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Court the Big Three
Paulson & Detroit.


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Stephen Spruiell

Treasury Secretary Henry Paulson is a busy man these days, and last Friday his life got busier. The previous night, Congress had explicitly rejected a bailout package for the three Detroit automakers. Senate Republicans, joined by some Democrats, blocked the bill after the United Auto Workers rejected a compromise that would have required them to accept lower wages and benefits. UAW president Ron Gettelfinger thinks that the union has compromised enough, even though UAW wages and benefits are still higher than what the foreign automakers operating in the U.S. pay their American (non-union) work force.

The White House issued a statement last Friday to the effect that it would not allow any of the Detroit automakers to fall into bankruptcy. Thus, the task of saving them fell to Paulson, who has hundreds of billions of dollars at his disposal courtesy of the extraordinarily flexible Emergency Economic Stabilization Act, otherwise known as the $700 billion bailout. Treasury is being tight-lipped about the options Paulson is considering, but there is only one way for him to do this right: He must make any financing he extends to the automakers part of a prepackaged bankruptcy. No “car czar”; just an offer to secure or guarantee (or possibly even make directly) any loans the Detroit three need to continue operating through Chapter 11.

Chapter 11 bankruptcy is the only option that makes Detroit competitive again, because no politically appointed official — in this case, the car czar — would have the power to force the Detroit three to tear up their labor contracts, downsize their operations, and reconstruct their businesses so that they are making cars the American public actually wants to buy. By contrast, a bankruptcy judge could force the automakers to accept these painful but necessary changes. Even if the Bush administration appointed a hard-headed realist to be the car czar, that person would soon be replaced by Barack Obama and the Democrats, who are beholden to the UAW and more interested in pleasing the Sierra Club than the American car-buyer anyway. The car czar would soon be nothing more than an intermediary between the Detroit three and Congress, repeatedly returning to ask for more money. Anything short of bankruptcy for the Detroit three is a perpetual life-support machine for three money-losing companies.

Nobody is rooting for layoffs, but it is not fair to bail out the automakers and not the thousands of other companies that are laying off workers during this recession. People often draw comparisons between the automakers and the Wall Street banks that got bailed out as part of the misnamed Troubled Asset Relief Program (TARP, misnamed because the $700 billion hasn’t been used to purchase any troubled assets). But these banks have laid off tens of thousands of workers, with more layoffs to come. The rank-and-file in the financial sector has taken a huge hit — and this is an industry that actually got a bailout. Dozens of other industries are laying off workers with no bailout for them in sight. Those workers have to be asking themselves, “Why is a UAW lineworker at GM making $28 an hour worth more to the U.S. economy than me?”

Pretty soon, if Paulson hands the automakers a blank check, this question won’t be just a rhetorical one. More industries will come forward seeking a bailout. They will learn the lesson of the Detroit three — that if you just shout “Great Depression” loud enough, policymakers who are terrified of the blame that might befall them will choose action over inaction, regardless of the cost to taxpayers. It helps to have a powerful union on your side, but once the Democrats eliminate the secret ballot in workplace votes by passing the Orwellian-sounding Employee Free Choice Act, that shouldn’t be a problem for any industry. Non-union workforces will become increasingly rare.

The Detroit three’s strongest argument so far against making them reorganize in bankruptcy court is that the American public won’t buy cars from a bankrupt automaker. But recent surveys suggest that a Chapter 11 reorganization for one or more of the Detroit three automakers would not be the disaster that they and their apologists have claimed it would be. In fact, these surveys show that people would continue to buy cars from the Detroit three even in bankruptcy, so long as the government stood behind them as a senior creditor of sorts.

That is the proper role for government in this case. Paulson has a lot of money at his disposal, but neither he nor Obama’s choice for car czar will have the knowledge or the political independence needed to make the bankrupt automakers competitive again. Only they and their creditors can solve their problems, and only in bankruptcy court. If Paulson wants to get this right, he’ll offer them whatever support they need to survive that process, and nothing more.

— Stephen Spruiell is an
NRO staff reporter.



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