Over e-mail, Jon expands on some of the policy implications of his piece on the auto industry's troubles, particularly on why Chapter 11 -- if indeed it could be used -- might prove a bad thing:
The gist is this:1) Letting GM fail would have potentially catastrophic effects on the economy. It probably couldn't reorganize under Chapter 11, so it'd have to liquidate. That would take down most of the suppliers, potentially sinking the rest of Detroit with it. Realistic estimates of new unemployment range from 1 to 3 million, once you include the ripple effects in communities with shuttered suppliers, dealers, etc..2) As the subheadline says, this is not your father's Oldsmobile we're talking about saving. All that stuff about myopic management and labor is true. But times have changed. Among the promising signs are the use of new, plant-specific contracts that allow for the kind of management-labor cooperation that made Toyota famous. Also, the big 2007 UAW contract off-loaded a lot the crippling legacy costs (retirement and health costs for retirees). The cars have gotten a lot better, the plants more efficient. Much work remains, but they're on the right track.3) The foreign carmakers are struggling now, too. But they have bigger cash reserves, so they can weather the storm. The Big Three don't have that luxury. And one reason is that the steps they've taken to restructure -- closing down plants and brand lines, setting up a trust fund for legacy costs -- cost a lot of money upfront. So their troubles are, in a sense, a function of factors beyond their control (the Wall Street meltdown) and attempting to do the right thing (spending on restructuring).4) Even if, somehow, GM managed to reorganize under Chapter 11, it would not transform it into a better company. On the contrary, the push to improve the bottom line as fast as possible would reinforce one of Detroit's worst habits: Seeking short-term gain at the expense of long-term health. One example is the companies' relationship with suppliers. The Big Three are cutthroat about finding the cheapest parts, which means constantly switching suppliers. Honda and Toyota take the opposite approach, maintaining steady relationships -- even if it costs a bit more -- because that allows better collaboration on innovation and quality.In the end, I say a government bailout makes sense, but it should come with strings attached -- not just the ones we saw for Wall Street, about compensation, but also asking them to hit benchmarks on quality and maybe even ratcheting up the mileage standards. I'd also clean house at GM's upper levels, starting with that idiot who thinks global warming is a hoax. At the same time, Obama should use this as an opening into bigger debates about health care and climate change.
