December 14, 2008
Op-Ed Columnist
A Finger in the Dike
By NICHOLAS D. KRISTOF
For the first time in human history, I agree with Dick Cheney. According to The Los Angeles Times, he warned Republican senators that if they refused to bail out the auto companies, “we will be known as the party of Herbert Hoover forever.”
The senators from the Herbert Hoover Party promptly fumbled, but President Bush seems poised to rescue the car companies anyway. Thank heaven!
Look, there are plenty of sound arguments against a bailout. But there’s a practical argument that trumps everything: when conditions are so fragile, we can’t risk a staggering blow to the national economy. When you see a hole in the dike, don’t discuss the virtues of laissez-faire policies — plug it!
There were also sound arguments for not rescuing Lehman Brothers. So the government allowed Lehman to collapse — and almost everybody now recognizes that it was a mistake that cost taxpayers more than a bailout would have.
Lehman Brothers was small potatoes — a tiny French fry — compared with America’s automakers. Lehman Brothers had 25,000 employees worldwide; General Motors alone has 250,000.
The Big Three have almost 400,000 employees worldwide, including about 230,000 in the United States. In addition, several hundred thousand people make car parts for the Big Three, and a half-million more sell or distribute cars from them. All told, considerably more than one million jobs in the United States depend directly on the American automakers, and many more indirectly.
Let’s look at the reasons cited for washing our hands of the auto companies:
A rescue mucks up the dynamic of capitalism; governments shouldn’t spend taxpayer dollars to reward failure. Thomas Murphy, the chairman of General Motors at the time of the 1979 Chrysler bailout, perhaps put it best: a bailout of Chrysler, he said then, would constitute “a basic challenge to the philosophy of America.”
In fact, the Chrysler bailout went ahead and worked pretty well. Jobs were saved, Chrysler retooled and came up with successful cars that included the first minivan, and the Treasury was repaid and made a profit on the bailout.
We’ve already rewarded failure by bailing out the banking sector, because the alternative was worse. If the same is true again, and it’s cheaper to rescue the car companies than clean up the mess afterward, wouldn’t a rescue reflect a pragmatism that is precisely “the philosophy of America”?
The solution isn’t a bailout, it’s bankruptcy. If the car companies enter Chapter 11, they’ll be able to rework burdensome contracts and actually make themselves competitive again. That’s how the airlines recovered, and auto companies shouldn’t be favored.
Bankruptcy would be a gamble because we just don’t know whether cars from bankrupt companies will still sell. I’ll buy a $400 air ticket to fly on a bankrupt airline, because it’ll still be honored in a month’s time, but that doesn’t mean I’ll spend $30,000 on a car from a bankrupt company when I’m counting on its resale value in 10 years’ time.
While bankruptcy would help automakers extricate themselves from onerous contracts, the gap with foreign automakers isn’t as wide as some believe. As my Times colleague David Leonhardt has noted, the reported $73-an-hour wage in Detroit is a fiction. Union workers at the Big Three get about $55 per hour in wages and benefits, compared with $45 per hour for nonunion workers at the American plants of Honda or Toyota. One reason for the gap is that the Detroit labor force is older, and health and other benefits are always more expensive for a 50-year-old worker than for one half that age.
A bailout is hopeless: This is a bridge loan to nowhere.
Yes, the Obama administration will have to come back in January with a full rescue package. The package should focus on saving jobs, not stockholders or bondholders. Shareholders should lose most of their investments, bondholders should get a haircut, managers and board members should be ousted, autoworkers should have their pay and benefits trimmed to market levels, and taxpayers should get an equity stake that they could profit from.
But saving the auto sector isn’t hopeless. Car companies have made progress in recent years, as underscored by the Chevy Volt, a plug-in hybrid that can go 40 miles without using a drop of gas. (The catch is that if gas prices stay as low as they are now, consumers may instead be demanding gas-guzzling S.U.V.’s.)
Think of a bailout as part of the huge planned stimulus package. It’s much cheaper to keep people in their existing jobs than to create new jobs elsewhere.
I lived in Tokyo in the 1990s, as perfectly reasonable arguments for government restraint led to acquiescence in the face of escalating economic disasters. Anyone who lived through Japan’s “lost decade” understands that the risks of inaction are greater than the risks of action.
