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Bailing out Detroit

November 18, 2008 | By Nathaniel Ward

Heritage Foundation experts agree that the Big Three automakers in Detroit (General Motors, Ford, and Chrysler) don't need a massive taxpayer bailout as the Left and special interests propose. Instead, the companies need to enter bankruptcy.

"Reorganization under bankruptcy would force the automakers to modernize their businesses," Heritage legal expert Andrew Grossman argues. Contrary to what the automakers are saying, bankruptcy could offer these firms a new beginning and not the end of the auto industry.

The benefits this sort of reorganization include:

  • Breathing room for debt payments in order to take stock of the situation.
  • A chance to terminate underperforming dealerships that is otherwise not prohibited under state franchise laws.
  • Better, re-negotiated contracts with remaining dealers.
  • The ability to exact needed downsizing free from otherwise oppressive labor laws.
  • Amenable debt-reconstruction.
  • New leadership to replace the failed leadership.

In a separate paper, Grossman focuses on the questions Congress must ask the automakers in the upcoming hearings on the auto bailout.

"Congress should ask automaker executives who testify point-blank about their legal duties, the state of their preparations for bankruptcy, and what they plan to do if they are ultimately forced to file for bankruptcy. These topics, more than any other line of inquiry, will inform Congress and the public about a bailout's prospects to turn the Big Three around, whether the automakers can be trusted with the investment of taxpayer dollars, and whether bankruptcy—instead of a bailout—would be a better option."

But Grossman reports that the Big Three aren't really considering bankruptcy. "Really, they are trying to play a game of chicken with Congress, and raising the stakes might make a taxpayer-funded bailout—which stands a good chance of keeping automaker leaders safe and comfortable in their executive suites—more likely." Clearly, this puts creditors' interests at "enormous risk" and likely violates the duty the automaker leadership has to owners, investors, and clients.

The problem with the bailout

Bailing out Detroit would only delay the inevitable bankruptcy, Heritage experts James Gattuso and Nicolas Loris argue, since the companies operate under a flawed business mode

GM CEO Rick Wagoner has gone as far to say that "the problems in the auto industry are a direct result of the credit crisis." But Gattuso and Loris point out that this is a flimsy excuse in light of Detroit's unprofitable decisions to rely on big, non-fuel-efficient vehicles, very high labor costs, too many dealerships for the market in the United States, and untenable legacy costs.

Proponents of the bailout claim it will give automakers "breathing room." But they can get breathing room through bankruptcy—which doesn't come at taxpayer expense.

» Read more up-to-date coverage of the Detroit bailout on Heritage's blog.

— David Talbot

Other Heritage work of note

  • The Heritage Foundation worked hard before the election to expose the dangers of voter fraud. Now you can sign up to get our free 45-page special report, Democracy in Danger: Case Studies on Election Fraud, compiled by Heritage expert Hans von Spakovsky.
  • In a National Review Online symposium on conservatives' priorities in the coming months, Heritage Vice President Mike Franc articulated a mantra for the coming policy battles on Capitol Hill: "If it's too good to be true, then it's too good to be true."

In other news

  • In Vermont, a dispute has broken out over how and where school children say the Pledge of Allegiance, with some arguing against reciting the pledge in the classroom at all.

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Nathaniel Ward is the Editor of MyHeritage.org—a website for members and supporters of The Heritage Foundation. David Talbot contributed to this report.