21 November 2008

Detroit, bailouts and the future of capitalism

There is a lot of news this week over whether or not to "bail out" the Big Three Detroit auto makers.

The stupidest piece of "news" was played up by FoxNews, who made a big deal out of the fact that the Big 3 CEO's all traveled to Washington by private jet, rather than fly commercial. Yawn. Why should Congress or a news agency that has never run a car company tell a car company how much the time of the CEO is worth?

In the the same vein, Foxnews was quite impressed by an exchange between a congressman who asked if the chairman would be willing to take a salary of $1 per year in exchange for a bailout. (Sorry, no link.) I think the exec should have asked the congressman if, since the federal government is in the hole for trillions of dollars, if he would be willing to take $1 per year.

Writing in the Wall Street Journal, Rick Wagoner, CEO of GM, makes the case that they have done a lot already, and are on the road to recovery but need short term help. In the same paper, Michael Levine makes the case that bankruptcy is the way to go.

The CEO's, when testifying before Congress, stated that they have not made any bankruptcy contingency plans, because if word leaked out, people would stop buying their cars.

Wrong. This assumes that bankruptcy is a death sentence. I have flown on airlines that have emerged from Chapter 11 Reorganization under bankruptcy law. In 1991 when they Mall of America was opening, Macy's, the giant New York department store chain got permission from their judge to rent space at the Mall as part of their restructuring and growth toward coming out of bankruptcy.

Speaking at the same congressional hearing, the president of the UAW had a gloom and doom prediction:
But United Auto Workers union president Ron Gettelfinger said a bankruptcy could spawn others."If there's a Chapter 11 (for) one of the companies, it will drag at least one other with them, if not all of them. And I do not believe Chapter 11 is where it will end. It will go to liquidation," he said ominously.
That is scare tactic hyperbole. Perhaps what might get liquidated is the UAW, which might not be a bad thing either. If you do not want companies to ship jobs overseas, then you are going to have to give them a competitive work environment here. That does not mean that unions are automatically bad, but, as Levine points out, they are the tip of the iceberg:
GM is contractually required to support thousands of workers in the UAW's "Jobs Bank" program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it's not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities.
At this point, I find that the two most convincing arguments come from, of all places, the New Orc Times. Mitt Romney, from a car family, son of a Michigan governor, and a successful restructurer of companies, says bankruptcy is the way to go. And David Brooks, also writing in the times, sums it up well:

Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be. ...

But the most persuasive experts argue that bankruptcy is the least horrible option. Airline, steel and retail companies have gone through bankruptcy proceedings and adjusted. It would be a less politically tainted process. Government could use that $50 billion — and more — to help the workers who are going to be displaced no matter what.

But the larger principle is over the nature of America’s political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.

That is a compelling argument to me.

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