When would anyone expect Investors Business Daily to agree with Robert Reich? On the issue of auto-industry bailouts, IBD commends Bill Clinton’s Commerce Secretary. If Congress passes a bailout, which IBD adamantly opposes, it should get treated like Chapter 11 — and force the automakers and the unions to completely restructure to regain their competitive posture and repay the loans:
Credit this idea to Robert Reich, the former Clinton administration official. We’ve had lots of disagreements with Reich in the past, and no doubt will in the future. But on this he’s right: If a bailout is to be given, the Big Three and their unions must thoroughly revamp their businesses, almost as if it were a bankruptcy. Call it a Chapter 11 Bailout.
Above all, the companies’ poisonous contracts with the United Auto Workers union have to be torn up. The problem is that the UAW, under President Ron Gettelfinger, remains adamant: No givebacks. This is financial lunacy.
Thanks in part to managerial incompetence, but mostly due to pricey union contracts, it costs American carmakers too much to build cars here; they can’t compete. When you fold in health care, pensions, hourly pay, vacations and the rest, average total compensation for a Big Three autoworker is $73.21 an hour, according to data cited by University of Michigan economist Mark Perry.
Toyota, Honda and Nissan pay a still-generous $44.20 an hour in total compensation — a cost edge of nearly 40%. Is it any wonder that Ford, GM and Chrysler can’t compete? Or that, after paying their workers, they never have enough cash left to retool?
Today the total market capitalization of the Big Three has fallen to about $7 billion. Is it better for the owners of those companies to suffer a total loss or for taxpayers to lose $25 billion? The answer is obvious. As such, the only case for a bailout is if it would force major changes on the industry. That won’t happen with current management in place or with giveaway union contracts that make the companies unviable.
These are the reasons why the bailout won’t help anyway. The problem the Big Three face has nothing to do with an inability to get loans, but with a fundamentally flawed business model that ensures that they cannot compete. They spend too much to produce cars that cost more without any extra added value to the consumer. Buyers select cars with better value and lower price instead.
Until GM, Ford, and Chrysler fix that problem, they won’t succeed regardless of how much they can borrow from Washington. Until unions realize that they have created an untenable position, they will put the jobs of their members at continued risk. Either they will have to become niche manufacturers, producing only high-quality, expensive cars that outperform the less-expensive competition, or they have to figure out a way to lower unit cost while improving quality on lower-cost products.
This isn’t exactly brain surgery. Markets exist to weed out the inefficient and overpriced. The Big Three and their shareholders should have made adjustments years ago to reduce costs and improve quality. Instead, everyone kicked the can down the road, coasting on a booming economy. When times got tough, it became too late to improve.
Management needs to change, and the unions need to adapt. Taxpayers should not subsidize failure out of some notion that private enterprises cannot be allowed to fail. A good Chapter 11 reorganization is what Detroit needs, and a bailout will only delay the inevitable — and toss taxpayer money down the drain in the meantime.
There shouldn’t be any bailout at all, but one seems inevitable in 2009, with or without the Republicans. But if Congress wants to invest in the automakers, then they had better demand a Chapter 11 reorganization as the price for it.
Update: Commerce Secretary, not Treasury. My apologies for the error.