive for the Canadian government to give auto workers (and workers dependent on the auto industry) enhanced employment insurance (EI) benefits. This would make some room for new auto companies that might actually try to be competitive in the industry.

6 comments:

  1. Right you are Michael. Worse for me is the fact that I own a Ford bond. By subsidizing these two uncompetitive firms and helping them to stay in business, other car firms that would pick up the slack from GM and Chrysler's demise are weakened. I'm sure GM/Chrysler bondholders are happier too - they get their part of taxpayer money through interest and a slightly better chance return of capital. Given the GMAC Canada yield at 55% for a November 30, 2009 maturity, markets aren't supremely confident about GM's survival even till then.

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  2. I am not sure what's more galling- this demand or the mortgage bailout in the U.S. Its such a slippery slope since every private business with a pension shortfall will now ask for money.

    How about letting them restructure, paying laid-off workers to retrain into more high tech jobs and attracting other businesses to come to Ontario. Wouldn't that make more sense?

    Sometimes I think we should get a bunch of bloggers and form the new government.

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  3. Thicken: On the slippery slope subject, I think I need a bailout to pay for a nice vacation somewhere warm. Having bloggers form a government is an interesting idea. I'm not sure it's for me, though. I'm too honest to line my own pockets, and it sounds like too much work for the pay level.

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  4. I have no experience wasting other people's money being neither in the investment advisory or political arena so, alas, I am equally unsuited for any public role.

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  5. Hey James, any new comments on the auto bailout?

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    1. @Anonymous: Not much more to say about the auto bailout. The car companies have taken some of the free government money and used it to pretend to pay back other government loans. My taxes have paid for a North American car but at least I don't have to drive one.

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