Tuesday, November 18, 2008

Bailout Needed

Martin Feldstein, a conservative columnist and former economic advisor for Ronald Reagan, is right when he says that a bailout of the Big Three U.S. automakers would require more than $25 billion. The rest of his prognosis, however, is decidedly irrational. He quickly delves into typical conservative union bashing, claiming that the fates of General Motors, Ford and Chrysler would be saved if only their workers were paid less and given less benefits. Let's be clear: the Big Three have not descended towards failure as a result of overbearing union demands, they have begun to capitulate because high gas prices, vanishing credit and a deepening recession have created the perfect storm for a U.S. automaker. The Big Three had bad business models before the economic crisis -- their healthcare costs were overbearing and their products were substandard, and if the companies failed during a period of economic stability bankruptcy would be a boon for efficiency, not a tragedy for the economy. This, however, is not a time of stability, and the well-being of the Big Three is intrinsically tied to the well-being of a large sector of the United States economy. A bailout is needed, but not one that hurts those in most need of help, the workers.

Feldstein writes,
The Big Three pay much higher wages than production workers are paid in
the nonunion auto firms and in the general economy. And the health-care
costs of current workers and retired union members are an enormous
additional burden. The simplest solution is to allow GM and the others to file for
bankruptcy. If the companies file under Chapter 11, they would be able
to continue producing cars, and the workforce would remain employed
while the firms reorganized. The firms would also be able to get
short-term credit under bankruptcy protection.
There is no doubt that the fault of the Big Three's demise lies at their own hands, but in the midst of this economic crisis, allowing three huge companies to default would be catastrophic not just for the auto industry, but for nearly all sectors of the economy. Feldstein argues that if General Motors files under Chapter 11 it can restructure its union contracts, which would result in lowered wages and reduced benefits. His estimation of the situation is an uneducated one, however. The UAW and the Big Three have been making significant strides in recent years towards bettering the efficiency of their contracts. Last year UAW and the Big Three reached an agreement whereby wages for new hires would be two-tiered and healthcare costs would be shared between the union and the company. More than squabbling over the efficacy of the UAW and the Big Three's ability to resolve their inefficiency issues, however, allowing the Big Three to file under Chapter 11 holds broader implications for the economy that in this time of crisis must be considered. First, lowering wages and reducing benefits for hundreds of thousands of workers is detrimental to the economy. As Congress mulls stimulus package after stimulus package for the middle class, a restructuring of union contracts would amount to, in effect, an anti-stimulus. There is no reasonable economist that believes less money for middle class workers, especially those in a struggling region like the Midwest, would be anything but bad for the economy.

Second, filing for Chapter 11 would not simply resolve the Big Three from their serious structural issues. In fact, it is widely believed that the Big Three would not remain solvent under Chapter 11 at all, and wouldl have to file for Chapter 7 bankruptcy, liquidating its assets and shuttering its doors. This is because the Big Three simply does not have enough cash to operate. If General Motors does not have enough cash to buy parts, which it will not if no federal bailout is provided, it cannot produce cars and thus not remain solvent. It would have to shut its doors and put 100,000 out of work immediately. The implications of such a liquidation do not stop there, however. If GM goes out of business, so too do the parts makers and suppliers that depend on General Motors for business. Those parts companies going out of business will result in no parts for other auto companies like Ford and Chrysler, forcing them to liquidate as well. The Center for Automotive Research (CAR) just published a study that predicted a loss of 3 million jobs in the case of such a meltdown, which would raise unemployment nationally by an astonishing third and result in the loss of income of hundreds of billions of dollars. In this economic climate, such a collapse can simply not be allowed if we are to expect our economy to recover.

A bailout package for the Big Three would have to encompass policy areas from climate change to healthcare, but the solvency of the companies must be considered first and foremost. Of course, the Big Three cannot continue operating as monolithic companies with arcane business models, and will have to be pared down and made more efficient. Such a restructuring of the firms, coupled with large cash infusions to keep them solvent, would stave off collapse while ensuring that business as usual does not continue. In addition, broader reforms must be made. Instituting a national health insurance program, and allowing UAW workers to buy into it, would both greatly reduce the cost of healthcare and provide more solvency for the Big Three. In addition, tax incentives for production of environmentally friendly automobiles will help modernize the Big Three and ease its transition back to solvency. Additionally, the passage of the Employee Free Choice Act, which would make unionization of autoworkers more viable on a national level, as opposed to a regional one, would ease competitive pressures placed on the comparatively over-unionized Midwest.

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