FGF E-Package
December 12, 2008
Bankruptcy Now Would Do Incredible
Damage
by Jon Basil Utley
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 in bankruptcy.
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Second, we should know that much of what is written about American auto manufacturers is obsolete or false.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. Forbes 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 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 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 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.
See a complete biographical sketch.
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