No Free Lunch

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Friday, November 14, 2008

THE IMPENDING collapse of General Motors presents Congress and the president with a choice between two domino effects, both potentially damaging to the U.S. economy. If the federal government does not lend GM money and the company goes bankrupt, the repercussions will spread throughout the country by way of the network of suppliers, dealers and local businesses that depend on GM and the other car manufacturers for their livelihoods. This could destroy hundreds of thousands of jobs when the economy can ill afford another shock. But if the federal government, frightened by these possibilities, gives GM just what it wants, it will be setting a precedent for even more multibillion-dollar bailouts -- of automakers and of other troubled companies. The closure of DHL's operation in Wilmington, Ohio, is costing 9,000 people their jobs; Circuit City's bankruptcy means about 7,800 layoffs. If Detroit and its relatively well-compensated workforce qualify for federal aid, why not these firms and workers, too?

Strict conditionality could ease this dilemma. When the International Monetary Fund lent money to cash-strapped countries, it demanded that they overhaul their tax and spending policies to ensure that the IMF would be repaid and that the countries wouldn't continue bad habits. The consequences could be painful for those countries' citizens, but the alternative -- national destitution -- was worse, so countries generally accepted. Furthermore, the example deterred others from mismanaging their affairs in the first place.

Congress should act like the IMF toward GM and the others. Conditionality is catching on in Congress, but so far the ideas we have heard are either tepid or misguided. Some say the firms should stop dividend payments, but GM already has suspended dividends. Taking equity in GM or any of the money-losing Big Three won't help taxpayers if the companies keep losing money.

GM might have a future in the North American market, but not with its current business model. The company and the United Auto Workers did take some steps toward becoming smaller and nimbler through their 2007 labor agreement. Recent events have shown, however, that those measures were too little, too late. Now that they are turning to the nation as a whole for help, GM and the UAW cannot expect any deference to their past business decisions or collective bargaining arrangements. They, along with the company's creditors and dealers, must prepare for transformations more radical than the ones they found mutually agreeable a year ago. Everyone should have to make sacrifices, as Chrysler's workers and managers did in return for a federal loan guarantee in 1979. There must be a revamped labor agreement to achieve greater workplace flexibility and lower labor costs -- as well as a haircut for holders of GM debt and an overhaul of the company's duplicative dealerships.

Unless Congress insists on such change, Detroit will be back for more help before long -- probably accompanied by other industries demanding the same indulgent terms. And if GM, the UAW and other stakeholders balk at the terms, Congress should make clear that the alternative is bankruptcy court, which is likely to insist on a similarly radical restructuring.


© 2008 The Washington Post Company

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