People Before Profits: Only nationalization can save U.S. auto industry

A raging debate is underway across the country, in Congress, and between the incoming Obama and outgoing Bush administrations on the fate of the U.S. auto industry. CEOs of GM, Ford and Chrysler have faced tough questioning in Congress. GM comes to Washington to beg for a $25 billion bailout to keep it and its ailing Detroit counterparts going next year. But nobody seems too thrilled about the prospect.

Some say the companies are to blame for their own mess because they’ve focused on turning out gas-guzzling sport-utility vehicles. The right wing obsesses over all the well-paid union members with alleged gold-plated benefits. (You would think it a crime to fight for full medical coverage for workers and their families!). The New York Times and Washington Post join this bandwagon by reporting wages and benefit figures for auto workers that are double what they actually get. The inflated figures they report include all the obligations that the companies have to retirees – money that workers, especially newer workers, never see. 'The downfall of the American auto industry is indeed a tragedy,' the Washington Post editorial board sermonized recently, 'but the automakers and the United Auto Workers have only themselves to blame for much of it.'

And, if they have only themselves to blame, the argument goes, why do they deserve taxpayer help? Let them fail and file for bankruptcy. In the long run, the economy will be stronger and the workers better off. It'd be worth the short-term pain, which might not even be so severe. So what if they cannot recover, maybe its time for Japan and Germany and Korea to produce all the cars of the world. (Of course that means all the engineering jobs will also head off shore.) The essential argument for letting GM fail is the assumption that bankruptcy would be no big deal: But, while bankruptcy has worked OK for reorganizing airlines, among others, it's very unlikely a GM failure would have the same result.

In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

Thus GM would not qualify for Chapter 11, and instead end up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM's business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations.

Restaurants, gas stations, hospitals, and then cities, counties, and states--all of them would feel pressure on their bottom lines. A study just published by the Michigan-based Center for Automotive Research (CAR) predicted that three million people would lose their jobs in the first year after such a Big Three meltdown, swelling the ranks of the unemployed by nearly one-third nationally and leading to hundreds of billions of dollars in lost income.

On the other hand, the auto executives should not be rewarded for their decades long inefficiency, short-sightedness, and outright corruption. If you are wondering why mass transit, energy, and transportation policy are 40 years behind where they should be, just consider the example of Rep. John Dingell of Michigan, chairman of the House Energy Committee. His wife, a member of the founding GM Fisher family, is a well paid public relations and lobbying rep for GM!

It is difficult to imagine the combination of legislative strings attached to a 'bailout' package that would change the behavior of auto execs enough to return them to profitability, or return to the public the modernized, fuel-efficient cars that the U.S. and the world need in exchange for our investment.

Nationalization is the only appropriate form in which the necessary re-organization and re-tooling of the U.S. auto industry to meet the requirements of the high-tech and fuel-efficient future can succeed.

Only nationalization provides an opportunity to show how a concentrated effort can renew a great industrial city like Detroit.

Only nationalization provides the framework in which collective bargaining over the pay and working conditions of workers in the automobile industry can result in a fair agreement that ends the destructive two-tier arrangements of the recent past, and grants auto workers a sustainable, long-term stake in the industry.

The U.S. auto industry, like the major financial institutions, is 'too big to fail' in the words of Federal Reserve Chairman Bernanke. But its executives cannot be trusted with public funds.

Once retooled and re-focused, it's possible the government could resell the industry in whole or in part back to private producers if that proved to be more efficient. This writer would hope that a government - UAW partnership in rebuilding the auto industry could create a sustainable, profitable, public enterprise. But regardless, for now, nationalization is the only practical course with any reasonable chance of success for the foreseeable future.