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Brother, Can You Spare $10 Billion?

If the Democrats are intent on a bailout, they should at least be realistic. Absent a radical restructuring of GM and Ford (and Chrysler’s demise), there likely will be no long-term recovery of the domestic car industry. Larry Kudlow explains that a large chunk of that involves adjusting the Big Three’s labor agreements and dealing with the companies’ crushing debt:

[Sen. Bob] Corker wants Detroit to have the exact same compensation levels as the Japanese transplants in the non-union Southern states. That means moving hourly labor costs down from roughly $70 to $48. It means reopening the UAW contracts that have created the huge pay-gap between Toyota and GM. It means putting an end to excessive pension and healthcare benefits.

According to Professor Mark Perry of the University of Michigan, GM healthcare benefits add $1,500 to the price of every vehicle, while pension costs add another $700 per car. That will have to end. The lucrative jobs bank that pays laid-off workers 95 percent of their compensation also will have to stop. And bondholders will have to be satisfied with a complete renegotiation of GM’s $62 billion in debt, including the union retiree healthcare fund that is under-funded by $30 billion.

There still will be considerable job losses for downsized Detroit carmakers. They’ll have to cut a huge chunk of their dealer networks. Domestic brands will have to be sharply reduced. But essentially, as would be the case under Chapter 11 bankruptcy, the federal government will provide short-term financing while Detroit goes through its radical restructuring. It looks like bankruptcy lite, and it will completely change the direction of the former Big Three.

The alternative is to throw $10-15 billion at the car companies in the form of temporary assistance, wait for them to make a comeback in the Obama administration, and then to put them on the neverending cycle of bailout-failure-bailout-failure. Democrats who are inclined to help the Big Three have no stomach for demanding the needed reforms that would affect the Big Three’s uncompetitive cost structure. So their “solution” is to begin a dangerous co-dependent relationship between unsuccessful companies and weak-kneed legislators. There will be no end to it, unless and until the public becomes incensed and demands an end to it. But before that happens, how much will be wasted — $10 billion?  A $100 billion? More?

It is clear what tactic the Republicans should employ. Absent significant restructuring of the car companies, Republicans would be wise to play no part in this debacle, as Sen. Richard Shelby advises:

Shelby, who also voted against the $700 bailout bill for the financial industry, called it a “”a bridge loan to nowhere,” and said G.M., Ford and Chrysler have to undergo a fundamental restructuring of their operations rather than look for federal help.

Shelby also predicted auto industry executives would soon come back to Washington looking for more money, beyond any assistance they are given now.

“This is a down payment on many billions to come,” Shelby warned. “This is not something that happened overnight. This is 30 years in the making. These companies basically have failed or are failing. They probably need, according to some people, about 60 percent of the management to go, and about 40 percent downsize of the workers.”

Shelby also threatened a filibuster of any auto aid agreement, but was unsure whether he had the votes to sustain it.

We’ll see if the Democrats have the votes, even on their side, to pass this, let alone break a filibuster. Time and transparency are against them, which is why conservatives should demand plenty of both before a vote is taken.



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