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Morning Bell: No 'Change' Coming to Corporate Bailout Parade

Posted By aarnn On November 12, 2008 @ 8:32 am In Ongoing Priorities | Comments Disabled

According to reports, ailing U.S. automakers are already lobbying [1] the Obama transition camp for a taxpayer-financed bailout, and they’ve turned up the dial on doom and gloom in recent weeks to make government action appeal all the more pressing. General Motors, for one, says it will run out of cash [2] around the end of the year unless something big happens — like an immediate economic rebound that boosts sales of its autos (unlikely) or a major infusion of government money.

These efforts are showing signs of success. In a letter to Treasury Secretary Hank Paulson over the weekend, House Speaker Nancy Pelosi (D-CA) urged government intervention [3], professing herself “convinced that our nation’s automobile industry — the heart of our manufacturing sector — and the jobs of tens of thousands of Americans are at risk.” On Sunday, incoming White House Chief of Staff Rahm Emanuel called the auto industry “an essential part of our economy and an essential part of our industrial base” and said the Obama administration would explore “different options” to save it.

An administration truly committed to “change” ought to consider this option: bankruptcy. It’s not the end of the industry, but a new beginning. Here’s why:

  • First, it’s really not so radical, in terms of magnitude. Yes, shareholders would stand to lose out, but with GM’s current market capitalization [4] of just $2.5 billion, they wouldn’t lose much. Apple, by comparison, is worth [5] $87 billion.
  • Second, reorganization would put the automakers on a sustainable course. Key are labor costs: Gold-plated salaries and benefits packages for union workers mean the automakers lose a bundle on most cars sold. There’s no incentive to renegotiate when government dollars to pay those contracts are a real possibility. With a bankruptcy judge’s approval, collective bargaining agreements can be reformed [6] to fit economic realities.
  • Third, bankruptcy is the only way to restore innovation to the U.S. auto industry. In the end, the automakers make money by producing vehicles that consumers want. But any government money is sure to come with strings attached. Pelosi, for example, said the government would exact a “recoupment [7]” for any investment of taxpayer funds — specifically, a say in what kinds of cars it produces. That’s a recipe for certain failure and future bailouts. Bankruptcy, in contrast, strips a company down to its valuable assets and then sets to putting those assets to work in the marketplace. Whether it works or not, it’s the best chance for success.

The incoming administration can deliver this dollop of change today: Take the bailout option off the table once and for all and let Detroit get itself working again.

Quick Hits:

Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2008/11/12/morning-bell-no-change-coming-to-corporate-bailout-parade/

URLs in this post:

[1] already lobbying: http://online.wsj.com/article/SB122616278065311225.html

[2] run out of cash: http://www.usatoday.com/money/companies/earnings/2008-11-07-general-motors_N.htm

[3] urged government intervention: http://www.ft.com/cms/s/0/1fc10c0e-ae63-11dd-b621-000077b07658.html?nclick_check=1

[4] current market capitalization: http://finance.google.com/finance?client=ob&q=NYSE:GM

[5] worth: http://finance.google.com/finance?q=aapl

[6] can be reformed: http://www2.law.cornell.edu/uscode/uscode11/usc_sec_11_00001113----000-.html

[7] recoupment: http://www.thestreet.com/story/10446593/1/automakers-seek-more-government-aid.html?puc=googlen&cm_ven=GOOGLEN&cm_cat=FREE&cm_ite=NA

[8] easily strike arch-foe Israel: http://www.usatoday.com/news/world/2008-11-12-iran-missile_N.htm

[9] Like Barack Obama’s stimulus plan, communist China’s stimulus plan: http://www.usatoday.com/money/world/2008-11-11-China_N.htm

[10] Alaska’s North Slope: http://www.washingtonpost.com/wp-dyn/content/article/2008/11/11/AR2008111103047.html

[11] charter schools: http://www.latimes.com/news/local/la-me-school12-2008nov12,0,5118646.story

[12] Obama Tilt: http://washingtontimes.com/news/2008/nov/10/post-concedes-bias-for-obama/

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