A Better Car-Bailout Plan
The Big Three would bid against one another for bailout money, and only two would get it.
A crisis is a terrible thing to waste. This moment of decision about the auto bailout should be when we summon the courage to reject broken policies, not just to throw more capital at them; use market forces to drive restructuring, not just provide bridge loans; and put in place true market-based pressures, not a veneer of government oversight that will substitute poorly for tough decision-making.
The unfortunate reality is that we are straying further from market-driven principles and moving to an economy that relies on government as benefactor. We have nationalized the financial-services sector and are on the cusp of nationalizing the automotive sector, yet we have failed to demand anything nearly adequate in the form of genuine competition, rule changes, or transparency from the affected firms.
The current iteration of the auto bailout—car czar and all—is a move in the wrong direction. Despite the appropriately rough ride the auto CEOs were given on their first jet-ferried trip to Washington, the House, faced with mounting job losses economywide—caved on the auto leaders' second, carpooled road trip. Senate Republicans blocked a congressional bailout on Thursday, but it now seems likely that the White House will use financial rescue money to fund some version of the bailout plan. The Big Three will receive an initial payout of billions, and nobody believes that the first check is anything more than a down payment. As with the financial-services bailout, once Washington is in the game, it is almost impossible to turn off the spigot. Yet the companies have proffered only paper-thin platitudes about possible actions to restructure, platitudes that are neither binding nor creative. And we still know precious little about the finances of the companies, especially Chrysler/Cerberus.
Even worse, the Big Three may be subject to the authority of a car czar with theoretically almost unfettered power. Yet this modern Wizard of Oz will have no more real power than did the original. I have yet to find a single person who believes that the czar would really be able to guide or force real change on the industry—or will have the wisdom to do so. Progress comes from competition, not from oligarchs or bureaucrats.
So here is a better—and tougher—way to proceed.
We all know that a significant downsizing of auto-industry capacity is necessary. Maintaining all three companies is probably not economically feasible. We also know that the incipiency of bankruptcy tends to focus the mind and produce real offers. Why don't we tell the current Big Three that $25 billion in capital is available—but only to two of them? The surviving two will be those that submit the best, and final, binding bids, supported by all the necessary constituencies: boards, managers, suppliers, vendors, creditors, and the UAW. The plans that are the best, as judged by a panel of private- and public-sector figures—Jack Welch, Warren Buffet, or Felix Rohatyn, plus Office of Management and Budget and Congressional Budget Office officials—are the plans that will get funded. The measures they will be judged by will be announced ahead of time and will be a combination of retained/gained market share, return on capital, jobs retained, and mileage and environmental efficiency gains. The company with the least impressive plan will be denied funding. To avoid letting the third parties—creditors, the UAW, or vendors—pick the winner by refusing to sign on with their least favorite of the Big Three, third parties will be required to offer the same deal to each of the three. This process will force the companies to bid against one another for aid, giving us the benefit of genuine competition. This is better than an "oversight board" of Cabinet members who have no real understanding of the industry.
This auction process should be accompanied by radical transparency. Before we fund the auto companies, we need to know whether they will live up to the promises they will be making, and that means discovering how truthful they have been in the past. We should demand immediate public release of the following information: projections, at each point over the past two decades, of what each company then believed it could produce in terms of fuel efficiency if we funded their ongoing research; all information pertaining to why they did not fund such research; all information about environmental measures that might have been taken and their consequences; and all contacts with energy companies and other auto companies about the impact of any of the steps above.
A simple reality should frame the bailout conversation: Taxpayer dollars are being used to cover the enormous legacy costs that resulted from the industry's failure to navigate through a changing business environment. In virtually any other context, the result would have been bankruptcy, creating the appropriate accountability for those whose capital was invested, those who benefited from unsustainable labor agreements in the short term, and those who extended credit to the company. Shifting this burden to the public makes sense only if we can begin the transformation of the industry. A car czar will not do so; competition among the companies might.