Bailout Mania: Big Labor and Big Government Come To Collect Payoffs

James Bailey Brislin
The Carpet City Chronicle

The Enfield Press, November 20, 2008

“It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state… A federal cash infusion will not infuse wisdom into management. It will not reduce labor costs. It will not attract talented new employees.“
—David Brooks

“Too much credit and easy money. Those were the biggest culprits behind this financial crisis. Yet, appallingly, the government’s rescue attempt is built on more credit and even easier money. That’s like giving a procrastinator a deadline extension. By choosing this course, Washington has steered us on to the “road to Weimar” – the road to runaway inflation.“
—Walker Todd

Nary a week has passed since the election of Barack Obama, and already special interests have lined up for payoffs in the name of “bailout.”

Leading the charge for bailouts are the American automakers: General Motors, Ford, and Chrysler. These companies are rapidly burning through their cash reserves and claim to be facing bankruptcy by year-end.

The automakers justify their bailout claims by arguing that a bankruptcy filing will result in thousands of layoffs and economic catastrophe for Michigan.

Let us be clear: the chief beneficiary of an automaker bailout is the United Auto Workers union, not the taxpayers of the United States. The United Auto Workers heavily supported Obama’s presidential candidacy and have now come to collect their payoff.

There is a reason why the automakers totter on the edge of bankruptcy: for many years, they have depended on a business model centered on leasing $40,000 SUVs and trucks. The oil price shocks of 2005 and 2008 have effectively destroyed the demand for these vehicles. Meanwhile, the Japanese automakers made research and development investments in fuel economy that have paid off handsomely.

In turn, there is a reason why American automakers have been wedded to the SUV and truck business model. Only those vehicles delivered the profit margins necessary to pay the UAW workforce. In the 1980’s, management promised generous retiree healthcare and pension benefits in lieu of wage increases. In recent years, these legacy costs have caught up with the automakers. Management should bear sole responsibility for making promises it could not keep. However, it is pure folly to expect American taxpayers to stand behind promises that were negotiated in bad faith.

Lining up behind the automakers are big cities. According to the Associated Press, mayors of Phoenix, Atlanta, and Philadelphia have asked for a cut of the $750 billion package. Atlanta projects a budget shortfall of $50 to $60 million. Phoenix faces a budget deficit of $200-250 million. Philadelphia’s municipal pension fund has posted a loss of over $650 million in the first three quarters of 2008. Bridgeport Mayor William Finch may also seek a bailout for his city, which faces a $20 million deficit.

State governments also want to get in on the bailout game. Declining revenues have created budget deficits in many states, including our own Connecticut, which faces a budget deficit of $300 million. As if that were not bad enough, the state faces projected deficits of $6 billion in the next two fiscal years.

The focus on bailouts obscures the mismanagement and structural problems that have gotten these entities into trouble in the first place.

The automakers face bankruptcy because their business model has ceased to be viable. Led by the cost of labor, expenses exceed revenues. They should use Chapter 11 bankruptcy as a shield to restructure expenses and debts, and reemerge as viable businesses.

Municipal and state budgets likewise have their roots in mismanagement. When drawing up budgets, state and city governments failed to make contingency plans for a recession and its consequences: declining tax revenues.

Curiously absent has been a discussion of how we are supposed to pay for the bailouts. Will it be through growth-stifling tax increases? Will we borrow yet more money from the Chinese and the Saudis? Or, will we run the printing press and destabilize the dollar?

The brutal reality is that there is no money left for bailouts. Both Peter Schiff and Walker Todd have warned that current economic policies risk inflation and possible hyperinflation, both of which would be aggravated by a string of bailouts.

Also absent from bailout discussions has been talk of holding management accountable. If state governments want a bailout, the governor and legislature should be expected to step down, just like senior management is being replaced at private companies. The same goes for the big city mayors and city councils.

Ultimately, the clamor for bailouts raises some fundamental questions about fairness. Where were the bailouts for Thompsonville when Bigelow Sanford skipped town? Where were the bailouts when Scovill’s and Chase Brass left Waterbury with sky-high unemployment? A resilient community responds to that kind of creative destruction by attracting and developing competitive new businesses that create jobs. Enfield responded to the closure of the carpet mills by diversifying its commercial base. In Waterbury, Scovill’s has been replaced by the Brass Mill Mall.

American automakers are not sacred cows. Neither are state and local governments. Size and influence should not entitle them to bailouts. Instead, they must come to grips with the belt tightening, austerity, and accountability that the rest of us face.