Congress took a sensible step in telling Detroit to come back with a plan before lawmakers consider an auto-industry bailout. Now that the heat is temporarily off, Congress should go the full monty and shut the door.
This may seem callous, and also brutally unfair in the wake of all the help that has been doled out to Wall Street. It may also look self-destructive — what if General Motors (GM: 3.56, -0.03, -0.83%), Chrysler and Ford (F: 1.66, +0.10, +6.41%) were to fail and then dragged down auto parts makers, paint suppliers, steel firms and the like? Couldn't it lead to a chain reaction of unemployment?
The answer is no. It's important to understand that auto manufacturers are different from financial firms — or rather, finance is different from everything else. When it comes to businesses that handle money, confidence is everything.
Once it goes, customers head for the exits and pretty soon, their fear becomes self-fulfilling. Liquidity evaporates and the firm dies. Ask Bear Stearns. And since finance delivers oxygen to the entire economy, financial panics, as we have seen, can produce generalized slowdowns and recessions.
Manufacturing is different. GM has been on the endangered list for two decades, yet it hasn't stopped millions of people from buying its cars. Aside from the relatively small loss of warranty protection, no one really cares if the company they buy a car from today is around tomorrow. They care about the styling, the mileage, the durability, the quality of the engineering, and the resale value. If the U.S. Treasury could fix those things, a bailout would be a great idea. But it can't.
We know this because Detroit has already received a bailout. When Chrysler was up against the wall, in 1979, the U.S. issued a loan guarantee that enabled Chrysler to obtain fresh bank credit and survive. It has limped along since then, but its problems were never fixed. In fact, the bailout enabled Chrysler to maintain the gilt-edged union wages and benefits that were a big part of its problem.
And unlike the case for Wall Street firms, for whom there can never be life after death, non-financial firms frequently continue to operate after filing. Consider airlines. In some cities, it is hard to book a plane ticket on a carrier that hasn't been through bankruptcy. Many of the top names in retail, such as Macy's (M: 6.46, -0.20, -3.00%) and the owner of Bloomingdale's, have done time in Chapter 11, as have Donald Trump's vaunted but occasionally insolvent casinos. The debt is restructured and, often with new management, the businesses go on. Employees stay on the job, though often in lesser numbers; suppliers still get paid.
In manufacturing, in particular, bankruptcy can force hard decisions that result in a more streamlined — and more viable — business. The best example, one very close to the auto makers, is the steel industry. From the 1980s on, many of the big steelmakers, such as LTV and Bethlehem, went through bankruptcy. The corporations disappeared, but some of the mills endured. Thanks to creative vulture investors such as Wilbur Ross, American steel was reborn as a sleeker, more profitable enterprise. Today, the industry is far more productive. In 1980, it took 10 man-hours to make a ton of steel; now, only two man-hours. Obviously, fewer workers are engaged in steelmaking, but those who do often get incentive pay and earn more money. They are still represented by the steelworkers union — but their contracts are geared toward productivity rather than redundancy.
In the auto industry, bankruptcy would allow for more than rewriting union contracts. Manufacturers could shrink their dealer networks and more easily abandon vestigial brands. It wouldn't spell the end of American-made cars — just of car-making organizations that have struggled for 30 years without seeing daylight. Currently, GM pays 8,000 people who do not do work (this is a legacy of the “jobs bank” to guarantee wages). If the U.S. were to rescue Detroit, the government would be underwriting the jobs bank — creating a giant unemployment office to be administered by failing managers.
Better that the government play a role after bankruptcy. If the Big Three do end up filing, by law, the U.S. will have to backstop shortfalls in the companies' pension funds. It should also guarantee the health benefits promised to older workers. Finally, the U.S. should step up with generous job retraining. The point is that society has an interest in maintaining a decent safety net for the workers — particularly those past their working primes. It has no interest in propping up GM. Put differently, social protection should be extended to blameless people, not to blameworthy corporations.
Once the machinery of automobile-making is freed from the contractual obligation to provide benefits to an army of retired workers (currently numbering well above one million), the plants could be profitable again. Wilbur Ross-type vultures would swoop down and show the world that the Rust Belt can still build cars, just as foreign-based auto makers do in plants scattered across the American South.
There is one last important reason why Washington should not save the companies from their fates. In recent weeks and months, the free market, and also the ideal of the free market, has suffered a terrible comeuppance. The government has endorsed, for better or worse, the notion that financial firms could not survive unassisted.
There is still a bright line between keeping the finances of the country going and intervening in manufacturing, retail, services, health care — the rest of the private economy. We have yet to cede to Washington the power to determine which industries live (and, therefore, which ones die). Once we do, it will be harder — much harder — to say no to the next failing industry or firm.
A very short time ago, it was popular to proclaim that the market was never wrong, and the government never right. That was not the view here. Now, amidst a crisis of capitalism of a scale unseen since Herbert Hoover's day, it is well to remember that the market, assuredly, still does some things better. At a very minimum, we should leave the allocation of capital to capitalists.
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