Bailout of Big Three Is Bankrupt
Industrial Policy: President Bush's $17.3 billion bailout for the auto industry just kicks the can down the road and does little to solve Detroit's long-term problems.
Just one day after it was reported that Bush was contemplating a "structured bankruptcy" for GM, Chrysler and possibly Ford, the White House announced it would make more than $17 billion in loans available to the automakers.
It's a lousy deal that rewards bad management and a stubborn United Auto Workers union. Together, they've made a series of bad decisions led to the U.S. industry's precipitous decline. American automakers were once dominant; today, they control less than half the market. This bailout will do nothing to change that.
Worse, as with the recent bank bailout, the U.S. government might soon become a controlling shareholder in the auto industry, since part of the deal requires GM and Chrysler (Ford isn't taking part) to give the government stock warrants in exchange for loans.
In giving his reasons for, in effect, nationalizing the car companies, Bush was blunt. "Allowing the auto companies to collapse is not a responsible course of action," he said, calling bankruptcy "an unacceptably painful blow to hardworking Americans."
But the fact is, the industry will now get money for doing nothing. No restructuring and no rewritten labor contracts, which are what the industry needs. This deal only buys time for the industry until March, when the loans come due.
Mark Zandi, chief economist at Moody's Economy.com, estimates the automakers will need $75 billion to $125 billion to stave off bankruptcy. Better to bite the bullet now with bankruptcy than have this massive bailout cost hanging over a struggling economy.
So why did Bush buck his party in Congress and accept a bailout? With a month left in office, no doubt he has governing fatigue. After the financial crisis and nonstop battering by the left-leaning mainstream media, he has little political capital to spend. He can't force the auto companies and unions to make concessions.
And being the decent man he is, Bush is keen not to hand President-elect Obama a major crisis on his first day in office.
That said, this bailout comes up short in a number of areas, starting with the fact it might not even be legal. Remember, the money will come from the $700 billion Troubled Asset Relief Program. But TARP was explicitly created to bail out financial institutions.
Moreover, though the bailout deal limits executive pay and, symbolically, forces the Big Three to mothball their fleet of corporate jets, it really requires them to do little else.
What it does do is set "targets" for future action, such as getting rid of the UAW's notorious "jobs bank," slashing dividends and cutting workers' pay to make them competitive again with profitable foreign car companies. But no one can force them to accept this.
The loans can be called in as early as March, if the auto industry isn't deemed "viable" by then. So expect the Big Three to be back for more cash in just a few months, with little to show for what they did with the last chunk they got.
It's true, as bailout supporters say, that the auto industry is very important to the U.S. economy. It accounts for 4% of GDP, 20% of manufacturing GDP, and employs more than a million workers.
That said, the Big Three together are losing $6 billion a month, and all of those jobs are now in peril. This bailout doesn't improve the picture one bit. Bankruptcy would have been better.