Now that the auto bailout seems to have failed (I say “seems” because these bailouts are more resilient than a Hollywood horror villain), what’s next? Hopefully, bankruptcy. Chapter 11 is specifically designed for the situation that we hope this is: a workable business that buried under commitments it cannot meet. A bailout is not going to help them, because their problem is not liquidity. Their problem is that they cannot build a good car at a competitive price.
The average labor cost (wages, benefits, and taxes) at the big three automakers is over $70 an hour, and that’s before you figure in restrictive union work rules. (The UAW and its allies have run an aggressive effort to discredit this figure, saying that it figures in retirement costs for retired workers and other non-current expenses. The Heritage Foundation has an article showing that’s not the case.) With their labor costs, Detroit must either charge higher prices (which they cannot do) or trim costs in the cars themselves, resulting in a crappy product. The only way Detroit can turn itself around is to bring its exorbitant labor costs under control.
Republican lawmakers made this a requirement for their support of a bailout, but the UAW balked, thereby killing the deal. I’m a little puzzled by what the UAW is thinking. Do they think that they will do better under bankruptcy? It seems like they’re determined to go down with the ship, like the steelworkers before them.
Perhaps Detroit needs a car czar, but let him be appointed by a bankruptcy judge.
UPDATE: National Review argues for bankruptcy.
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