Save Detroit — Bankruptcy Now Would Do Incredible Damage
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Most libertarian and conservative leaders are opposing 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, as it is now for bonds. Libertarian theories and principles are great for normal times, but they need to be realistic and modified during times of chaos. Consider that they now coincide with the Far Left which also wants to see the car companies in bankruptcy.
Instead of just blindly opposing any government intervention or subsidies, libertarians should be debating how to make government provision of liquidity to markets both minimal yet effective. Otherwise, a collapsed U.S. auto industry will strengthen socialism, nativism, and anti-free trade forces in general. Libertarians won’t 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 laid off as fearful companies husband their cash resources. More workers then can’t afford or fear buying, for example, cars. Then car makers and their suppliers lay off workers who then can’t 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’s 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, put in place after the 1929 crash; it allows speculators to easily drive even viable companies into bankruptcy. These are not the companies’ fault.
Secondly we should know that much of what is written about American auto manufacturers is obsolete or simply false. For example, one often hears that workers earn $70 per hour. Workers don’t 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 are already set aside for this purpose which is already half funded. Another is that American quality is not competitive. Forbes describes the quality of new models and how Ford and GM are major, 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% of the market. It has many enticing new models coming along.Their skilled workers and engineers are at the heart of American 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 UAW union, in 2007, has already given in with 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 pension 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.
BANKRUPTCY
Thirdly are the glib proposals for easy bankruptcy, often comparing auto factories to airlines. Some libertarians even blithely argue to let foreign companies take over the whole American market. The industry is immensely complicated and inter-twined with suppliers which provide foreign makers as well. The damaged credit markets have also severely damaged its suppliers. 54 factories, hundreds of suppliers, 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.
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 a few supplies. A passenger buys a ticket for a few weeks out, but an auto buyer depends upon warranties and dealers for years. Airlines don’t compare to auto manufacturers with independent suppliers providing credit and some four thousand parts needed every day; just one missing part can prevent assembly of a whole car. The long bankruptcy process is well explained in the New York Times. Former Senator Spencer Abraham describes the almost sure consequent collapse of many supplier companies also now unable to raise capital or refinance bonds.
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 Corp. 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 human misery that bankruptcy would entail, but libertarians should also be cognizant of them, even though they are rarely discussed
Mr. 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.
Filed under: Economics, Politics
An outstanding summary of the situation.
The problem is that you’re phrasing the question incorrectly – maybe even deceptively. The question is not whether we should let the Big Three fail. They have already failed. The question is what to do about it.
So… subsidize them so they can continue to operate under the same failed business model they’ve been operating under for the past thirty years? So they can make lousy decisions like killing the electric car because gas-guzzling SUVs were the wave of the future? So they can hand out astronomical bonuses to the jackasses who make these bad decisions? So they can come back in another thirty years and ask for another bailout – which we’ll give them for the same reasons?
At what point do Ford and GM become Lada and Trabant – kept around because the government won’t let them go out of business no matter how badly they’re run? Are the auto companies going concerns in a capitalist economy, or are they state-subsidized jobs programs? If the latter, why not just rename them the CCC and the WPA and get it over with?
Many of these “free marketers” were not warning or were on the other side during the credit expansion which caused the housing bubble and as even the most casual student of Mises would see – the ultimate bust.
Nor did they ask for the auto industry to be freed from all those other regulations (often ignored in other countries) governing what kinds of cars they must build – for every hugely profitable SUV, they must sell a crappy compact to meet CAFE. They need specific emissions equipment (yes, a catalytic converter even if the engine can meet regulations without one).
The late Harry Browne described Government as one who says they are magnanimous for giving you a crutch – after breaking your legs. Too many libertarians’ idea of a free market is to keep you crippled, take away the crutch, then let you compete against a foreign athlete who cheats using steroids, and saying the loss was just the market.
One ought not treat or demand things of the sick and injured the same as the able.
The greatness of Ron Paul is he does want to get BACK to the constitution, but describes it as a journey, and describes the promises and dependencies we have today. Dismantling them as a bomb is diffused, not blowing things up letting things fall where they may.
The auto industry is one such case. If you desire socialized medicine, it will come as the corporatists desire it, and cutting off all the employees in an entire industry from the payer will bring it to pass.
The alternative – generally as described above – is to realize the same government (and the people as well as their representatives) that caused the mess – perhaps unknowingly and unintentionally – first shoudl make restitution and restore things to their proper balance and only then figure out how to remove government from the picture.
There are many stories of people the government prosecutes into bankruptcy with charges that prove to be completely wrong. Do the libertarians say the victims should have saved more? Had some kind of unobtainable insurance? Or that Government should heal what it injured? If the government is responsible for the hurt, and perhaps it is a case of entrapment (remember DeLorean?), should they not bear the cost of the healing?
Mr. Utley,
Are you rehearsing for a job at the Onion? Your piece is parody-proof.
