In my December 16th, 2008, column for the Pittsburgh Tribune-Review I argued against the conventional wisdom that, back during that crisis, insisted on the necessity of a government bailout of U.S. automakers. You can read my column beneath the fold.
Would you buy a new car from this company?
Pay attention and you’ll be impressed (or, rather, depressed) by how fast baseless claims for government intervention become accepted as monuments of wisdom and of incontrovertible truth.
A current example is the now-conventional wisdom that some “special” quality of GM, Ford and Chrysler make them deserving of a government bailout. That special quality is the fact that cars are long-term investments by consumers — ones that require warranties, special servicing and parts available only from their original manufacturers.
Let’s lay out the premises of this conventional wisdom.
First, consumers will not buy automobiles from firms that are widely expected to be out of business in the near future.
Second, consumers would be so scared knowing that the Detroit Big Three are being restructured in Chapter 11 bankruptcy that these firms will be unable to sell enough cars to turn a profit – not because these firms would operate inefficiently but because consumers would worry that GM, Ford and Chrysler will each be history in a year or two. (In short, this premise is that Chapter 11 would inevitably turn into Chapter 7 — liquidation.)
Third, Chapter 7 liquidation of each of the Big Three would somehow destroy all the productive assets that now make up these firms — assets such as factories, workers’ skills and contracts to buy steel and tires. These would all go poof! into thin air.
Fourth, a government bailout will avoid these problems by assuring consumers that the Big Three will survive.
Only the first of these four premises has any merit. Consumers might well resist buying or leasing cars from companies that are on the verge of disappearing. The other three premises are unfounded.
The point of Chapter 11 is to restructure those firms whose products still likely have a significant market but whose balance sheets have gotten seriously out of whack. In the case of the Big Three, a major problem with their balance sheets is that these corporations each caved in to the UAW and promised their workers pay, employment conditions and fringe benefits far in excess of what these workers produce in a competitive environment.
These debt obligations are simply unsustainable for these firms if they are to continue as for-profit, private enterprises subject to the discipline of market competition.
Chances are excellent that some (probably scaled-down) versions of GM, Ford and Chrysler — perhaps merged together or with another auto producer — would be viable if restructured. The Big Three, after all, still together supply nearly one-half of all new automobiles sold and leased in the United States. It’s highly unlikely that none of the productive capacity in these firms would be competitive with the likes of Toyota and Hyundai.
The trouble is that now any productive efficiencies that the Big Three possess are masked by these firms’ huge debt obligations.
So, far from solving this problem, any “bridge loans” from Uncle Sam to the Big Three will only delay the inevitable need to restructure. Bailout money would force taxpayers to foot the bill for Detroit’s irresponsible past promises while it protects these firms from having to do the hard work of correcting this real source of their unprofitability. (Of course, bailout money would also protect overpaid and over-pensioned UAW members from having their pay and pensions scaled back to reasonable levels.)
With the symptoms of this serious ailment socialized for however long the bailout funds last — that is, with nothing done to cure the ailment — GM, Ford and Chrysler will be no better able to operate profitably after they run through the bailout funds than they’re able to do now.
So if they’re bailed out now, they’ll inevitably be back in Washington in the near future to beg for another bailout.
This fact means that the conventional wisdom has matters backward. If consumers are going to be made reluctant to buy cars manufactured in Detroit, it’s a government bailout rather than Chapter 11 bankruptcy that will spark this reluctance.
Chapter 11 will remove the unsustainable debt, thus allowing the Big Three to return not only to efficient but also profitable operations. It will also send a signal that government will not coddle automakers, which will tell the world that these firms must survive by pleasing consumers rather than by genuflecting and pleading in the halls of government power.
A bailout, in contrast, will only sustain the problem, making Detroit’s survival ever-more dependent upon the whims and fancies of politics.
Any consumer who doesn’t want to buy a car from a shaky company would wisely avoid one living on the dole.
