Tuesday, November 11, 2008

Don't bail out the car companies

Rich Lowry makes a lot of sense on why it would be a mistake for the federal government to bail out the Big Three car companies for all the mistakes they've made in dealing with the unions and management of their companies.
US consumers have long been voting against US automakers. Now, they'll be asked to put their tax dollars at risk to preserve the very companies from which they don't want cars.
The real reason that there is all this talk of bailing out the car companies is because of the UAW and their support of the Democratic Party. They want the federal government to underwrite the contracts that they negotiated. Those contracts are a big part of the problem.
It's the UAW that saddled the Big Three with unsustainable labor costs and obligations to retirees. Detroit has desperately been trying to get out from under this burden, but Ford still lost $1,467 per vehicle in 2007, while GM lost $729 and Chrysler lost $412. Where the UAW doesn't reign, the industry thrives. Toyota and others profitably manufacture almost 4 million cars in nonunionized states in the South.

The case for the bailout is that the job losses from a GM going down - 100,000 directly, and many more indirectly - would be too painful to bear, and the government would be left holding the bag on GM's pensions. This line of reasoning conceives of GM essentially as a job programs and welfare agency.
And don't think that because we already bailed out financial institutions that the car companies should be next.
The Paulson financial rescue obviously created a dangerous predicate. But the financial system is uniquely fragile. Banks that are otherwise sound, and have been run profitably for decades, can go under in a panic. Wells Fargo, which took an equity injection under duress, shouldn't be confused with GM.
We should not be rewarding the Big Three's shoddy management. If we continue down this road, where will we stop? Are we going to be bailing out every large company that makes bad decisions and then goes under? Is Circuit City next? Will the only companies that we don't bail out be the small mom and pop businesses that are small enough to fail?

I hope Bush resists the pressure to sign onto some auto bailout now. And perhaps the Democrats can push it through after January 20, but the Republicans should resist as much as possible. As Lowry said, why should taxpayers be on the hook for cars they decided they have decided that they don't want to buy?

UPDATE: Stephen Bainbridge has a good analysis of the problems plaguing GM the other American auto companies and concludes that bankruptcy would be the best outcome for them to restructure themselves.
GM and Ford should be allowed to go through bankrupt reorganizations. Yes, there will be huge transaction costs. Yes, some of those costs will be borne by the taxpayers. The bankruptcy court’s ability to remake contracts, however, will be critical. GM and Ford need to tear up their contracts with the unions, its retirees, and its dealers. Bankruptcy is the easiest way of doing so:
As airlines and steelmakers have done, GM could use Chapter 11 to rewrite union contracts, potentially enabling it to slash retiree benefits and close plants without having to pay furloughed workers. The auto maker could even dump tarnished brands and get bankruptcy court protection from dealer lawsuits.

Letting GM avoid bankruptcy by giving it a federal bailout ought to be unthinkable, because of the very real risk that a federal bailout will come with conditions that preclude GM from fixing its core problems. It’s likely to preserve the gold plated union contracts, the excess payroll numbers, the excess plant capacity, and the excess number of dealers.