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No New Deal For Big Three

This column was written by The Editors.
Last month, it was $25 billion. This month, it is $34 billion. Does anyone need a clearer illustration of what we're getting into if we bail out the Big Three automakers?

Nothing in the plans they submitted to Congress this week modifies our understanding of their predicament - the only thing that has changed is that extra $9 billion added onto the amount of money they want. They are facing the same problems they faced before, and the solutions they have devised are unconvincing. A bailout for the Big Three would only postpone their day of reckoning, at which point they would be back for more money. Bankruptcy, on the other hand, would spare the taxpayers and put the Big Three on a sounder footing for the future.

House Speaker Nancy Pelosi has declared that bankruptcy for the Big Three is not an option. But bankruptcy, properly approached, is the best option. It seems that Pelosi has succumbed to the fearmongering of people such as Chrysler's vice chairman, who said letting his company fail "could trigger a depression." Such claims are based on faulty evidence.

The Big Three execs and their confederates in the automakers' unions (they're all in this together now) claim that bankruptcy would mean an immediate liquidation of their companies, the loss of three million jobs, and a reduction in U.S. personal income of $150 billion.

The first claim is based on surveys purporting to show that 80 percent of Americans would not buy a car from a bankrupt auto company, because that company might not be around to service the warranty or to provide parts. The latter two claims come from a Center for Automotive Research (CAR) study on the economic impact of letting the Big Three fail. The study assumes a major wave of supplier bankruptcies and therefore that "not only does domestic production by the Detroit companies fall to zero in the first year, but that domestic production (in the U.S.) by the international producers also falls to zero."

The assumption that all automobile production in the U.S. will fall to zero is plainly preposterous. The Big Three will not cease to function if they enter Chapter 11 bankruptcy. They currently supply nearly half of the U.S. auto market, meaning that, as a practical matter, 80 percent of Americans couldn't stop buying from the Big Three even if they wanted to - the "transplants" (foreign companies making cars in the U.S.) simply don't make enough cars. Demand for cars, depressed though it may be, will give the banks - particularly the Big Three's creditors - plenty of incentive to provide the automakers with "debtor-in-possession" financing, which will keep them operating through bankruptcy.

Without bankruptcy, however, the Big Three will continue to struggle with labor contracts that have left them unable to produce cars cost-effectively. The United Auto Workers union made vague gestures toward reform after a meeting Wednesday afternoon, but offered few specific concessions. The union refuses to give up the work rules and product commitments that have hobbled the Big Three's ability to shed jobs and eliminate brands in response to market signals. A bankruptcy judge could throw these provisions out and force the automakers' unions to accept reality.

Even though a radical restructuring in bankruptcy would redound to the Big Three's long-term benefit, the auto execs are opposed to it because there is nothing in it for them. This is the kind of short-term thinking that led these companies to their present straits. Rewarding them would open the door for any number of large companies to cry "Great Depression" the next time they want a bailout. In this case, the only thing we have to fear is the fearmongers themselves.
By The Editors
Reprinted with permission from National Review Online