From the November 23, 2008 Sunday Times (London)
November 24, 2008
by Irwin Stelzer
Set out a giant honeypot and the bears will come. And the more bearish they are about their prospects, the faster they will come, and the louder they will grunt. The Bush administration presides over a giant honeypot, containing some $350 billion. And a smaller one, with a mere $25 billion already promised to the begging bowls of the three US carmakers. This smaller pot comes with too many restrictions — money must be used only to produce greener vehicles — to suit the “Detroit Three”.
So the carmakers want Congress and the White House to dip into the money originally intended to help financial institutions weather the current credit crisis, the Troubled Asset Relief Program (Tarp).
President Bush and Treasury secretary Hank Paulson don’t want to bail out the carmakers, and so are arguing that they do not have the legal authority to transfer Tarp money to a purpose not authorised in the legislation.
If GM is on the verge of bankruptcy, says the administration, all the Democrats in Congress have to do is remove the green conditions, and the initial $25 billion will flow to GM and others to meet their immediate cash needs. By the time they burn through that cash pile — at current rates that will take a few months — Barack Obama will be sitting in the Oval Office, from which perch he can decide how much taxpayer money he wants to commit to satisfying the seemingly insatiable appetite of the cash-guzzling trio.
The politics are clear. The United Auto Workers (UAW) union, which claims more than a million active and retired members, helped deliver the key state of Michigan to Obama. They are calling in their IOU.
Two things surprised the car-company bosses when they appeared before Congress last week. The first is the weight of the baggage carried by their principal spokesman, GM chief executive Rick Wagoner, whose company is in worse shape than Chrysler, and in far worse shape than Ford, which says it can survive without aid through 2009.
Wagoner contends that GM’s problems stem from a short-term liquidity crisis caused by high oil prices, tight credit and consumer reluctance to spend — all forces beyond the control of management. But Wagoner has been boss since 2000 and at GM for 31 years. During this period its market share has sunk from over 50% to 20%, its losses have mounted so that it is haemorrhaging over $2 billion in cash every month, and repeated efforts to restructure the company have failed.
The sad truth is that GM has too many workers making too few cars that people want, being sold through too many dealers at prices too low to turn a profit.
A second surprise for GM, Ford and Chrysler has been the extent and intensity of the opposition to a bailout from a variety of politicians.
Proponents of the bailout have always expected to have a fight on their hands from conservatives who believe that capitalism without failure is like religion without sin, from long-time critics of the industry’s management, and from those who feel that the UAW has for years extracted excessively lush compensation packages from the carmakers. (If you doubt that GM’s union contracts are a big source of its inability to compete, consider this: outside North America, where it is not burdened with such legacy costs, it is a highly successful company.)
But nobody guessed that politicians in the many states in which non-union foreign carmakers such as Toyota, Nissan, Honda and BMW are providing good jobs for more than 113,000 workers would be quite so vigorous in protecting those companies from unfair, taxpayer-subsidised competition.
That opposition and the weak performance of the carmakers’ chiefs in their appearance before Congress forced the Democratic leadership to abandon efforts to push through its bill to allocate $25 billion of Tarp money to the Detroit Three. Score a win, although only a temporary one, for the Bush administration.
The car companies will now have to await the coming of Barack Obama before receiving the taxpayer-funded loans they seek — which he will make available, he says, only if he can be shown that “we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere”.
The opposition to the bailout makes a powerful case for denying aid and letting GM file for bankruptcy. A bailout will do nothing to lighten the burden of the legacy costs under which GM and others labour. GM’s over-numerous dealers are protected from termination by state laws, and its workers’ extravagant benefit packages by contracts that require almost full compensation for laid-off workers, indefinitely. Only a bankruptcy court judge can undo those legacies.
Bankruptcy is not an option, says Wagoner firmly. Consumers will buy tickets on bankrupt airlines because their relationship with the carrier lasts only for the short duration of the flight. But car purchasers are entering a long-term relationship with the manufacturer on whose warranty they must rely.
Unfortunately for Wagoner, there is an easy fix to that problem: a government guarantee of all warranties backing vehicles sold while GM (or Chrysler) is in bankruptcy. Throw in government guarantees of pension obligations, some retraining and other protection for older workers who might be adversely affected by rulings of the bankruptcy courts, and you have a compassionately conservative and economically efficient solution to the industry’s problems.
But that is not to be. Politics trumps economics, and Obama now has promises to keep. Nobody wants to take note of the fact that our British friends poured billions into a failed attempt to rescue British Leyland.
The stark choice is bankruptcy now or bankruptcy later, and now beats later by at least $50 billion.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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