In Favor Of Bailouts

Commenter Tripp writes in on the subject of auto bailouts:

Remember Chrysler in ’79? I don’t but I do know that they were bailed out by the fed and saved from insolvency. The gov’t dictated a number of things and basically owned some kinda preferred stock in the company. They loaned Chrysler $1.5B (something like that anyways). Chrysler paid the money back 7 years ahead of schedule and the gov’t made ~$500M on the deal. NPR had a story on this the other night. Soooo bailouts may not be such a horrible thing in the end, but the number of them being discussed and their magnitude is pretty disturbing.

And, without a doubt, there is definitely a set of realistic circumstances that you could put out there that I would agree would make an auto bailout a worthwhile venture to undertake.

Ezra posts an e-mail from TNR‘s Jon Cohn expanding further reasoning behind supporting the bailouts:

1) Letting GM fail would have potentially catastrophic effects on the economy. It probably couldn’t reorganize under Chapter 11, so it’d have to liquidate. That would take down most of the suppliers, potentially sinking the rest of Detroit with it. Realistic estimates of new unemployment range from 1 to 3 million, once you include the ripple effects in communities with shuttered suppliers, dealers, etc..

2) As the subheadline says, this is not your father’s Oldsmobile we’re talking about saving. All that stuff about myopic management and labor is true. But times have changed. Among the promising signs are the use of new, plant-specific contracts that allow for the kind of management-labor cooperation that made Toyota famous. Also, the big 2007 UAW contract off-loaded a lot the crippling legacy costs (retirement and health costs for retirees). The cars have gotten a lot better, the plants more efficient. Much work remains, but they’re on the right track.

3) The foreign carmakers are struggling now, too. But they have bigger cash reserves, so they can weather the storm. The Big Three don’t have that luxury. And one reason is that the steps they’ve taken to restructure — closing down plants and brand lines, setting up a trust fund for legacy costs — cost a lot of money upfront. So their troubles are, in a sense, a function of factors beyond their control (the Wall Street meltdown) and attempting to do the right thing (spending on restructuring).

4) Even if, somehow, GM managed to reorganize under Chapter 11, it would not transform it into a better company. On the contrary, the push to improve the bottom line as fast as possible would reinforce one of Detroit’s worst habits: Seeking short-term gain at the expense of long-term health. One example is the companies’ relationship with suppliers. The Big Three are cutthroat about finding the cheapest parts, which means constantly switching suppliers. Honda and Toyota take the opposite approach, maintaining steady relationships — even if it costs a bit more — because that allows better collaboration on innovation and quality.

I’m sure that, as with most public policy questions, there is not a ‘right’ and ‘wrong’ answer here.  There are better and worse ones, and hopefully we can find out a better one sooner rather than later.  I could definitely be convinced that further bailout is the correct course of action.  I just want to be sure that it’s being done intelligently, and for the right reasons, not simply because the CEO of a major American company claims that it would be bad for America if his poorly-managed company goes belly-up.

If, as Cohn says, the Big Three are making real moves to improve on the most debilitating aspects of their terrible management structure, then there is good reason to lend them money, with reasonable strings attached, continue encouraging the positive development, and see what happens.  But simply handing money over without conditions would be an incredibly stupid development.

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