No Bailout For You!

Well, as many predicted (but not me, alas), the bailout of the financial industry has triggered a long, long line of other businesses looking for their piece of the action from Uncle Sugar. And near the front of the line (probably because they drove over everyone else in their gas-guzzling SUVs) is the auto industry.

There’s no denying that the Big 2.5 (and I think I’m being generous with Chrysler there) are in serious trouble right now. A lot of people like their products, but nowhere near enough. They are hemorrhaging money like a hemophiliac in a blender, and their stocks have tumbled to record lows. If you could pay for gas with shares in Ford and GM, you’d get about a gallon a share.

So they need help if they are to survive. That’s indisputable. But that raises two points: first, should the governnment help them? Secondly,if it should, how should that help be delivered?

The first question is certainly debatable, but I’d have to say yes. The auto makers are one of the few major manufacturing industries left in the US, and we need that component of our economy. Being able to make things is so fundamental that we must not give it up. So much of our economy has shifted to services of late that it troubles me. We need people and businesses that produce actual physical goods. So yeah, we ought to put some effort into keeping the auto industry alive and viable here in the US.

So that then leads to the second question: how should we help them?

Not by a simple cash infusion.

Analogies are often imprecise, but in this case likening the auto makers’ dilemma to a medical model is helpful. They are in serious financial trouble, and are cash-strapped, but simply throwing money at the problem won’t help. Yes, it is the traditional Democratic solution (witness how well it’s worked in education, in fighting poverty, winning presidential elections, and a host of other examples) and we are heading into a Democratically-run government, but it’s seldom a solid long-term solution.

The problems that the automakers have are legion, but two elements keep coming up as major sources of their woes: the costs of labor and the dealer-franchise structure. And both of them are locked in by long-term contracts and severe legal penalties should they be altered.

With expenses like that, simply giving the automakers cash (either directly or through loan guarantees) won’t do a bit of good. It would be like giving a transfusion of blood into a man who’s just had an arm severed — the fresh blood will just go gushing out the severed limb. No, you first need to stop (or at least slow) the blood loss before you start replacing that which has been lost.

The auto makers need the ability to restructure their obligations if they are to survive long-term. They need to re-negotiate their labor contracts, their obligations to retirees, and their agreements with their dealer networks to cut their massive financial obligations first.

And for that, no bailout is needed. The mechanism for such radical lifesaving surgery already exists:


Yup, good old Chapter 11 reorganization bankruptcy. Let them file for bankruptcy, throw themselves on the mercy of the courts, and come up with a plan that will keep the automakers in business.

For example, the average auto worker makes about $150,000 a year. Think about that. That’s AVERAGE. That’s some damned good money — but is it really worth that?

American auto makers, on average, have labor costs that run about 50% higher than those of Japanese automakers — and that’s based on the plants the Japanese have here in the US. The Japanese companies aren’t in trouble, so the question arises: what is the major difference between the two?

The largest one is probably the fact that the American companies are unionized. The United Auto Workers have had literally decades to wring more and more concessions out of the Big 2.5, and now the costs of those are proving too much for the auto makers to continue to honor. This would be the time for the UAW to cooperate with management, to engage in triage, to realize that fewer jobs with less generous pay beats the dickens out of no jobs with zero pay.

But that’s not how unions work The union leadership seems willing to engage in a game of “chicken” with the auto makers, hoping against reality that they can somehow keep their well-paying jobs (with commensurately high union dues) in the face of the start truth: Ford, GM, and Chrysler are on the verge of collapse.

The other problem is the dealer network. This is particularly true for GM. They simply have too many brands, and end up competing more with themselves for customers. As much as I respect the brands, GM would probably be better off if it dumped Pontiac, Buick, or both.

But that isn’t cheap. When GM phased out Oldsmobile a few years ago, it spent roughly $2 billion to end the line. Under a bankruptcy court, many of those costs could be reduced as contracts are renegotiated or set aside entirely.

No, it won’t be pretty. No, it won’t be fun. And no, it isn’t guaranteed to succeed.

But it offers the auto makers far better chances for long-term survival than simply writing them a blank check.

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