The Hummer Bailout

[jgaffney]

Over the weekend, there were many reports of the Big Three automakers going, hat in hand, to Capitol Hill to beg for (more) money. The WSJ has this:

For decades, Congress has never had a second thought as it imposed tighter emissions standards on GM, Ford and Chrysler, denouncing them for making evil SUVs. Yet now that the companies are bleeding cash, and may be heading for bankruptcy, suddenly the shrinking Big Three are the latest candidates for a taxpayer bailout. One $25 billion loan facility has already been signed into law, and Senator Debbie Stabenow (D., Mich.) wants another $25 billion, this time with no strings attached.

Speaker Nancy Pelosi and Senate Majority Leader Harry Reid met last week with company and union officials, and they later sent a letter urging Treasury Secretary Henry Paulson to bestow cash from the Troubled Asset Relief Program (Tarp) on the companies. Barack Obama implied at his Friday press conference that he too favors some kind of taxpayer rescue of Detroit, though no doubt he'd like to have President Bush's signature on the check so he won't have to take full political responsibility.

The news reports only briefly mentioned that there was a fourth supplicant at the table. The United Auto Workers was sitting there with a straight face, next to GM, Ford and Chrysler. I didn't hear anybody in the MSM make the connection that UAW is one of the major reasons why the American automakers are losing ground to Toyota, Honda, et al. Those companies have shown that American workers can turn out a competitive automobile product when they're not burdened with all of the union overhead. Any bailout of our Big Three should include requirements that they become similarly unburdened. The chances of that under an Obama/Pelosi/Reid administration, with their ties to organized labor, are slim, indeed.

We're in big trouble.

[bolverk]

Yes, and this time I doubt that like Chrysler did before, the loans will not be paid back ahead of schedule. This time we are in trouble.

[jgaffney]

The WSJ has this to add:

Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.

In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver -- someone hard-nosed and nonpolitical -- should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.

That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.

These are radical steps, and they wouldn't avoid significant job losses. But there isn't much alternative besides simply letting GM collapse, which isn't politically viable. At least a government-appointed receiver would help assure car buyers that GM will be around, in some form, to honor warranties on its vehicles. It would help minimize losses to the government's Pension Benefit Guaranty Corp.

But giving GM a blank check -- which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant -- would be an enormous mistake. The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end.

The current economic crisis didn't cause the meltdown in Detroit. The car companies started losing billions of dollars several years ago when the economy was healthy and car sales stood at near-record levels. They complained that they were unfairly stuck with enormous "legacy costs," but those didn't just happen. For decades, the United Auto Workers union stoutly defended gold-plated medical benefits that virtually no one else had. UAW workers and retirees had no deductibles, copays or other facts of life in these United States.

What do you think the chances are of a Democrat Congress passing a Hummer Bailout Bill that includes tearing up existing union contracts? I think we should have a serious debate about the auto workers' contracts, and how they compare with the benefits the average worker receives.

[jgaffney]

Here's more:

The media have been terrible in explaining how the homegrown car companies landed in their present fix, when other U.S. manufacturers (Boeing, GE, Caterpillar) manage to survive and thrive in global competition. Critics beat up Detroit for building SUVs and pickups (which earn profits) and scrimping on fuel-sippers (which don't). They call for management's head (fine -- but irrelevant).

These pre-mortems miss the point. Critics might more justifiably flay the Big Three for failing long ago to seek a showdown with the UAW to break its labor monopoly. In truth, though, politicians have repeatedly intervened to prevent the crisis that would finally settle matters.

The Carter administration rushed in with loan guarantees to keep Chrysler out of bankruptcy. The Reagan administration imposed quotas on Japanese imports to prop up GM. Both parties colluded in the fuel-economy loophole that allowed the passenger "truck" boom that kept Detroit's head above water during the '90s.

Barack Obama and Nancy Pelosi now want to bail out Detroit once more, while mandating that the Big Three build "green" cars. If consumers really wanted green cars, no mandate would be necessary. Washington here is just marching Detroit deeper into an unsustainable business model, requiring ever more interventions in the future.

The author offers some solutions of his own:

The simplest step forward would be to get rid of the "two fleet rule," devised by Congress's fuel-mileage managers to keep Detroit making small econoboxes in high-cost UAW factories. Dumping the rule would force the UAW to compete directly inside each company for jobs against cheaper workers abroad.

Even better would be to dump CAFE altogether. If Congress really thinks consumers must be encouraged to use less gas, replace it with an intellectually honest gas tax. Mr. Obama promised to transcend the old stalemates -- let him begin with the 30-year-old fraud that our fuel-economy rules represent.

He ran a brilliant campaign, but his programmatic prescriptions amounted to handwaving designed to capture the presidency rather than tell voters what really to expect. This may have been a virtue in campaigning but it becomes a handicap in governing. The public now has no idea what to expect -- except miracles, reconciling all opposites, turning all hard choices into gauzy win-wins. Thanks to Detroit, his honeymoon is about to end before it begins.

Somehow, I think that Madam Pelosi's fealty to the UAW will trump any sense of what is right or workable. The thought that Obama, by dint of his personality and popularity, can affect the outcome is laughable. I think we will all be treated to a finely-crafted piece of legislation that will accomplish nothing.

We're all in big trouble.