We almost lost Detroit — and may still

Could the Detroit automakers have come off looking anymore callous and indifferent than they did yesterday, arriving via private jet for a Capital Hill hearing at which they were asking for a government handout?

The Big Three auto companies — Chrysler, Ford and G.M. — are asking the federal government to provide them with a bridge loan as part of a bailout designed to stave off their collapse. The $25 billion requested would come from the $700 billion financial-industry bailout.

As The Washington Independent reports, the executives are warning that the aid is necessary because, “one or more of the companies could fail.”

GM says that it’s burning through cash at a rate that could drive it under before Christmas. The economic effect of the car manufacturer’s collapse, the executives claimed, would reverberate far beyond Detroit.

“The costs would be catastrophic in jobs lost, income lost, government tax revenue lost and a huge blow to consumer and business confidence,” Wagoner testified before the Senate Banking Committee. “This is all about a lot more than just Detroit. It’s about saving the U.S. economy from a catastrophic collapse.”

Wagoner — G.M. CEO Rick Wagoner — is not far off. The ripple effect from an auto company collapse could reach into numerous sectors of the economy, as Paul Krugman points out:

No illusions — these are companies that, to a large extent, drove themselves into a ditch. If the economy as a whole were in reasonably good shape and the credit markets were functioning, Chapter 11 would be the way to go. Under current circumstances, however, a default by GM would probably mean loss of ability to pay suppliers, which would mean liquidation — and that, in turn, would mean wiping out probably well over a million jobs at the worst possible moment.

Krugman cites this piece by Jonathan Cohn in The New Republic, which makes basically the same point:

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.

That’s why many analysts and scholars believe GM would likely 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. From Toledo to Tuscaloosa, the nation’s assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money.

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. The Midwest would feel the effects disproportionately, but the effect would reach into every community with a parts supplier or factory–and, to a lesser extent, into every town and city with a dealership. In short, virtually every community in the country would be touched.

He calls this a “worst-case scenario” and “the sort of dire projection you’d expect from a Michigan-based think tank that receives a small amount of industry money.” At the same time, there are numerous “economists and industry analysts” who “vouched for CAR’s integrity and suggested the group’s estimate was in the right ballpark.”

Susan Helper, an economist at Case Western University and a specialist on the automobile industry, told me her rough calculations suggest the most optimistic outcome would be “just” half a million jobs lost–and that’s only if the failures are contained to GM. But she expects much worse, given the likely spillover effects: Her best estimate is that between 1.5 and two million jobs would be lost. The price of addressing such human misery with unemployment benefits, Medicaid, and other services would be huge, making a $25 billion loan seem like a bargain-particularly if the companies pay it back, just as Chrysler did after its bailout in the 1980s.

Ron Gettelfinger, president of the United Automobile Workers union, made the same point to Congress earlier today:

“If one of these companies goes over the cliff, it could for sure take at least one of the others, if not both, with them,” Mr. Gettelfinger said, speaking at a news conference at the U.A.W.’s headquarters, known as Solidarity House. “We cannot allow one of these companies to fall off a cliff.”

He said critics of a bailout who believe bankruptcy is the answer was a dangerous gambit, because “the current recession would be made much worse.”

Hundreds of thousands would be laid off by companies that supply parts to the automakers, he maintained, and each job related to automotive manufacturing supports many more in other fields.

Thomas Geoghegan, the Chicago labor lawyer and author, told The Washington Independent that

the failure of any of the Big Three would signal a cultural shift, signifiying the fall of the United States as the world’s premier industrial powerhouse.

“It would be a dramatic marker in what has been a very slow collapse of the U.S. as a manufacturer,” he said.

Geoghegan, who has represented labor unions, said he supports a bailout of Ford, GM and Chrysler — with reservations. If the proposal is part of a renewed government commitment to get the country manufacturing again, he said, it would be worth it. “Otherwise,” Geoghegan said, “it’s probably just a waste of money.”

Unions understand what is happening, having made significant concessions on wages and health benefits in recent contracts — concessions that help the car-makers’ bottom lines but not workers. At the same time, Mr. Gettelfinger says, right-to-work states like Alabama and others in the South “enticed foreign automakers like Honda and Mercedes to open plants there by giving out $3 billion in tax breaks and other incentives since 1992″ — and these states are represented by many of the conservatives who are opposing a bailout.

“We can help the financial industry and give incentives to let foreign automakers compete against us,” Mr. Gettelfinger said, “but at the same time we’re able to walk away from the industry that is the backbone of our economy.”

Mr. Gettelfinger insisted that the union had done its fair share to help the carmakers become more competitive but did not directly say whether he would be open to more concessions if Congress demanded them as part of any assistance package. He said his chief concern is getting aid to Detroit fast enough to save the automakers. G.M. and Chrysler have warned that they could run out of money within several months,
and Ford, while healthier in relative terms, has also been rapidly depleting its cash
reserves.

