Bankruptcy Now Would Do Incredible Damage

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Most libertarian and conservative leaders oppose government aid for the auto makers. However, theories of leaving everything to the free market are not valid when the market is crashing or is dysfunctional. Libertarian theories and principles are great for normal times, but they need to be realistic and modified during times of chaos. They now coincide with the Far Left, which also wants to see the car companies in bankruptcy.
Instead of blindly opposing any government intervention or subsidies, libertarians should be debating how to make government provision of liquidity to markets minimal yet effective. Otherwise, a collapsed U.S. auto industry will strengthen socialism, nativism, and anti-free trade forces in general. Libertarians will not be acclaimed for abiding by their principles; rather, they will be seen as having contributed to economic disaster and will become marginalized for future battles.
First, we must comprehend the risks. Markets are in a free-falling downward spiral. The real estate collapse crippled banks, banks then ceased credit for businesses, workers then are being laid off as fearful companies husband their cash resources. More workers then cannot afford or fear buying, for example, cars. Then auto makers and their suppliers lay off workers who then cannot pay debts, and real estate takes another dive. We are in extraordinary and desperate times!
Letting auto companies be bankrupted at this time would compound America’s and the world’s disastrous economic situation. Those who argue that it is all the companies own fault and they should be left to bankruptcy and “free markets,” whatever the consequences, virtually ignore the credit collapse and two major reasons for crashing bonds and stocks. “Mark-to-market accounting,” explained by Newt Gingrich, combined with the SEC’s elimination of the “uptick rule” governing short selling that was put in place after the 1929 crash, allows speculators to easily drive even viable companies into bankruptcy. These developments are not the companies’ fault.
Second, we should know that much of what is written about American auto manufacturers is obsolete or false. For example, one often hears that workers earn $70 per hour. Workers do not make that. That cost includes all the legacy benefits to retirees. Detroit is unwinding from years of union domination, and in 2010 companies will be transferring legacy costs to their unions. Billions have been set aside for this purpose, which is already half funded.
Another false statement is that American quality is not competitive. Forbes describes the quality of new models and how Ford and GM are major and profitable producers in Asia, Europe, and South America. Ford has closed 17 plants and was profitable in the first quarter. GM is the largest auto company in China with 14 percent of the market and has many enticing new models coming.
These skilled workers and engineers are at the heart of America’s heavy manufacturing.
Yet most critics’ talk of the auto unions is about the way they used to be, not the situation now. In fact, the United Auto Workers union in 2007 has made major concessions and will no longer have a stranglehold on the companies. New hires will come in at $14 per hour, with only a 401K plan, reduced health care benefits, and major work-rule revisions. Work-rule revisions and the two-tier wage structure strike at the heart of union monopoly power. Also, it is not necessarily true that companies would be back for more money soon after, as many opponents assume, without evidence.

Read the full article at
Fitzgerald Griffin Foundation

Date published: Dec 12, 2008

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