Most libertarian and conservative leaders oppose 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.
Libertarian theories and principles are great for normal times, but
they need to be realistic and modified during times of chaos. They
now coincide with the Far Left, which also wants to see the car companies
Instead of blindly opposing any government intervention or subsidies,
libertarians should be debating how to make government provision of
liquidity to markets minimal yet effective. Otherwise, a collapsed
U.S. auto industry will strengthen socialism, nativism, and anti-free
trade forces in general. Libertarians will not 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 being laid off as fearful
companies husband their cash resources. More workers then cannot afford
or fear buying, for example, cars. Then auto makers and their suppliers
lay off workers who then cannot 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 is 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 that was put in place after the
1929 crash, allows speculators to easily drive even viable companies
into bankruptcy. These developments are not the companies’ fault.
Second, we should know that much of what is written about American
auto manufacturers is obsolete or false. For example, one often hears
that workers earn
$70 per hour. Workers do not 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 have been set aside for this
purpose, which is already half funded.
Another false statement is that American quality is not competitive.
describes the quality of new models and how Ford and GM are
major and 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 percent of the market
and has many enticing new models coming.
These skilled workers and engineers are at the heart of America’s
Yet most critics’ talk of the auto unions is about the way they
used to be, not the situation now. In fact, the United Auto Workers
union in 2007 has made 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 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.
Third, the glib proposals for easy bankruptcy often compare auto factories
to airlines. Some libertarians even blithely make the case for foreign
companies taking over the whole American market. The industry is immensely
complicated and intertwined with suppliers that provide foreign makers
as well. The damaged credit markets have also severely damaged suppliers,
and 54 factories, hundreds of suppliers, and 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 of people.
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 supplies. A passenger
buys a ticket for a few weeks in advance, but an auto buyer depends
upon warranties and dealers for years. Airlines do not compare to auto
manufacturers with independent suppliers providing credit and some
4,000 parts needed every day; just one missing part can prevent the
assembly of a whole car.
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 Corporation 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 aspects of human misery that bankruptcy would entail, but libertarians
should also be cognizant of them, even though they are rarely discussed.
Copyright by Jon Basil Utley and The
American Conservative magazine. A version of this article appeared in the December 4, 2008
online edition of The American Conservative.
Jon Utley is associate publisher of The American
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
See a complete biographical sketch.
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