Bailout—II

Nancy Pelosi and Harry Read, along with the entire Michigan delegation to Congress and hundreds of other politicians talk breathlessly about the need for U.S. taxpayers to “save” the big three U.S. automakers. The MSM tells us that 3 million jobs are at stake and that the rescue of the credit and banking system justifies saving the big three automakers.

But it seems that no one wants to talk about the industry’s abysmal record on fuel efficient, environmentally clean vehicles, it’s overall lack of 21st century innovation, it’s utter capitulation to UAW demands that have created an untenable pension and health care systems, it’s bloated work force, aging factories, and grossly incompetent management.

Thomas Friedman comments:

How could these companies be so bad for so long? Clearly the combination of a very un-innovative business culture, visionless management and overly generous labor contracts explains a lot of it. It led to a situation whereby General Motors could make money only by selling big, gas-guzzling S.U.V.’s and trucks. Therefore, instead of focusing on making money by innovating around fuel efficiency, productivity and design, G.M. threw way too much energy into lobbying and maneuvering to protect its gas guzzlers.

This included striking special deals with Congress that allowed the Detroit automakers to count the mileage of gas guzzlers as being more than they really were — provided they made some cars flex-fuel capable for ethanol. It included special offers of $1.99-a-gallon gasoline for a year to any customer who purchased a gas guzzler. And it included endless lobbying to block Congress from raising the miles-per-gallon requirements. The result was an industry that became brain dead.

No one, including me, wants to see hundreds of thousands of auto industry employees on the street, and no one, including me, wants to see one of the few manufacturing industry’s left in the U.S. shut it’s doors. But the big three have serious structural defects that will not be cured by a bailout. In fact, it can be argued that a bailout will exacerbate the structural defects, unless it is very carefully controlled (and not by auto-industry execs or members of Congress).

What to do? Friedman quotes Paul Ingrassia of The Wall Street Journal:

“In return for any direct government aid,” he wrote, “the board and the management [of G.M.] should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver — someone hard-nosed and nonpolitical — should have broad power to revamp G.M. with a viable business plan and return it to a private operation as soon as possible. That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others and downsizing the company ... Giving G.M. a blank check — which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant — would be an enormous mistake.”

I would add other conditions: Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol.

It’s important to note that GM execs are not the only ones to blame for this mess. If the big three are to survive, their employees (read: the UAW) are going to have to accept extreme pain. The union’s greed and stupidity along with management’s incompetence have created a failed industry.

Rather than laying off hundreds of thousands, any bailout should mandate pay cuts across the board, factory workers to managers to any executives that do remain with the company. A bailout should mandate greater employee contributions to health care and to pension funds.

Some would argue that isn’t fair. But neither is the company’s and union’s request that the taxpayers save them from their own failures.

Update (11/13/08):

It appears that President elect Obama has doubled down. Bloomberg reports:

Nov. 13 (Bloomberg) -- President-elect Barack Obama is pushing Congress this year to approve as much as $50 billion to save cash-starved U.S. automakers and appoint a czar or board to oversee the companies, a move that would require President George W. Bush's support, people familiar with the matter said.

Obama's economic advisers are now convinced that if General Motors Corp. doesn't get a financial lifeline soon, it will have to file for bankruptcy by the end of January. And if the companies don't get almost $50 billion, Obama will be dealing with the issue again by next summer.