Detroit, Mich. — With General Motors and Chrysler on the precipice of bankruptcy, House Speaker Nancy Pelosi and other green California legislators finally relented late Friday in allowing the use of $15 billion of an already-appropriated $25 billion in federal loans to Detroit automakers. The money — only half of what automakers requested — will provide short-term relief to keep Detroit’s two most vulnerable car companies out of Chapter 11 until the new Obama administration enters office next year.
Despite widespread concern among auto analysts that bankruptcy would devastate an already crippled U.S. economy, they are also concerned that government aid is a missed opportunity for Detroit to tackle the labor restructuring necessary to make the companies viable in the long term.
As first reported here in National Review Online as well as in the Detroit News, the California delegation had held billions in Department of Energy money hostage to their demands that the money also fund Silicon Valley–based automakers that Green activists insist are the future of auto transportation.
Additionally, the California politicians had demanded that the DOE money only be used by the Detroit Three to retool plants to make smaller, more fuel efficient cars (Pelosi had insisted any automaker relief come from the $700 billion fund reserved for financial institutions). But with the growing specter of GM going bankrupt — and sucking down millions of related jobs in its auto supply and banking chain — the more pressing concern for national Democrats became whether there would be a domestic auto industry left to retool.
A bipartisan deal crafted by Sen. Carl Levin (D., Mich.) and Sen. Kit Bond (R., Mo.) — and backed by the Bush administration — for releasing the DOE money has been on the table since November 20. But powerful Californians have stood in the way. Over the Thanksgiving break, Sen. Diane Feinstein (D., Calif.) wrote Majority leader Harry Reid (D., Nev.) declaring that “I do not support disadvantaging the next generation of American automobile companies in an effort to save the first generation.”
The roadblock revealed the deep animosity between California and Michigan interests that has been an undercurrent of the automotive debate in recent years, as West Coast greens have blamed Detroit for global warming and tried to force automakers to build more “planet-friendly” vehicles — regardless of consumer demand. As Detroit executives begged Capitol Hill in recent weeks for loan money to weather the current credit storm, California pols tried to attach strings to any loans by insisting that the Detroit Three drop lawsuits against California mileage laws — laws that analysts agree would make it impossible for them to sell cars in California.
The rivalry has increased tensions within the Democratic party, a party once dominated by blue-collar union interests in the Midwest, but that is now run by upper-income coastal greens. That shift was dramatically illustrated last month when California Rep. Henry Waxman — a zealous critic of Detroit — displaced senior Congressman John Dingell, an industry ally, as chairman of the House Energy and Commerce Committee.
This week’s hearings caused the intra-party anger to boil over; Michigan state representative Coleman Young wrote to Nancy Pelosi on Friday: “I have been appalled at the recent congressional hearings regarding the Bailout Plan for America’s Big 3 Auto Manufacturers. What is your thinking? Are you trying to kill America?” wrote Young. “Will you decide that Michigan will lead the nation into a full-blown depression? Enough! Get with it!”
Economists across the ideological divide testified this week that Detroit bankruptcies would have a devastating domino effect. Harvard liberal Jeffrey Sachs predicted Detroit Three failures could cost as many as 3 million jobs at a time when the country is suffering one of its worst recessions in 30 years. Pat Anderson, a conservative Michigan economist, agreed that a conventional, “’prepackaged’ bankruptcy would be a failure. Indeed, we see no available ‘package’ for such a huge bankruptcy.”
On top of such concerns, Friday’s Labor Department report that 533,000 jobs were lost in November seemed finally to move the green roadblock.
“Today’s announcement of major job losses and findings from Congressional hearings from the last two days make it clear that Congress must work to provide short-term and limited assistance to the automobile industry,” said a resigned Pelosi. Her surrender was no doubt cushioned by the fact that not all of the DOE’s $25 billion fund would go to the Detroit Three. Pelosi has been adamant that some of the money also assist struggling San Jose startups like Tesla Motors, which has applied for a $400 million government loan to help in production of its battery-powered sedan.
Assuming both houses pass the $15 billion band-aid (not a given), the question remains whether the Detroit Three are viable companies in the long term. Republican senators like Robert Corker of Tennessee, home to non-union Japanese plants, insist that any relief package contain bankruptcy-like provisions that would force the Detroit Three to make aggressive labor and debt reforms. “Based on the outline we have seen so far, we are disappointed,” said Corker.
While acknowledging the difficulty of bankruptcy for an industry with “a franchise and warranty nature,” economist Anderson echoes Corker’s concern (PDF available here).
In return for the federal money, automakers will have to give the government stock warrants and proof of cost-cutting — including eliminating brands, limiting executive compensation, and banning dividend payments. But gutting the United Auto Workers’ notorious work rule and pay contracts to put the companies on an even playing field with non-union Japanese transplants is less likely.
Anderson writes that automakers, “with a significant restructuring, could become quite profitable companies producing a smaller set of vehicles through a streamlined dealer network.”
But without concessions from organized labor, it is doubtful that any significant restructuring can occur.
– Henry Payne is an editorial writer and cartoonist with the Detroit News.