These auto company “loans” you advocate are nothing short of taxpayer theft. It’s extortion, nothing more. In other words, you’re proposing that the coercive power of the state be used to confiscate property from Group A (the taxpayers), with a healthy cut for the middle man (the government parasites), with the remaining loot going to Group B (the Big 3 in Detroit). This is your brilliant idea.
Here’s a better proposal: let the car companies re-organize under bankruptcy protection. That’s what it’s there for. If management cannot produce a product or service that consumers want at a price they’re willing to pay, they should have no alternative but to liquidate and allow more competent management to take over. The capital and equipment would not disappear. If there is a profit opportunity, someone will seize it.
As for the notion that we should entrust a band of government thieves “responsible for the hurt” with fixing a problem it created, I can only question your judgment. Why would anyone think it’s a sound idea to give them more money and power? Haven’t they inflicted enough economic damage already? Are you completely insane?
It’s much, MUCH too late to save the auto industry from bankruptcy. 25-50 billion dollars won’t accomplish anything other than lining some pockets and buying some favors.
http://rightklik.blogspot.com/
[...] my head but giving a fair hearing: A self-professed libertarian wants to bail out the Big Three. I’m not agreeing with him, but he has made me step back and think about it some more. [...]
“Otherwise, a collapsed U.S. auto industry will strengthen socialism, nativism, and anti-free trade forces in general. ”
Remove “socialism” and that sentence doesn’t sound so bad to me…
So the moral of this story is that government and you and I are obligated to save this industry– which will disappear from our shores if the Big3 undergo chapter 11—because it is largely government’s fault anyways, and chapter 11 will lead inevitably to liquidation and massive unemployment, which will ultimately lead to socialism (socialized medicine and pensions, closed markets, etc).
This narrative may be correct, but it raises some questions that I would like publicly answered before any money is spent:
Just what will they do with the money (i.e. pay down debts, invest in research, temporarily shore up operating budgets, etc.), and how long would it prop them up?
Is bankruptcy protection not government involvement? If it is, then is the charge of free-market zealotry relevant?
Does anybody else find familiar these dire warnings about a perilous end to our way of life without major government action outside the bounds of its constitutional authority?
Does anybody still wonder why progressives truly believe that libertarian/conservative ideals sound fine but are proved false when the stuff really hits the fan?
It’s nice to finally read an article that doesn’t aim to tear down the auto makers with all these rehashed false accusations. I don’t agree with this loan though because I can easily see Washington attaching all kinds of crazy requirements with it that would only, ultimately, hurt the businesses. (Like requiring electric cars or whatever.)
I don’t think Detroit has operated under a free market for decades, so I wish that argument would ease. And it’s not like the foreign makes are playing on an even field. Doesn’t Japan provide health insurance for its citizens, unloading a major employee cost for Toyota, etc.?
As an adherent to the Austrian theory of the business cycle, from a purely economic standpoint I think as long as a social commitment to free-markets and private property is somehow unshaken in a deep downturn, dynamic liquidation and entrepreneurial repurposing of capital produces the best overall chance of markets recovering their fullest ability to increase the standard of living in the long run.
However, This libertarian realizes that the “Economic Man” is a fantasy and the more likely result of massive dislocation and upheaval is social regression–making totalitarianism a real possibility. This is the paradox purist libertarians have to grapple with–a frustration in the belief that these kinds of crises would never occur in a truly free economy (ex. free banking, private money, minimal interventionism, priced-in moral hazard, minimal taxation and subsidies), while having to face the fact that we don’t have the prerequisite political economy to make the libertarian “solution” viable.
It seems because statism has been so thoroughly ingrained into the social and economic DNA, only statist solutions can solve statist crises, while an attempted free-market solution will backfire and result in super-statism. Arghh! Of course the endgame is either total state usurpation of the means of production and/or a currency crises both of which result in the inevitable bankrupcy of the State. What then, “moderates”?
The mid to long-term macroeconomic consequences of the govt.’s activities today will make the inevitable collapse even worse when it does come, assuming they can prevent it from occuring now. I suppose the reality is, given the unsustainable fundamentals, we’ll have totalitarianism now, or later…take your pick.
“Does anybody still wonder why progressives truly believe that libertarian/conservative ideals sound fine but are proved false when the stuff really hits the fan?”
What has been proved false?
I sigh when people say things like this, because it indicates they’ve taken what “conservative” politicians say they believe at face-value, instead of actually looking at how they behave, and comparing that to a standard of “conservative” or libertarian scholarship on a given issue. You’ll find that what most conservatives are good at is platitudinous lip service, and not much else.
It should not be a shock that when you “deregulate” an industry, like banking, by relaxing loan requirements for example, while leaving intact its State Privileges, like arbitrarily fractional reserves, deposit insurance, a cartel enforcer (the FED) and the ability to multiply money out of thin air…You will get abuse, and possibly disaster.
