Bailout and the Alternatives

The UAW has been making a PR blitz warning the consequences of not providing a multi-billion dollar bailout for the big three car makers. Among their points:

• There will be a cascade effect as auto parts suppliers and dealers go out of business with up to three million unemployed.
• Labor costs only make up 5%-8% of the cost of a car so the unions are not to blame. The real culprit is demand which has dropped by half.
• The union has already made concessions that, when fully implemented, will make union labor competitive.
• It is vital to preserve the country's manufacturing base.

These points are not as honest and straightforward as the UAW makes them seem. There are several flaws in their reasoning.

First, there are two types of bankruptcy: Chapter 11 and Chapter 13. Chapter 11 shelters a company from its creditors while it reorganizes. Often it renegotiates its debts and contracts at a discount. Chapter 11 is for companies that have a good chance of becoming successful given this shelter. Chapter 13 is for companies that have no chance at staying in business. A company in Chapter 13 is closed and its assets sold off. Chapter 13 mainly defines the order that its creditors will receive the funds gained by selling its assets.

The big three are currently talking Chapter 11, not Chapter 13. That means that some factories, suppliers, and dealers will be closed but not all. This also lets them renegotiate their union contracts. The UAW and the big three have argued that no one will buy a car from a company in Chapter 11 so it will eventually lead to Chapter 13. This is not a given.

What is more, people are still buying cars. If they stop buying from the big three then they will buy from Honda, Toyota, and other foreign competitors. This will give new markets to the parts suppliers and dealers.

The same thing is true for the American manufacturing base. Cars will still be made in America.

What has not been addressed is that the big three have been losing money on everything but the most profitable pick-ups and SUVs for years. The union has made some concessions on new employees but none on the current employees and retirees whose costs are killing the car companies.

There are other problems like an excess of dealers that can only be solved by Chapter 11. A bailout will just let the problems continue.

One irony in this is that Chrysler is included in the list of American car makers. Just a few months ago they were a German-owned company. Currently they are owned by an investment group which has international investors.

The real reason that Chrysler is included and that the bailout is being discussed at all is the UAW. The big three are one of the few bastions of unionization. The unions have been funding Democrats for years. Now they want a return on their investment.