A leak in the transmission

Congress tries to thwart automakers' efforts to economize on distribution.

ANNOUNCING the bankruptcy-cum-bailout that saved General Motors last June, President Obama declared a hands-off approach toward the federal government's new ward. The board of directors, he said, "not the government, will call the shots and make the decisions about how to turn this company around." The president's pledge made sense: Success for GM and its fellow bailout recipient, Chrysler, hinges largely on operating according to strictly economic criteria -- not political ones.

Alas, Mr. Obama's ringing words were not binding on Congress, which has now intervened to protect the companies' overgrown dealer networks. Every serious analyst who has looked at the industry, including the Obama administration's auto task force, has concluded that these networks must be streamlined. The bankruptcy cleared the way for GM and Chrysler to eliminate more than 2,000 dealerships, with GM estimating that it would save $2 million per shuttered outlet. But on Thursday, the House passed a measure, attached to a must-pass spending bill, that largely undoes this vital reform. Headed for likely passage in the Senate and unavoidable signing by the president, the bill lets dealers threatened with closure take GM and Chrysler to arbitration on terms considerably more favorable to dealers than the companies had previously been willing to accept. The result will be hundreds of time-consuming cases -- or demands by dealers that the companies pay them to go away. Either way, the taxpayers, who own most of GM and much of Chrysler, will bear the cost.

The bill's promoters, notably including House Majority Leader Steny H. Hoyer and Reps. Chris Van Hollen and Frank M. Kratovil Jr., all Maryland Democrats, argue that it's only "fair" to give dealers a day in court before putting them out of business, especially since many of those on the chopping block have been profitable. This is spurious both morally and economically. But for the taxpayer-funded bankruptcies, there would be zero dealers, not fewer. Other auto industry stakeholders -- bondholders and autoworkers come to mind -- have been hit as hard as the dealers, if not harder. GM had taken a number of steps on its own to ease the transition for dealers.

As for dealer profitability, it's a phony issue. Dealers who don't sell many new cars often make profits through service and used-car sales. Even phonier is the view, voiced by Mr. Van Hollen among others, that the bill merely lets "the market" decide which dealers survive. Actually, one reason it took bankruptcy to prune the dealer networks is that they have long been protected from market forces by a thick web of state franchise laws. The issue here is whether the auto manufacturers can have effective control over their channels of distribution. The less control they have, the smaller their chances of returning to profitability and paying back taxpayers.

To be sure, the new legislation is an improvement over the dealers' initial proposal, which would have forced the reinstatement of dealers with no chance for the companies to resist. This reflects Obama administration pushback. Still, the measure is impossible to justify, except as a sop to a lobby with influence in practically every congressional district. By ramming it through, the bill's supporters risk undermining an already tenuous auto bailout.