Notice that underlying all of these economic crises is a dysfunction in money and credit allocation, which leads to malinvestment of capital? Guess what, “irrational exuberance” is just a greedy desire to milk this cow. There would be no cow in the first place were it not for the fundamentally mercantilist nature of the financial system, monetary and fiscal policy. “Market discipline” and “self-regulation”, while valid concepts and applicable to a true market with requisite transparency, accountability and liability, are irrelevant to the workings of State Capitalism.
Deregulating corporatism without removing privilege is simply unchaining a self-destructive beast.
So, is the Libertarian line that a state run economy is inevitable? The market can’t solve the imbalances caused by the state, because of the massive human misery that will follow, and this misery will then be used to justify a massive expansion of the state. However, the state’s current course (especially its sanctioning of a debt currency) will continue to cause economic turmoil, which the state will gladly promise to fix with incrementally expanded powers.
Does not this line of reasoning (which I may have misinterpreted) reduce the Libertarian vision to a theory that can never be practiced? Even those who believe it to be sound also believe the cost of implementation could be a disaster equal to or greater than the cost of inaction. Furthermore, the private recipients of state privelege will surely not give it up, even if that means incorporation into the state.
Is regulation without privelege the answer? Are we damned if we do, damned if we don’t?
[...] American Conservative makes the case for a government bailout rather than Chapter 11 (which I advocate.) Chapter 11 would [...]
Libertarians agree that the free market is a wonderfully efficient institution to make people more productive. While productivity is a good thing, it is not the only good thing. There are some others that the free market encourages — discipline, creativity, thrift — and some that it does not encourage — such as generosity. Almost all libertarians recognize that a well functioning free market needs “rules of the game” that the free market cannot,by itself, make — bankruptcy rules are one of these. These are human rules and they can and do change over time to accommodate changes in circumstances. Bankruptcy is not primarily about saving the innocent and punishing the guilty but dealing with a set of circumstances that resulted in economic failure. Jon may very well be right that the auto industry today needs to be seen as an unusual set of extreme circumstances and that normal bankruptcy laws and procedures should not apply. But government intervention needs to be seen as exceptional and that some elements of bankruptcy probably should apply — the government should not insist that all three companies “live forever.” There may be merit in delaying their possible failure by giving them some exceptional help — that may also allow one, two or all three to ultimately succeed. Not a pure market solution, but if the government is setting the rules, it is never totally pure. And if this is even less pure, it should still aim toward moving the government out quickly even if it does intervene. That too is difficult.
What’s the REAL cause of auto makers’ and even the greater economic crash?
It is the WTO and NAFTA “free trade” treaties which put cheap foreign wages into direct competition with middle class auto and other American workers. This is why the auto makers supposedly “can’t compete”.
If we want a nation where our citizens can earn middle class wages and have important benefits such as pensions and non-socialized medical care, then we cannot let foreign countries who offer no such benefits or who are state-subsidized under-price our products.
No job in America is safe from cheap wages, particularly Chinese sweatshop and slave labor. None. And for every job that can’t be sent to China, the corporate-greed response is to import low-paid 3rd world workers to replace Americans.
“Free trade” apparently refers to what corporations wish to pay their workers. Next to nothing. “Give me the China price” is what is now demanded of American manufacturers, but of course they can’t because China pays sweatshop or slave wages and use poisonous and shoddy components; so the American manufacturers who pay middle class wages and use quality and safe components go bankrupt and their workers join the unemployed. And then those formerly middle class workers now have no choice but to root for counterfeit-quality Chinese products, unable to afford quality American goods and the middle class wages paid to produce them. The cycle will only end with national bankrupcy, which we are fast approaching.
The free trade concept does NOT work when high wage countries directly compete with the lowest wages on the planet, or even with countries where workers earn less or get fewer benefits.
We can kill our domestic automakers and other domestic industries, and buy 100% of everything from foreign companies, running up the trade deficit to infinity until the nation is completely bankrupt. But we will quickly become a third world country, selling only foreign goods to each other, and the great good the United States has done in keeping freedom alive around the world will be only history. China and Russia will rule the world and we will be in total debt to them and never complain even as our own freedoms vanish.
Free trade isn’t “free”. We are paying the price now, and the price may well be that the USA falls to 3rd world status.
Do you want that?
It is easy for others to be anti-American when we no longer make products the rest of the world needs. Lose the auto industry and the loss of American influence will decline even further. We are now importing even major military items–witness the Air Force tanker project; hastening the day when even our defense is completely reliant upon imports from other nations. Our nation is being hollowed out, a mere retail store for imports, not the manufacturer for the world.
Scrap the WTO and NAFTA and restore Congressional authority to set tariffs to balance the difference between sweatshop wages and middle class wages. The US has an astronomical trade deficit which must be ended. Leaving WTO and NAFTA will not stop world trade, it was already robust before WTO and NAFTA, but America will no longer have it’s wealth and workers held hostage by the poorest nations on Earth.
Obama–you promised renegotiating NAFTA. Do it for real and scrap WTO and you will reap credit for restoring America’s prosperity.