Bailing out the Big Three


Should the Big Three (or as they are now, the Detroit Three, for they're no longer so big) automakers be bailed out with public money? Or allowed to go bankrupt? Or, at the very least, allowed to go into Chapter 11 bankruptcy  so as to reorganise?

Thomas Palley and other left leaning economists and commentators are insistent that they should be bailed out. I'm almost certain that he and they are wrong on this (although I certainly agree with this "the bosses of the Big Three automakers could never be convicted of an excess of imagination.").

However, the cost structure of these companies just seems to be appallingly wrong. Unless that is tackled a bailout will simply mean sending ever more money into a black hole. For example, their labour costs are hugely higher than their competitors in other parts of the United States. I can't see how they could ever return to profitability without cutting those.

Now there is some argument as to whether those labour  costs are a result of paying for their current workforce and their promised benefits or whether it's a result of the benefits promised to their now retired workforce. But for the purposes of my argument that doesn't actually matter. It could be that they cannot make a profit because they pay their current workforce too much and it could be that they can't make a profit because they promised their past workforce too much in deferred pay. So what, they still cannot make a profit at present and thus have to restructure. And they have to restructure by reducing what they pay their workforce, either past or present.

And to break those labour contracts they need to go into at least Chapter 11 bankruptcy. Yes, this does mean that the shareholders get wiped out and that the bondholders take a haircut. But this is the very purpose of this form of bankruptcy. To tear up the existing division of spoils and to examine the whole to see if it in fact creates value or not. If it doesn't, then liquidate in Chapter 7 proceedings. If it does, then create a new split of the spoils and relaunch under the new dispensation.

While I get the political angle of all of this I really don't get the logical one: what is the objection to a reorganisation inside bankruptcy? Don't people want to find out whether they do in fact create value within these companies or not? Or is it that there is a worry that we'll find out that they don't?

Please note that if they are in fact destroying value (and will continue to do so in the long term) then that does make us all poorer and thus we really do want them to be liquidated, whatever the short term chaos that would cause.