As the U.S. auto industry remains on the verge of bankruptcy, Congress struggles to decide whether to throw the big-three car companies a life preserver or leave them to sink or swim.
Bankruptcy or Bailout for Detroit Auto Industry?
One of the arguments I hear most often against a federal bail out of the auto industry is that the big-three car companies should be left to sink or swim on their own merits. While I agree that the juggernaut companies have problems all of their own making -- including inflated, inefficient corporate structures and little pro-active “green” planning –- the current crisis cannot be laid entirely at their feet.
I would argue that the weaving together of several economic circumstances created a kind of perfect storm in 2008. In other words, company inefficiencies and mismanagement are only part of the story and would not, by themselves, take down the companies in such a sudden-death fashion. Taken in combination with the skyrocketing gas prices of the last couple of years and the financial-service-industry crisis (with its resulting credit crunch), however, and Detroit is facing a huge, upward swell. Is a lifesaver appropriate? Or should we employ a Coast Guard Cutter, a National-Guard helicopter and U.S. Air Force Special Operations Command operatives (better known as pararescue jumpers) like those utilized during the Halloween Storm of 1991?
Bankruptcy
Of course, there are those who argue that a Chapter 11 bankruptcy would not necessarily be a bad thing for the big-three car companies. After all, a leaner, meaner auto industry would emerge from the restructuring. It bears noting, however, that bankruptcy is just another form of government intervention. Rather than congress formulating a plan, the judicial branch of the federal government would provide restructuring oversight through appointed trustees.
The problem with bankruptcy, however, is that the financial burden resulting from the crisis will shift to the companies’ employees (through layoffs and discharged/reformulated labor contracts) and its creditors (through debt restructure/discharge). This process can last years and take down many other companies, including dealerships and suppliers – think “trickle-down” economics.
Furthermore, the process of bankruptcy taints consumer’s perception of the car companies and their products, resulting in lower consumer confidence at a time when the economy in general has already taken its toll. After all, if I buy a GM car, will parts for it be available when I need a repair three years down the line?
Bail Out
A bail out, on the other hand, would be overseen by congress, possibly through a car czar or board. As a loan plan is worked out, conditions and stipulations can attach, limited only by creativity and verve, to insure the industry is better poised to face the future. One such condition, mentioned by Michigan Senator Carl Levin in a The Detroit News article, would require the big-three CEOs to resign. Whether or not this specific condition is utilized, the excesses of the big-three car companies can definitely be addressed.
True, the burden of a bailout will ultimately fall on taxpayers; but, ideally, this would only be true in the short run because the various bailout plans being formulated all envision a loan to be paid back with interest. Better yet, a bailout plan could involve a taxpayer guarantee of private loans for the big three, a notion that worked successfully in 1979 for Chrysler (as described by my fellow guide over at USPolitics.about.com).
Unnatural Selection
Ideally, natural selection should determine the survival of the fittest when it comes to business; but, for good or bad, internal (government regulation and politics) and external factors (trade agreements) often fiddle with the natural order of economic theory. Furthermore, the Pandora’s Box of bail-out evils has already been open courtesy of Bear Stearns, Fannie Mae, Freddie Mac and AIG. Unlike the aforementioned companies, however, the big-three car companies actually make a product and arguably form the manufacturing backbone of the country; so it is hard to see a distinction that justifies bailing out one industry and not the other.
More Information:
- G.M.’s Troubles Stir Question of Bankruptcy vs. a Bailout by Micheline Maynard / The New York Times (11/12/08)
- Bankruptcy vs. Bailout: Which is Really Better for the Taxpayer by Charles Cooper / America’s Best Companies (11/13/08)
- Market Movers: Bailout vs. Bankruptcy by Felix Salmon / Portfolio.com (11/17/08)
- How Oil Prices Are Affecting the Auto Industry / SeekingAlpha.com (8/4/08)
- Obama Pushes for $50 Billion for Automakers, Oversight Czar by Matthew Benjamin and Julianna Goldman / Bloomberg.com (11/18/08)
