One reason nobody is excited about bailing out the auto industry is that it defies the free market. If the companies can't make it on their own, shouldn't the government just let them die? It's a reasonable argument. But today in the Washington Post, an economist with some pretty cood intellectual credentials--Jeffrey Sachs--makes the case for a bailout anyway.
...the automakers cannot turn to ordinary borrowing to tide them over until that happens because of the ravaged capital markets. The risk spreads of corporate bonds over U.S. Treasuries are the highest ever, and many borrowers can't get credit at any price. That's why the government has embarked on nearly $1 trillion in direct interventions. A small part of that should be used for the auto industry.
In this environment, the normal market test of consumer demand can't be used to judge which industries should survive. We are experiencing the steepest temporary decline in consumer spending since the Depression. Consumer financing for autos has collapsed. Households are retrenching after the greatest wealth loss in equities and housing in history.
Sachs' excellent article makes one other point, which I neglected to mention in my own take on the auto industry. Among the reasons Chapter 11 may not be a great option for the auto industry is the potential impact on consumer demand. As many industry analysts told me, people are perfectly willing to fly on an airline that's in bankruptcy. They have faith in safety regulations plus, in many cases, there are few if any alternatives for getting from one city to another (at least by a convenient, affordable route). But a widely cited marketing survey has shown consumers would not buy a car from a company in Chapter 11, because they'd worry about service warranties and the availability of parts in the future.
One thing to keep in mind: Offering the auto companies a bailout is not an alternative to restructruing. It's really about managing a restructruing, already underway, in part to avoid a catastrophic shock to the economy. And that's going to mean, among other things, management and unions giving up more.
As it happens, this is precisely what President-elect Obama implied last night on "60 Minutes". Here's the key exchange with Steve Kroft:
Kroft: You have a situation right now where you have General Motors, which is in dire straits.
Mr. Obama: Yeah.
Kroft: May run out of cash by the end of the year, maybe by the end of certainly, if we believe what we read in the papers, by the time you take office.
Mr. Obama: Yeah. Well, let's see how this thing plays itself out. For the auto industry to completely collapse would be a disaster in this kind of environment, not just for individual families but the repercussions across the economy would be dire. So it's my belief that we need to provide assistance to the auto industry. But I think that it can't be a blank check.
So my hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan what does a sustainable U.S. auto industry look like? So that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere. And that's, I think, what you haven't yet seen. That's something that I think we're gonna have to come up with.
Kroft: Are there a lot of people that think that the country would probably be better off and General Motors might be better off if it was allowed to go into bankruptcy?Mr. Obama: Well, you know, under normal circumstances that might be the case in the sense that you'd go to a restructuring like the airlines had to do in some cases. And then they come out and they're still a viable operation. And they're operating even during the course of bankruptcy. In this situation, you could see the spigot completely shut off so that it would not potentially permit GM to get back on its feet. And I think that what we have to do is to recognize that these are extraordinary circumstances. Banks aren't lending as it is. They're not even lending to businesses that are doing well, much less businesses that are doing poorly. And in that circumstance, the usual options may not be available.
The government obviously has enormous leverage over the terms of an auto industry bailout. From the inteview, it sounds like Obama understands that and is willing to use the leverage, even with labor, although he also understands why rescuing the Big Three still makes sense, at least in this environment.
--Jonathan Cohn