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Detroit at the Brink
The carmakers cannot get out of their crisis unless they first get out of denial.

Thursday, November 20, 2008

AFTER TWO DAYS of congressional testimony from the heads of the Big Three automakers and the United Auto Workers, the prospects for federal aid are anything but certain, and a big part of the reason is that Detroit is still in denial. Yes, the auto industry has cut costs and improved products more than its critics may recognize. But the companies and union must stop insisting that the financial crisis alone is responsible for their current predicament -- and that federal aid should therefore not hinge on more restructuring.

In fact, the industry remains burdened by work rules -- including a "jobs bank" that pays laid-off employees not to work -- and by health and pension benefits that exceed those of its competitors. Private investors evidently have no desire to buy car company stocks or bonds to underwrite better-than-usual health benefits for hundreds of thousands of UAW members, active and retired; the general public should not have to do so, either. And while U.S. companies have been making some better models of vehicles in terms of initial quality, when it comes to projected resale value, Detroit still lags far behind European and Asian firms, as Kelley Blue Book reported yesterday.

Chapter 11 bankruptcy would force the companies to tackle these issues, but at the cost of much collateral damage to the rest of the economy. That should be avoided if reasonably possible. Congress should step into the breach, however, only in return for ironclad commitments that Detroit will revamp its business -- from the executive suite to the overgrown dealership network to the labor agreement. Otherwise, no matter how much the companies downsize, they will not emerge as viable entities, and the money will be wasted -- whether it comes from the Treasury Department's bailout fund, as Democrats in Congress prefer, or from $25 billion in already-approved energy-efficiency loans, as the Bush administration wants.

The two political parties are engaged in a game of chicken, threatening each other with blame for letting the auto industry fail. This argument obscures the fact that none of the plans under discussion would guarantee that the companies go through the needed bankruptcy-like restructuring. For its part, an administration-backed Republican bill would use the energy-efficiency loan's requirement that the recipients be "viable" to compel change. Senate Democrats demanded only modest limits on executive compensation, warrants for the government, and "a detailed plan on how the government funds requested will be utilized to ensure the long-term financial posture of the company" and to produce fuel-efficient vehicles. A House bill drafted by Financial Services Committee Chairman Barney Frank (D-Mass.) is better in that it breaks the loan into short- and long-term pieces, with the latter portion being contingent on the Obama administration's approval by April 1 of a "restructuring" plan that would include "rationalization of costs" and debt renegotiation. Yet this merely sets up an inevitably political negotiation with the next administration. Spending public money to prop up the auto industry might make sense if, and only if, the Big Three and their union agree that their current ways are not sustainable.

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