Harvard economist Martin Feldstein explains the benefits of Chapter 11 for the auto industry:
The Big Three pay much higher wages than production workers are paid in the nonunion auto firms and in the general economy. And the health-care costs of current workers and retired union members are an enormous additional burden. The simplest solution is to allow GM and the others to file for bankruptcy. If the companies file under Chapter 11, they would be able to continue producing cars, and the workforce would remain employed while the firms reorganized. The firms would also be able to get short-term credit under bankruptcy protection.
But, aware that the new administration might not be able to withstand the pleas of the auto companies and their allies, he counsels that Congress would be well advised to prescribe the same stiff medicine:
To do that, the government should insist that the unions accept reductions in wages and benefits to levels that allow the firms to compete with imports and with nonunion U.S. auto firms. The trustees of retiree benefits should be required to accept reductions in those benefits. The government should also insist that management eliminate dividends and restrain salaries until the firms return to profitability. Even creditors should have to accept write-downs in the value of their debts.
The government has substantial leverage to ensure that these changes occur. The auto companies’ management, unions, trustees of retiree benefits and creditors would recognize that without government assistance, the firms would be forced into bankruptcy and that the bankruptcy court could require even more severe cuts in incomes, benefits and payments to shareholders and creditors.
Does anyone believe a Democratic Congress and Democratic President – which collectively received hundreds of millions of dollars in soft and hard campaign money from Big Labor – would have the nerve to insist on this very harsh but needed corrective action? I certainly don’t.
So perhaps the easiest way out politically, which just coincidentally happens to be the smarter economic avenue, is to let GM receive its bitter pills from the bankruptcy court. Hey, it’s those mean Republicans who would not agree to the bailout. The Democrats would have liked to have helped — honest. Really, if the Obama Administration wants to be both fiscally responsible and politically astute, the easiest course may be to let Chapter 11 work its will.
But why not just throw billions more at the Big Three and require some half-hearted reform measures? Because it is obvious, even to Democrats, that GM would burn through that and be back for more (or eventually file for bankruptcy after squandering taxpayers’ money). So long as the Republicans don’t give them cover, they may be unwilling to pursue that folly on their own. Hence the “punt” to January on the auto bailout measure is expected this week, as Democrats discover they have few willing co-conspirators on the other side of the aisle.
So we inevitably come back to the same conclusion. As many others have advocated, George Will declares:
Do nothing that will delay bankrupt companies from filing for bankruptcy protection, so that improvident labor contracts can be unraveled, allowing the companies to try to devise plausible business models.
We’ll see if the Democrats come to the conclusion that GM must revamp its cost structure.