Tuesday, November 18, 2008

Why Democrats Are So Eager to Save Detroit Auto Makers

Throwing good money after Bad!

There's a big push on in Washington to bail out the Big Three automobile companies. It's the usual "crisis" scenario where scare headlines predict woe and economic gloom if something isn't done NOW!

But would a bailout of the Big Three actually solve their problems? No. But it would make sure unions which have held these companies hostage to a failing business model don't get hurt.

Consider this:

GM also famously spends over $1,600 per vehicle on the healthcare costs of current and retired U.S. workers while Toyota pays about $200 per vehicle. Although GM also pays about another $1,000 per vehicle on holiday pay, work rules, plant-shutdown-pay and line-relief to UAW workers -- expenses Toyota, for example, does not have.
And this from the Wall Street Journal:

GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive.
Foreign-owned manufacturers who build cars with American workers pay wages similar to GM's. But their expenses for benefits are a fraction of GM's. GM is contractually required to support thousands of workers in the UAW's "Jobs Bank" program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it's not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month. Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is.
GM's solution is to ask the federal government for the cash that will allow it to do all of this piece by piece. But much of the cash will be thrown at unproductive commitments. And the sense of urgency that would enable GM to make choices painful to its management, its workers, its retirees, its suppliers and its localities will simply not be there if federal money is available. Like AIG, it will be back for more, and at the same time it will be telling us that it's doing a great job under difficult circumstances.

Federal law provides a way out of the web: reorganization under Chapter 11 of the bankruptcy code. If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM's viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn't be easy but, unlike trying to bail out GM as it is, it wouldn't be impossible.

The social and political costs would be very large, but if GM fails after getting $50 billion or $100 billion in bailout money, it'll be just as large and there will be less money to soften the blow and even more blame to go around.
Here in South Carolina we have a plant manufacturing BMWs. Like similar plants in other states making Mercedes or Toyota they are all making money. No bail out needed because these manufacturers are not held hostage by unions and decades of bad decision making.

Will Congress take the easy way out and throw more money down this rathole? You bet. And when the Big Three's problems aren't solved, will they take the blame? No way. All Democrats in Congress are really interested in is a union bailout that rewards campaign contributors and sets them up for more contributions in 2010.

At some point, it's no longer a financial bailout, it's a Democrat bailout!

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