Both the House and the Senate are set to gavel back into session this week, and both chambers’ first order of business will be a proposed bailout for Detroit’s Big Three: General Motors, Ford and Chrysler. Rep. Barney Frank (D-MA) and Sen. Carl Levin (D-MI) will introduce legislation to carve out $25 billion for Detroit from the $700 billion Wall Street bailout passed last month. This is on top of the $25 billion Congress already gave Detroit this past September. Oh, and the auto unions have already told Congress they will ask for another $15 billion next year. If you’re beginning to notice a pattern here, you’re not alone. If Congress goes through with this auto bailout, it will not be the first nor last time Detroit will be coming to Washington with its hand out. It will simply become the way the auto industry is run.
There is no doubt U.S. auto manufacturers are in real trouble. Each company posted large losses in the third quarter, with General Motors and Ford reporting losses between $2 billion and $3 billion. But while all auto manufacturers have suffered a downturn in sales, Toyota still managed to come out in the black this past quarter. The problem is not an inherently troubled industry. The problem is that Detroit’s automakers are trapped in a business model designed for another era. Union contracts force the Big Three to pay their workers an average of $30 more per hour than competitors like Toyota. The Big Three have to keep 15,710 independent dealerships happy nationwide, compared to only 4,000 for all their Japanese competitors. Finally, the Big Three are saddled with billions in annual “legacy costs” that go to more than 800,000 retirees and pay for enormous amounts of facilities they will probably never use again.
The policy question facing Washington is how best to facilitate the changes Detroit must make to survive. The left wants to run everything through Congress. Speaker Nancy Pelosi (D-CA) wants to choose what types of cars the automakers can build and craft a centralized plan to “assure the long-term viability of the industry.” Frank wants a “very tough oversight board” that could “veto ventures” new management wants to pursue. Detroit will never go through the necessary changes with Congress in charge. The types of changes needed will be painful and unpopular, and it is difficult to imagine politicians allowing them, never mind insisting on them.
There is an alternative. And it’s right there in the U.S. Constitution: bankruptcy. Since the founding of our country, the bankruptcy process has been an essential part of the nation’s commercial fabric. Bankruptcy is not the end of the road; it is, rather, a new beginning. The reorganization process provides unique flexibility to unlock the fundamentally sound productive capabilities of a faltering business by freeing it of many obstacles to success, such as unviable contracts, crushing debt and poor management. Reorganization is the right tonic for businesses like the Big Three that need to adjust quickly to new economic realities but are, at their cores, sound, productive and potentially profitable.
The fight over how the Big Three should be reformed will be an early test for the incoming liberal majority. The auto industry is hardly the only sector of the economy that is facing difficult choices. How Washington deals with Detroit will set a precedent for other businesses. As Sen. Richard Shelby (R-AL) told “Meet the Press” this weekend: “This is just a beginning of corporate welfare in a big, big way.”
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