To bail out or not to bail out, that is the question.
Whether 'tis better in the economy
to suffer the expense and burden of outrageous union contracts
or take up bankruptcy against the risk of greater losses
and defaulting end the debt. To default to reverse --
No more -- and by bankruptcy to say we end
the bad business, and the thousands of pensioners at the gates
that demand satisfaction for their years of hard work.
'Tis truly a consumption
devoutly to be wished: Bankruptcy or Bailout?
Okay, not sure why I felt the need to rip off an ol' Englishman but I find the whole issue tiring. But lacking anything else really interesting to write about and no post for a few days I'll go over this beyond the simple fact that sometimes the economy goes to hell, and sometimes big, crummy, businesses go under too. Less than a decade ago it was the airlines that needed out from under their union contracts that were unsustainable. On principle, I don't have a problem bailing out the auto industry. I do have a few problems with this auto industry. The big 3 have screwed up their business by the numbers.
Sure, parts of it are at least explainable. The Michigan legislature is a bought and paid for subsidiary of the United Auto Workers. When management has tried to fight the union the government has always taken the side of the workers... which again, is fine, in general. Except when the demands of a union threaten to put the business as a whole out of action and leave everybody, including the workers, without jobs. Still, the first and major fault lays with management. It is their responsibility to prevent this from happening, they make millions of dollars for their "talent" in managing labor and legislatures. They failed, it's more their fault than anybody else.
Now that we know who to blame... we have a problem to solve. It's likely that letting GM, Ford and Chrysler go under will cost the government more than any bailout. Analyzing it as a matter of adding to the debt or inflation etc. actually might argue for a bailout. So, on the one hand, bailing out the auto makers will save the economy money in the short and probably even medium term. On the other hand continuing the unsustainable labor contracts will just have the auto industry back on the hill hat in hand. The only legal method for the auto industry to get out from under the current contracts is bankruptcy.
Unfortunately, bankruptcy has a few nasty side effects that might be better termed as "effects." First, sales will suck. Who wants to buy a car form a company that is has its debtors seizing color printers from the head office for sale at pawn shops? Obviously, that's an exaggeration, but the market share of the Japanese car makers will still go up with a bankrupt GM and that's not market share that's likely to return. The dirty truth is that Toyota makes better cars for less. When GM is paying north of $70/car on health benefits for workers and retirees in Michigan and Toyota pays just over $40/car in Alabama it is a very powerful advantage. GM cars cost more and are, frankly, lower quality. This is only effectively offset by national loyalty to "American Made." In the current penny pinching atmosphere I seriously doubt people will feel obliged to pay extra for pride. Second, it murders the company's credit. Cars need financing, if the company is not able to maintain a high stock price, borrow money and sell bonds they won't have the cash to give to customers who want to buy cars. Cash flow is impossible in bankruptcy because any free assets can be claimed by debtors. Sure, the courts can protect some liquid assets but that is a huge expense unto itself. Thirdly and finally, who is big enough to finance a auto-industry bankruptcy anyway? It isn't going to be Citibank that's for damned sure. The fact is that it would have to be the government that would provided protection regardless. The bankruptcy would just cost more albeit with the advantage of breaking the Union.
So on the pro column for bankruptcy we have the breaking of the UAW... pretty tempting. On the con column a much larger government expense than a bail out... pretty terrible. Bad and worse. Without being a real economist (I just play one on the Internet) I'm not going to guess. Go to somebody that you trust and take their judgement. Here are a few articles proposing one solution or another:
The Big Three Make Their Play John Steele Gordon
U.S. automakers deserve a bailout By Gregg M. Sherrill
Auto Bailouts Will Give Us Detroitsky By Robert Tracinski
Why the Dems' Drive to Aid Detroit Is Stalling Out By Jay Newton-Small
Why GM Deserves Support Short-term government backing can preserve a vital industry.By RICK WAGONER
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