What to do about the big three automakers? I am old enough to recall the last time they were surprised by rising oil prices. It is not very clever of them to be surprised again, though the leader to this article suggests it was not really a surprise, just an inability to act.
Their most recent labor contracts are getting down into a range where the wages can at least shout to the marginal products, which is good, but the legacy of past contracts where the two could not even see each other through the telescope linger on, as do decades of poor management and an adversarial corporate culture poorly suited to the times.
My thought is that Chapter 11 bankruptcy is just what the firms need. I think two of the arguments that have been against this are silly, the third is sensible but one that I cannot really evaluate. The silly ones are that customers will not buy from the big three because of concerns over warranties or spare parts. The first of these is easily solved by the auto companies, which can package their cars with third party warranties. The second is easily solved by recalling that parts firms like to make money and if there is a market for parts, someone will produce them. The more sensible argument is that there will not be credit available to finance the big three while they are in Chapter 11. I suspect that clear signals by the firms, the unions and the politicians that cost structures will be changed in ways ensure firm persistence would take care of this one as well but I do not know enough about the credit market for firms in Chapter 11 to rely solely on my own views.
More thoughts and links here from MR this morning. They quote Bruce Bartlett to the effect that Obama needs to use this occasion to show that he can't be "rolled" or it will be a long (and expensive) next four (eight?) years.
Full disclosure: a bailout would probably have a positive direct effect on me by helping out the budget of the state of Michigan, which provides about a quarter of the funding for the university, with the remainder coming from our endowment, tuition and research overhead.
Addendum: a positive case from Jeff Sachs and a negative case from Gary Becker. Sachs adds an additional argument about resale value being an issue under Chapter 11. Presumably this is an empirical question that one can address by looking at brands that have disappeared in the recent past, such as AMC. Hat tip to Greg Mankiw on these.
It's really quite easy.
1 year ago