For years, the United States has railed against other countries' tendencies to pick winners and losers through "industrial policy." It is unfair, we have said, to force our companies to compete against the treasuries of foreign governments.
A special target of this indignation in the past has been Japan, which nurtured its own auto industry through supportive government policy. But now we seem to be headed toward the very approach for which we have scolded so many others.
The Detroit carmakers have economically run aground because their business model is broken. The most effective way to fix it is not through a Washington bailout, but through reorganization under Chapter 11 of the bankruptcy code.
The problems facing the industry are precisely why Chapter 11 bankruptcy exists. It allows struggling companies to continue operating as they restructure. Bankruptcy judges have ultimate power to force the parties to seriously negotiate.
Through bankruptcy, the industry could pare down its too-large network of dealers and realize essential changes in the labor agreements, which have imposed costs on the U.S. companies that the foreign operators — which have created thousands of American jobs — don't have.
Bankruptcy is not an end point, but a fresh start.
After congressional negotiations on a Detroit bailout fell through last week, the White House said the administration was prepared to step in to save the companies, perhaps using money from the fund created in September to rescue the financial system.
"Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry," the Treasury said.
Any initial stopgap payments, however, would likely be the beginning of an ever-increasing stream of outlays. (General Motors and Chrysler say they face insolvency without some form of assistance. Ford is in slightly better shape, and seeks access to a line of credit.)
Economist Mark Zandi of Moody's told Congress recently that a comprehensive bailout for the Big Three could come to as much as $125 billion. The companies’ request of $34 billion in bridge loans, he said, would not be enough to keep them out of bankruptcy "at some point in the next two years."
Bankruptcy, then, is a real possibility no matter what Washington does.
Why object to a bailout for Detroit, when so much money has been thrown at the financial sector? The $700 fund created by Congress — the Troubled Assets Relief Program — was intended by Congress to rescue the nation's financial system, without which business in general would grind to a halt.
In fact, funneling money from TARP to carmakers may not be legal. A Heritage Foundation paper points out that aid must be directed at "financial institutions."
While the definition of that term has some wiggle room, if carmakers are "financial institutions" then what sort of business would be excluded?
Has the TARP worked? Admittedly the results so far are mixed and grudging at best. There has been some improvement, especially in lending between banks, but some markets — such as those for corporate and high-yield bonds — remain clogged for many creditors.
Still, outlays from the TARP arguably may well prevent the recession we're currently in from morphing into a severe depression.
Detroit has fumbled many opportunities in the past to reform itself. A bailout would cross a line and stand as a profound policy mistake. It would open up Congress to intense pressure from all sorts of politically connected industries, each seeking its own bailout.
The car companies should reorganize using the bankruptcy process, not a politically directed plan hatched in Washington.