A Friend in Need

Saturday, November 8, 2008

BARACK OBAMA made clear yesterday that the American automobile industry will have a friend in the White House starting Jan. 20. At his first post-election news conference, Mr. Obama, who had supported more federal aid for Detroit during the campaign, echoed talking points the industry has been using to seek more aid from Congress. He described carmaking as "the backbone of American manufacturing," and noted that its current "hardship" extends to "countless suppliers, small businesses and communities throughout our nation who depend on a vibrant American auto industry." Mr. Obama wants his aides to come up with new ideas "to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States."

Hemorrhaging cash, Detroit wants an acceleration of an already approved $25 billion government loan to retool for greater fuel efficiency, plus $25 billion more to help the

automakers ride out the financial crisis. This would, indeed, be a bad time for a sudden shutdown of the industry; including related businesses, that could eliminate hundreds of thousands of jobs, with tragic effects for communities across the Midwest. Still, the industry is no longer quite as pivotal to the American economy as it once was; and many other businesses are also hurting, including many whose workers make less than Detroit's unionized workforce. Even with a bailout, U.S. carmakers will have to shed workers by the thousands. As for improving the fuel efficiency of the U.S.-made fleet, the best way to do that would be to permanently raise federal gas taxes. Alas, higher gas taxes seem to be politically impossible at the moment.

For all his sympathetic words, Mr. Obama did not commit himself to any particular policy but left himself room to consider what kind of aid might be appropriate. In fact the only sensible bailout of Detroit would be one with strict conditions. Congressional Democratic leaders have suggested assurances that GM, Ford and Chrysler would use taxpayer money to create high-tech, "green" cars; for their part, the Big Three are willing to discuss an equity stake for Washington.

That's better than a blank check but is hardly sufficient. Post columnist Steven Pearlstein has suggested that these companies need to be reorganized top to bottom, through a kind of "prearranged" bankruptcy greased with federal aid: Under court direction, the firms would trim wages and benefits that far exceed those of non-union competitors, reduce the burden of pension payments, which stands at $90 billion over the next decade, and prune an outmoded network of 10,000 dealerships. Under such a scenario, existing shareholders would be wiped out, as shareholders of Bear Stearns were; creditors would be bought out at pennies on the dollar; and current management would go.

We doubt that this is the kind of rescue the car companies or the United Auto Workers have in mind, but it points to what should be an essential principle of any government charity. If the result is not a viable, albeit smaller, U.S. car industry, Washington will be simply throwing good money after bad.


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