“There’s a long way to go and a short period of time to get there,” Mr. Gettelfinger said.

The bailout also would have to recognize that significant changes must be made in the way Detroit does business. The Big Three has spent too many years defending old and outmoded ways of doing business and, while it has blamed its unions for wage and healthcare inflation, it is bad decisions made in the corporate suites that are most to blame for its ever-shrinking share of the world auto market.

Consider:

• The industry fought the installation of seat belts in the 1960s and was late to install airbags.
• It was late to improve fuel efficiency even at a time — the 1970s — when there were fuel shortages.
• They’ve focused their efforts on the larger SUVs and trucks and were left flatfooted when gas prices spiked and demand for those vehicles fell off.
• Most were late to the hybrid revolution.
• And they are still fighting nearly every government effort to force them to rethink their business and produce more environmentally friendly vehicles.

Cohn says the backward culture is changing, that new labor rules are creating flexibility, that productivity and quality are improving and Chevy is expected to introduce the Volt, “a plug-in hybrid that can go 40 miles without gas,” and a “compact that relies solely on gas but that gets 45 miles to the gallon.”

The Volt would represent a rare leap ahead of the Japanese, who never embraced plug-in technology with the same enthusiasm. It’s also typical of the better cars that observers say Detroit has in store. “There’s a lot of accumulated negativity about these companies out there,” says Wharton’s John Paul MacDuffie, who directs the International Motor Vehicle Program. “U.S. consumers gave the Big Three the benefit of the doubt for a long time before turning away from them, and now their reputation is worse than their actual performance and progress toward needed reforms.”

That may be. And more change needs to occur to make the Big Three competitive again.

Whether the bailout being discussed is the best way to fix the industry, however, remains an open question. As I said, Paul Krugman views a condition-laden bailout as a necessary evil, as do a number of economists. And I, with deep reservations, agree.

Titus Levi, an economist and blogger, wrote in a piece on Truthdig today that “”treating Detroit’s malaise will be a complicated affair with no assurance of success. However, doing nothing may be worse, especially for the state of Michigan.”

He admits that bankruptcy — when considered solely in short-term economic terms — appears a better option than bailout.

Bankruptcy would likely allow some leaner, meaner and more durable versions of GM and/or Ford to survive. (Chrysler looks like a dead duck; the only reason GM has any interest in the firm is its $11 billion cash stash.) Overcapacity could be pared back more rapidly under the watchful eye of bankruptcy courts and the companies could shed various obligations.

Bankruptcy, of course, comes with its own problems, including further suppressed sales and significant human damage, and “may be too high a price to pay in terms of the devastation it would inflict on jobs, families and communities.”

He says several issues must be considered before moving forward:

First, let’s put together a careful cost-benefit analysis. To begin with, Detroit must open its books to thorough scrutiny, and that includes the tight-lipped Cerberus. As a taxpayer, I’m sick and tired of the leap-before-you-look approach to taking action. I’m equally exasperated with Detroit’s tired claims of “trust us, we’re professionals” in demonstrating genuine recalcitrance to changing its organizational culture.

Second, we need to produce a no-holds-barred assessment of the managerial dysfunction at these firms and come to terms with what needs to be done to improve performance and change organizational cultures for the better. Given the track record of these firms, and their reaction to the bad news that immediately had them pulling back on innovation and new product development, I’m not sanguine about the quality or nimbleness of the current leadership. They have to go as part of this process.

Third, jettison utterly hopeless brands and initiatives like Hummer while focusing on integrating innovative ideas into GM’s R&D, design and production systems.

Fourth, engage in a thoughtful analysis of what individuals, families and communities lose in an environment of sweeping job losses and what can be done to ease the pain. This is especially important in places like Michigan, which will suffer near-Great Depression levels of unemployment and disruption, at least in the short run.

Fifth, Detroit could become a public-private partnership built around encouraging innovative and viable ideas in transportation technology. This would allow the automakers to readily leverage the research going on in the U.S. on various fronts and to create systems for developing ideas into commercially viable packages and processes. Even if the Little Two lose some money, they will provide jobs and harness economic benefits that will accrue across the country and even the world.

Finally, if GM and Ford do go into bankruptcy, they probably need to be given some federal support in the form of debtor-in-financing, since financial markets will not back Detroit given the conditions of banks and the auto industry.

In the end, he says the national economy “probably can survive the loss of cities like Detroit and Flint, but letting that happen will likely bring on human losses that do not show up in economic statistics.” It is that point, the human element in this, that is most important.

As we decide the automobile industry’s fate, we need to consider something else in this process: What kind of lives will we consign the people of Michigan to living? What kind of people have we become when we plan for, and perhaps execute, the demise of whole cities and even states? How can we prevent genuine harm from coming about and begin the healing process for those who have been and will continue to be displaced by the shrinking of the U.S. automobile industry? How can we, to borrow a sentiment from Albert Camus, strive our utmost to be healers?

We should answer these questions before we make any decisions on how to save Detroit.