The 18th Century English essayist Samuel Johnson confessed that he found abstinence from alcohol far easier than temperance. That may also be the case for the federal government when it comes to bailing out failing businesses. Having stepped in to save banks and other financial institutions, Washington — surprise! — is now being asked to extend help to the Big Three automakers before they slide into bankruptcy.
That would be a bad idea for an industry that has consistently failed to meet the demands of consumers at prices they are willing to pay. But it’s not the worst idea. The worst idea would be saving car companies without imposing stringent conditions that afford some hope that they can transform themselves into viable competitors.
Unfortunately, the worst option seems to be a live possibility. Democrats owe a debt to organized labor for their electoral triumphs Nov. 4, and the United Auto Workers are pushing a bailout that would protect their wages and benefits. President-elect Barack Obama urged assistance to Detroit in his meeting last week with President George W. Bush, and House Speaker Nancy Pelosi has offered an aid plan. Pelosi wants to tie help to curbs on executive pay, but neither shows an interest in making demands on the UAW.
The automakers are victims of their own mistakes, such as falling short on the production of attractive, fuel-efficient vehicles and giving up too much in union negotiations. General Motors’ compensation costs exceed $73 an hour — compared with less than $48 for Toyota in its U.S. factories. The Big Three’s share of the market has dropped from 70 percent to 47 percent in the last decade.
Considering those twin burdens, the best option is Chapter 11 bankruptcy, which lets a corporation keep operating while renegotiating terms with workers and creditors. The government might have to cover some pension costs, but GM says most of those have already been provided for. In any case, better a one-time hit to the federal Pension Benefit Guaranty Corp. than an open-ended commitment to companies that may be past saving.
The drawback of bankruptcy is that unlike airline passengers, car buyers want some assurance the manufacturer will be around to provide parts and service. But an automaker could set aside funds to make sure warranties will be honored, and suppliers should keep making spare parts as long as there are vehicles that need them. Bankruptcy could also entice a foreign automaker to buy out GM, Ford or Chrysler, giving customers the assurance of long-term support.
Supporters of federal aid warn of the broader economic fallout if one or more automakers collapses in an economy that is already in recession. But barring real changes in Detroit, help now would probably mean bankruptcy would be postponed only a year or two — to a moment when a failure would endanger economic recovery. Having saved them once, we will be obligated to save them again.
If Washington must intervene, it should intervene in a tough-minded way — insisting that the UAW accept the sort of concessions that bankruptcy would facilitate, while compelling lenders to write down their loans. It should also stipulate that any company getting help will reimburse taxpayers if and when it regains its health.
Those requirements would serve a couple of vital purposes: improving the chance that the federal help will not be wasted and deterring other companies from demanding such assistance.
Of course, leaving ailing automakers to Chapter 11 would avert those risks entirely. But if our leaders have to provide help, they should do all they can to foster success and minimize taxpayer exposure. Right now, those don’t seem to be high priorities.
