WASHINGTON - So it's come to this: General Motors, once the world's mightiest industrial enterprise, is now flirting with bankruptcy. Ford and Chrysler may not be far behind.
Car and truck sales have collapsed. With cash reserves rapidly falling, GM may soon be unable to pay its bills.
Here's the dilemma. GM and other U.S. automakers ought to be rescued to minimize damage to the economy; but the rescue should require tough conditions that neither the Democratic Congress nor the incoming Obama administration yet supports.
In a booming economy, a GM bankruptcy might be tolerable and useful.
It would remind everyone of the social costs of mediocre management and overpriced unionized labor. But far from booming, the economy is declining at an apparently accelerating rate.
By one survey, confidence among small businesses is at a 28-year low; in October retail sales dropped a stunning 2.8 percent.
No one knows what further havoc a GM bankruptcy might inflict. The Center for Automotive Research estimates an initial job loss of 2.5 million.
The logic: If any of the "Big Three" went bankrupt, many suppliers would also fail; because car companies share suppliers, all U.S.-based manufacturers would suffer parts shortages. American production would virtually stop until new supplier arrangements emerged.
"It takes 6,000 to 14,000 parts to make a vehicle," says Sean McAlinden, CAR's chief economist. "If you don't have one, you can't make it."
This may be too pessimistic. In a Chapter 11 bankruptcy, GM would "reorganize." It would suspend many existing debt payments and continue normal operations.
Perhaps. The snag is that even in "reorganization," GM would require new loans that might be unavailable.
"Historically, when companies go bankrupt, there's 'debtor in possession' financing - investors lend you money, but they get repaid first. That market has evaporated because of the credit crunch," says auto analyst Rod Lache of Deutsche Bank.
Why run these risks when the 6.5 percent unemployment rate seems headed toward 8 percent? Just to satisfy a purist "free market" ideal?
It doesn't make sense.
But neither does it make sense simply to heave taxpayers' money at automakers. The goal is not to rescue the companies or workers; it's to shore up the economy and improve the U.S. industry's competitiveness.
A bailout won't succeed unless other things also happen.
First, auto companies' existing creditors need to write down their debts. Even with federal aid, companies will shrink.
WASHINGTON - So it's come to this: General Motors, once the world's mightiest industrial enterprise, is now flirting with bankruptcy. Ford and Chrysler may not be far behind.
Car and truck sales have collapsed. With cash reserves rapidly falling, GM may soon be unable to pay its bills.
Here's the dilemma. GM and other U.S. automakers ought to be rescued to minimize damage to the economy; but the rescue should require tough conditions that neither the Democratic Congress nor the incoming Obama administration yet supports.
In a booming economy, a GM bankruptcy might be tolerable and useful.
It would remind everyone of the social costs of mediocre management and overpriced unionized labor. But far from booming, the economy is declining at an apparently accelerating rate.
By one survey, confidence among small businesses is at a 28-year low; in October retail sales dropped a stunning 2.8 percent.
No one knows what further havoc a GM bankruptcy might inflict. The Center for Automotive Research estimates an initial job loss of 2.5 million.
The logic: If any of the "Big Three" went bankrupt, many suppliers would also fail; because car companies share suppliers, all U.S.-based manufacturers would suffer parts shortages. American production would virtually stop until new supplier arrangements emerged.
"It takes 6,000 to 14,000 parts to make a vehicle," says Sean McAlinden, CAR's chief economist. "If you don't have one, you can't make it."
This may be too pessimistic. In a Chapter 11 bankruptcy, GM would "reorganize." It would suspend many existing debt payments and continue normal operations.
Perhaps. The snag is that even in "reorganization," GM would require new loans that might be unavailable.
"Historically, when companies go bankrupt, there's 'debtor in possession' financing - investors lend you money, but they get repaid first. That market has evaporated because of the credit crunch," says auto analyst Rod Lache of Deutsche Bank.
Why run these risks when the 6.5 percent unemployment rate seems headed toward 8 percent? Just to satisfy a purist "free market" ideal?
It doesn't make sense.
But neither does it make sense simply to heave taxpayers' money at automakers. The goal is not to rescue the companies or workers; it's to shore up the economy and improve the U.S. industry's competitiveness.
A bailout won't succeed unless other things also happen.
First, auto companies' existing creditors need to write down their debts. Even with federal aid, companies will shrink.
Economist McAlinden estimates that the country has surplus assembly capacity of about 4 million vehicles, much of it owned by the Big Three and destined to be shut.
GM will need a $25 billion government loan to get through the recession and cover closing costs, says Lache. But GM already has $48 billion of debt. Unless the old debt is sharply written down, GM would be overburdened and its rendezvous with bankruptcy would merely be delayed.
Second, labor costs need to be cut.
By Lache's estimates, GM's hourly compensation - wage plus fringe benefits - totaled $71 in 2007 compared with $47 for Toyota's U.S. plants. Health benefits for retirees (many in their 50s, having retired after 30 years) are expensive.
But the United Auto Workers opposes concessions. Government aid, says UAW President Ron Gettelfinger, is needed "so that auto companies can meet their health care obligations to more than 780,000 retirees and dependents." The bailout should be more than union welfare.
Finally, automakers need a consistent energy policy.
Congress demands that companies produce more fuel-efficient vehicles (35 miles per gallon by 2020, up from 25 mpg now). But politicians also want low gas prices.
These goals are contradictory.
To encourage consumers to buy fuel-efficient vehicles, Congress should mandate higher gas prices. Gasoline taxes could be raised gradually (say, a penny a month for four years, possibly offset by other tax cuts).
Wild swings between low and high fuel prices have crippled the U.S. industry by erratically shifting buyer preferences - to and from SUVs.
In bankruptcy, a judge can modify a firm's labor contracts and debts.
GM needs the benefits of bankruptcy without the uncertainties, but the political process - so far - disdains that desirable bargain. The conditions that Democrats mention are mostly rhetorical gestures against high executive compensation and in favor of more fuel efficiency.
The Bush administration resists additional assistance without saying why.
We are now seeing the fallout of the open-ended $700 billion rescue of financial institutions. Boundaries need to be established. Who deserves support and why?
Imposing tough conditions on automakers not only improves the odds of success but also - by the sacrifices required - makes the process sufficiently unpleasant to deter a stampede of other industries seeking handouts.
In 1979, when the Carter administration rescued Chrysler from bankruptcy, the price was concessions from management, investors and labor.
We should do as much.
First of all, in a booming economy, GM wouldln't need to file bankruptcy. This isn't a booming economy. Hence, the need to file bankruptcy.
Bankruptcy would require GM to reorganize. There would be some pains at firs, but in the long run, it would be better for everyone. GM would reorganize, their old and unsuccessful ways of doing things would be trimmed away, and GM could, once again, stand on its own and become the giant it once was.
Not so with a bailout. All that will happen is that the same way of doing things will continue. In the not so long run with a bailout, GM will just need another hand out. What happens then? It goes under. With it, all of those job losses and trickle down losses the original bail out only temporarily prevented.
But, had they filed bankruptcy, all of that would have been avoided and GM would be well on its way to recovery.
The old way isn't working. Feeding it isn't the answer