Why the auto industry needs Chapter 11
Chapter 11 bankruptcy is probably the best way for General Motors, Ford and Chrysler to solve their cash crunch. That’s the solution I proposed in Tuesday’s column, and it’s also favored by University of Chicago finance professors Luigi Zingales and Joshua Rauh, University of Maryland economist Peter Morici and former Massachusetts Governor Mitt Romney.
Zingales and Rauh, writing on VoxEU.org, compare GM to the Italian airline Alitalia, which was a basket case for years before filing bankruptcy in August:
Trying to avoid the political pain a bankruptcy would have caused, the government continued providing subsidised financing to the money-losing airline, delaying the necessary restructuring. Not only was a gigantic waste of taxpayers’ money, but it was a death sentence for the very company it wanted to save. Postponing the day of reckoning weakened Alitalia’s competitive position, making it lose market share it will never regain as a reorganised company.
Similarly, they say that a proposed $25 billion bailout wouldn’t be in U.S. auto workers’ long-term interest:
Throwing money at a drug addict only enables the addict to continue abusing drugs and ultimately shortens his life. Similarly, government money aimed at a company that needs restructuring enables it to avoid taking responsibility of its future, condemning it to a certain death.
On Tuesday, Morici added a dose of sanity to the Senate committee hearing that featured the chief executives of all three Detroit companies. He told senators:
By assisting the Detroit Three, Congress can delay one or all of them going through Chapter 11 reorganization but sooner or later one or all will face reorganization. The communities and suppliers dependent on these companies would be better off going through that process now than by delaying it with assistance from the federal government.
Romney joined the pro-bankruptcy chorus in a New York Times commentary piece. He does envision a role for the government, albeit a limited one:
A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.
Chrysler Chief Executive Robert Nardelli said on Capitol Hill today that his company had considered, but rejected, the bankruptcy option. One has to wonder, though, whether a prepackaged Chapter 11 filing is being prepared in case Congress says “no.”
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
First of all, Mr. Nicklaus–I look with great skepticism at ANYTHING that comes out of the Chicago School of Economics. Milton Friedman, who adored the Saint of Selfishness(Ayn Rand), is the heart and soul of the Chicago School. His laissez-faire worldview and complicity in the brutal dictatorship of General Pinochet, hobnobbing with Chinese McCommunists, etc. speaks volumes to the deterioration of not only our US economy but of the entire globe as well.
We do need to prop up our domestic automobile industry, but with strings attached. While the hard right wing rails against the auto worker, little, if anything is said about the corporate leaders. For example, the three CEOs of the Big Three make almost 25 million per year between them–and this does not count perks, such as stock options, etc. The hard right wingers rail about the alleged “high wages” of the average auto worker, citing the deceptive 70 per hour figure. Funny how these corporate bootlickers never tell us how they arrived at that figure. The average auto worker makes about 28 per hour straight time. There are about 180 thousand active auto workers in the Big Three companies. There are about 640 thousand retirees and their spouses. When you add active and retired employees/spouses together, with all of the wages, pensions, and medical benefits, and divided the total benefit packages by the actual total numbers of hours worked by the active auto workers, you do arrive at the 70 dollar an hour figure. Therefore, no active auto worker makes anywhere near that dollar per hour figure. Very deceptive. But what should we expect from the morally, intellectually, philosophically bankrupt Friedmanites and their supplicants, such as the Cato, American Enterprise, and Show-Me Institutes? Laissez-faire is a failed system and only touted by those who serve failure and the super-rich. America and the world is waking up!
Whitero,
I’m sorry but you’re wrong. They need to file chapter 11. The “loan” is throwing good money (albeit inflated) at a bad situation. They will continue their failing ways with a handout. No strings, because they should just compete. Re-org, re-negotiate salaries, at all levels, and produce a product that people will buy around the world. Not a gas guzzler, not a cheapo, not an expensive over-the-top product. How did toyota and honda succeed, by being frugal and producing a high quality sensible product(s). Our fat and happy auto industry has hit the ceiling and it’s time to pay the piper. Sorry, but you have to be accountable and compete without gov’t or taxpayer subsidies.
Whiterose–the only economist quoted is from the University of Maryland. The folks from Chicago are finance professors, not economists.
The real difference between Toyota and GM isn’t what they pay their executives–it’s what they pay the regular workforce. GM, et al are going bankrupt because of it. Management has to give a lot at the US automakers, and it will under any bailout or bankruptcy plan. But GM is burning through billions a month; they aren’t paying Rick Wagoner’s team anything near that much.
I thought this analysis by economist Dean Baker might shed a little light on those that want the working man to carry the rich mans burden.
ACTUAL AUTOWORKER COMPENSATION
Inflating Auto Worker Pay
It’s contract time for the United Auto Workers and the Wall Street Journal is working hard to build the case for big pay cuts. The paper tells us that compensation for UAW members is in the range of $70-$75 an hour.
Well that’s serious money. At that rate, with overtime, an autoworker can earn as much in a year as an incompetent CEO gets in a day. Clearly things are out of line.
Seriously, $70-$75 an hour is pretty good pay, but it is also not really what UAW members earn. The base pay for these workers is around $25 an hour. To get to $75 an hour, you would have to believe that autoworkers get $100,000 a year in benefits. Is that plausible?
Assume that they get $15k for their pension and $25k for their health insurance, that gets you to $40k. Where is the rest of the $100k? Well, what the auto industry does to get this figure is they average in their health care and pension costs for their retirees. These are real expenses for the industry, but they have nothing to do with the compensation received by current workers.
News reporting on the UAW contracts should clearly distinguish between the compensation received by current workers and the legacy costs from retired workers. UAW members are well-paid, but averaging in the legacy costs hugely exaggerates their earnings in the mind of readers.
–Dean Baker