The U.S. Government Should Allow the Big Three Automakers to Go Bankrupt

1. Definitions. For the purposes of this debate, the "Big Three" are General Motors, Ford, and Chrysler. "Bankrupt" is a legal state of financial insolvency whereby (a) stockholders lose all of their equity investment, (b) future contract obligations of the corporation are voided, and (c) creditors are apportioned the corporate assets under court supervision. It is within the scope of the debate to permit modifications to the existing law, a "special" bankruptcy, so long as the three provisions of the definition are broadly maintained. Welfare assistance to unemployed workers may be provided by the Government, separate from any bankruptcy. What is at issue is the Government providing loans or grants, a "bailout." to one or more of the Big Three solvent in order to avoid bankruptcy. 2. A bailout would at best postpone inevitable failure. Automobiles can be manufactured profitably in the United States. Foreign-owned automakers such as Toyota have many plants in the U.S., and those plants manufacture profitably. There are two reasons why the Detroit-based Big Three are failing: (a) their labor costs, in Michigan and other northern states, are approximately double that of the plants, mainly in the South, run by foreign manufacturers, and (b) the Big Three has many billions in legacy costs accrued from labor contracts that provide lavish pensions. A bailout will do nothing to remedy these basic problems because the contractual obligations for both will remain intact. Only bankruptcy can remove the continuing obligations. Thus a bailout will ultimately waste the taxpayer's money. "G.M. has an unfunded liability of $85 billion in today's money to cover future health care costs for workers and retirees. That is seven to eight times the market value of the whole company. ... G.M.'s pension plan has also been a drain. Since 1992, G.M. has plowed $56 billion in stock and cash into it. ..." http://www.nytimes.com... 3. A bailout will set a precedent whereby Congress will be obliged to bail out other companies that failed in the free market. There are currently 35 automakers in the category of making more than 200,000 vehicles per year, and all of the top 17 sell products in the United States. http://en.wikipedia.org... At a time when there was little international competition, unions demanded high wages and benefits and U.S. automakers granted them. These were extremely unwise decisions that led to failure of the companies. However, in a free market, the companies that cannot compete should fail and cede the market to successful competitors. Having the government subsidize non-competitive companies is a bottomless pit. Even if the bail out were to work, by some miracle, in the auto industry, there would be a very long line of other failing companies demanding equity by receiving a similar bailout. The precedent should be avoided. 4. The impact on U.S. jobs will be less than feared. One may ask why the auto companies in Japan and Germany have decided to build manufacturing plants in the United States. Clearly, the economics favors domestic production. It only favors it, however, when companies have a clean slate in formulating wage and benefit packages and selecting tax-favorable states for operations. Having the Big Three go bankrupt will not change the fundamental economics that favors domestic production. Industry analyst Rich Folts states, "But because of the weak dollar versus the euro and some of the other currencies around the world, manufacturing may see a resurgence here -- perhaps not in Detroit because it's still high cost, but in other parts of the country such as the Deep South where unions aren't as prevalent. ... Working with global European suppliers, I see a greater emphasis on moving operations to the U.S -- particularly the South. They see the potential to expand because we're still the largest economy in the world. It provides them the opportunity to increase their capacity at a lower cost and be closer to their customers." http://www.manufacturing.net... 5. We should not fight the markets. It may be the case that ultimately auto manufacturing will become uneconomic in the United States. It isn't clear because the increased productivity from high tech automation helps compensate for increased labor costs. If that turns out to be the case, then attempting to forestall the inevitable would be a terrible mistake. In 1900, 92% of American jobs were in agriculture. Now it is about 4%, although substantially most food is produced. Suppose the government had, in 1900, decided to do everything possible to keep all of the jobs in agriculture? that isn't the path we should adopt now. We should let the market determine the best allocation of resources. 6. Easing dislocation is a proper government function. There is the potential for substantial economic dislocation during the realignment, however, the resolution allows the government to ease that dislocation. The methods for doing that including a phased selling of the auto company assets to new owners who can profitably keep the production lines running. Also, the government can provide for unemployment benefits and retraining of workers. 7. Industry transitioning can succeed. There is an excellent example of a similar situation. North Carolina was once heavily dependent upon textile manufacturing and tobacco growing. those industries became largely non-competitive. Rather than receiving bailouts, the state successfully transitioned to new industries, including finance, pharmaceuticals, and technology. 8. Conclusion. The government can help the Big Three transition to new ownership under a bankruptcy sale and redeployment of their assets. The union pensions already have billions in funding, and they would get more as creditors in the sale of the assets. The government can also provide aid in unemployment benefits, retraining, and relocation. What the government should not do is waste taxpayer money in a vain attempt to postpone the inevitable.