Detroit is not Wall Street

MondayâÄôs announcement by the National Bureau of Economic Research that the United States was officially in a recession was somewhat welcome. It was inevitable and an official declaration will hopefully push discussions away from hypothetical situations and into real policy. On Tuesday, the CEOs of the Big Three Detroit firms went to Congress asking for their own (second) bailout. GM is seeking $12 billion in loans with an additional $6 billion in credit lines. Ford seeks $9 billion it might not need, while Chrysler, the worst off of the three, says it needs $7 billion or it may not get through the first quarter of next year. Amid the financial collapse that started with Lehman Brothers, many wonder why bankers should get bailed out but not the auto companies. The latest sales reports are dire âÄî GM, Ford and Chrysler had sales drop 41, 31 and 44 percent respectively. Proponents of government intervention have produced statistics claiming 3 million jobs, or 2 percent of the labor force, would be lost if GM went bust. In letting that many people lose their jobs, the government would be burdened with unemployment insurance and other benefits that cost far more than any bailout. And the Big Three have been coming around. Cars are becoming more reliable, green and popular. FordâÄôs approval ratings and ChevroletâÄôs Malibu and Volt are common examples cited. The credit crunch is what is preventing Detroit from restructuring to meet market demands. Without it, the manufacturers would be in a better position. So the argument goes. But there is much more to it. Firstly, if one treats the automotive industry and finance as simply separate sectors, it is easy to make the case for bailing out both. Yet doing so does a grave disservice to the discussion. Wall Street was not given government money out of sympathy for their plight. The banking system is unique in how inextricably tied it is to the rest of the economy. One could plausibly make the analogy that finance is the brain or the heart. Trouble in the banking system leaves far more than 3 million people exposed to ruin. Others complain of the amount of taxpayer money that is going to Wall Street, whose workers already made generous salaries. Standing on the side of the âÄútaxpayerâÄù is like standing for the âÄúpeople.âÄù They are not a homogenous-thinking group being exploited by some large, monolithic body âÄî in this case, bankers. But the fact remains those wealthy financial geeks pay roughly a quarter of U.S. tax revenue. Some may rightly point out that the Treasury has been unsure of how to proceed with the TARP plan. In part, that is due to poor management and too much hesitation. Some banks have not been proactive enough with the money they were given. But banks have also been dealing with further worsening economic indicators. Now commercial property is losing value, and taking banking assets down just as the housing bust did. It is tough to have a concrete plan when the situation is so fluid and complex. Detroit cannot make the same case. Rather than being the victim of the crisis, the crisis was, as so many have put it, âÄúthe straw that broke the camelâÄôs back.âÄù GM went through $1 billion a month for the first nine months of this year, when the crisis hit in mid-September. Simply keeping GM afloat during the crisis would solve nothing. It is burdened with many problems. One of the more interesting memes arising in the debate it is the United Auto Workers who are to blame, or if you oppose a bailout you are âÄúanti-labor.âÄù But that is not a substitute for an argument. The question of whether unions themselves are bad is for another discussion. Nevertheless, GMâÄôs legacy costs are massive, and put it at a massive disadvantage. In the U.S. it paid $30 more per worker per hour to build cars than its competitors. That is not derived solely from wages. It also includes retiree benefits, which are generous. To compensate, SUVs become the focus because of their high margins. The Volt and Malibu certainly are exciting cars. They still are two among a lineup of too many models that do not sell. The government bears blame for lax fuel standards and the low price of gas-made guzzlers, economical to buy. People were demanding those cars. But gas has been rising for some time. Detroit did not respond fast enough. Some believe the government subsidized the competition through tax breaks for hybrids, but the hybrid market is still too small to have made a difference. GM had trouble in the American market when times were good. Management did not respond to market forces. Labor was too inflexible. A cash infusion by the government will not create green cars or more realistic labor compensation quickly enough. It will only ensure that GM will be back for more money next year. The current recession is not going away soon and may even get worse. Bankruptcy is not synonymous to collapse. It allows restructuring while revising terms of liabilities. It will inevitably require layoffs. With the credit markets gummed up, traditional Chapter 11 bankruptcy is difficult. The government can create a hybrid procedure involving the government providing financing instead of a private lender. If bankruptcy cannot save GM, then money is better spent retraining its employees for new work. St. JamesâÄô Street welcomes comments at [email protected]