How to bail out General Motors
So it's come to this: General Motors, once the world's mightiest industrial enterprise, is now flirting with bankruptcy. Ford and Chrysler may not be far behind. Car and truck sales have collapsed. With cash reserves rapidly falling, GM may soon be unable to pay its bills. Here's the dilemma.
In a booming economy, a GM bankruptcy might be tolerable and useful. It would remind everyone of the social costs of mediocre management and overpriced unionized labor. But far from booming, the economy is declining at an apparently accelerating rate.
No one knows what further havoc a GM bankruptcy might inflict. The Center for Automotive Research (CAR) estimates an initial job loss of 2.5 million. The logic: If any of the "Big Three" went bankrupt, many suppliers would also fail; because car companies share suppliers, all US-based manufacturers would suffer parts shortages.
This may be too pessimistic. In a Chapter 11 bankruptcy, GM would "reorganize". It would suspend many existing debt payments and continue normal operations. Perhaps. The snag is that even in "reorganization", GM would require new loans that might be unavailable.
The goal is not to rescue the companies or workers; it's to shore up the economy and improve the US industry's competitiveness. A bailout won't succeed unless other things also happen.
First, auto companies' existing creditors need to write down their debts. Even with federal aid, companies will shrink. Economist McAlinden estimates that the country has surplus assembly capacity of about 4 million vehicles, much of it owned by the Big Three and destined to be shut. GM will need a $25 billion government loan to get through the recession and cover closing costs, says Lache. But GM already has $48 billion of debt. Unless the old debt is sharply written down, GM would be overburdened and its rendezvous with bankruptcy would merely be delayed.
Second, labor costs need to be cut. By Lache's estimates, GM's hourly compensation - wage plus fringe benefits - totaled $71 in 2007 compared with $47 for Toyota's US plants. Health benefits for retirees (many in their 50s, having retired after 30 years) are expensive. But the United Auto Workers opposes concessions. Government aid, says UAW President Ron Gettelfinger, is needed "so that auto companies can meet their health care obligations to more than 780,000 retirees and dependents." The bailout should be more than union welfare.
Finally, automakers need a consistent energy policy. Congress demands that companies produce more fuel-efficient vehicles. But politicians also want low gas prices. These goals are contradictory. Wild swings between low and high fuel prices have crippled the US industry by erratically shifting buyer preferences - to and from SUVs.
We are now seeing the fallout of the open-ended $700 billion rescue of financial institutions. Boundaries need to be established. Who deserves support and why? Imposing tough conditions on automakers not only improves the odds of success but also - by the sacrifices required - makes the process sufficiently unpleasant to deter a stampede of other industries seeking handouts. In 1979, when the Carter administration rescued Chrysler from bankruptcy, the price was concessions from management, investors and labor. We should do as much.
The Washington Post Writers Group
(China Daily 11/18/2008 page9)
