Most libertarian and conservative leaders are opposing government aid for the auto makers. However, theories of leaving everything to the free market are not valid when the market is crashing or is dysfunctional, as it is now for bonds. Libertarian theories and principles are great for normal times, but they need to be realistic and modified during times of chaos. Consider that they now coincide with the Far Left which also wants to see the car companies in bankruptcy.
Instead of just blindly opposing any government intervention or subsidies, libertarians should be debating how to make government provision of liquidity to markets both minimal yet effective. Otherwise, a collapsed U.S. auto industry will strengthen socialism, nativism, and anti-free trade forces in general. Libertarians won’t be acclaimed for abiding by their principles; rather they will be seen as having contributed to economic disaster and will become marginalized for future battles.
First we must comprehend the risks. Markets are in a free falling downward spiral. The real estate collapse crippled banks, banks then ceased credit for businesses, workers then are laid off as fearful companies husband their cash resources. More workers then can’t afford or fear buying, for example, cars. Then car makers and their suppliers lay off workers who then can’t pay debts and real estate takes another dive. We are in extraordinary and desperate times! Letting auto companies be bankrupted at this time would compound America’s and the world’s disastrous economic situation.
Those who argue that it’s all the companies own fault and they should be left to bankruptcy and “free markets,” whatever the consequences, virtually ignore the credit collapse and two major reasons for crashing bonds and stocks, “mark to market accounting,” explained by Newt Gingrich, combined with the SEC’s elimination of the “uptick rule” governing short selling, put in place after the 1929 crash; it allows speculators to easily drive even viable companies into bankruptcy. These are not the companies’ fault.
Secondly we should know that much of what is written about American auto manufacturers is obsolete or simply false. For example, one often hears that workers earn $70 per hour. Workers don’t make that. That cost includes all the legacy benefits to retirees. Detroit is unwinding from years of union domination, and in 2010 companies will be transferring legacy costs to their unions. Billions are already set aside for this purpose which is already half funded. Another is that American quality is not competitive. Forbes describes the quality of new models and how Ford and GM are major, profitable producers in Asia, Europe and South America. Ford has closed 17 plants and was profitable in the first quarter. GM is the largest auto company in China with 14% of the market. It has many enticing new models coming along.Their skilled workers and engineers are at the heart of American heavy manufacturing.
Yet most critics’ talk of the auto unions is about the way they used to be, not the situation now. In fact the UAW union, in 2007, has already given in with major concessions and will no longer have a stranglehold on the companies. New hires will come in at $14 per hour, with only a 401K pension plan, reduced health care benefits and major work rule revisions. Work rule revisions and the two tier wage structure strike at the heart of union monopoly power. Also it is not necessarily true that companies would be back for more money soon after, as many opponents assume, without evidence.
Thirdly are the glib proposals for easy bankruptcy, often comparing auto factories to airlines. Some libertarians even blithely argue to let foreign companies take over the whole American market. The industry is immensely complicated and inter-twined with suppliers which provide foreign makers as well. The damaged credit markets have also severely damaged its suppliers. 54 factories, hundreds of suppliers, a million direct and indirect workers are at risk. Auto dealers are the backbone of small communities all over America and employ hundreds of thousands.
A quick bankruptcy is impossible. Chapter 11 would take years to unfold during which time the companies would lose unrecoverable market share. The process tries to be fair by promoting negotiation. It is not a government cram-down. The theory is that this would allow a judge to break union and dealership contracts. It is not comparable to the airlines flying during bankruptcy. Airlines just buy fuel and a few supplies. A passenger buys a ticket for a few weeks out, but an auto buyer depends upon warranties and dealers for years. Airlines don’t compare to auto manufacturers with independent suppliers providing credit and some four thousand parts needed every day; just one missing part can prevent assembly of a whole car. The long bankruptcy process is well explained in the New York Times. Former Senator Spencer Abraham describes the almost sure consequent collapse of many supplier companies also now unable to raise capital or refinance bonds.
A new problem is that there is now little “debtor in possession” financing. This provides for fresh loans to sell or wind down business in an orderly manner. Circuit City’s recent orderly bankruptcy is now in trouble because of this issue. Consequently, Chapter 11 can slip into Chapter 7 liquidation bankruptcy. This would mean selling off assets, voiding repair warranties, and halting production as suppliers stop providing credit. Payments to workers and retirees would stop dead and billions of dollars of bonds would stop paying interest. Billions more of credit default swaps losses (bond insurance) would clobber the credit markets again. This would affect millions of America families.
Another option being bandied about is “pre-packaged” bankruptcy. In practice this would necessitate prior agreement and detailed legal contracts with hundreds of suppliers, dealers, unions, bond holders, and creditors, any one of which could stymie the agreement. It would take months during which time car sales would plummet. The Detroit News explains what would happen. Lost tax receipts, unemployment, medicare and Medicaid costs, and new billions charged to the Pension Benefit Guaranty Corp. would cost Federal and State governments more tens of billions.
Loans to the auto companies will help them survive and cost taxpayers far, far less than letting them go under. I have not addressed all the human misery that bankruptcy would entail, but libertarians should also be cognizant of them, even though they are rarely discussed
Mr. Utley is associate publisher of The American Conservative. He was formerly a foreign correspondent in South America for Knight Ridder newspapers and has written for the Harvard Business Review. For 17 years, he was a commentator on third world economic issues for the Voice of America. He is a long time conservative and libertarian activist.