Looters' Paradise

News reports indicate that Congressional leaders and the Bush administration are working on an interim $14 billion bailout that is intended to keep GM and Chrysler afloat until March until a more permanent solution can be devised.

Characterized as a "down payment" since the Big Three asked for $34 billion, we should assume that once the government starts funding the auto makers, they will get whatever sums are needed to keep them afloat. Otherwise, to have granted money but to have them later fail will be perceived a bigger political failure than cutting off funding.

So while "down payment" seems a poor choice of words to characterize spending $14 billion and 40% of the ask, I suspect it will be a small portion of the money eventually committed to the auto industry before we are through with this

Among the many things that can be said about this, I want to highlight a few.

First, it is deeply offensive that some jobs are more politically-favored than others. It is said that the report that the economy lost 533,000 jobs in November is further encouraging Congress to bail out the auto makers. In fact, it should have the opposite effect. The companies, and their employees, that employed the 533,000 who lost jobs last month, and the nearly 2 million who have lost jobs in the past year, sure would have liked a bail out. I guess UAW workers are more deserving than others.

Second, if the auto makers are correct that customers won't buy their cars if they file for bankruptcy (and I'm not sure that it isn't just a scare tactic), the bail out is helping GM and Chrysler at the expense of Ford. Ford's financial position is much stronger than GM's and Chrysler's, since its restructuring efforts have been more comprehensive and it raised more financing when it could. For those who want to protect the historical American auto makers, bankruptcy won't change that - Ford will thrive.

There is a case for sympathy for the Big Three, but it bears no relation to today's political environment. The auto makers have been severely hobbled by many regulations that have imposed on them excessive costs and limited their flexibility to adapt to changing market conditions:

• Labor-friendly legislation has tilted the negotiating leverage toward the UAW, allowing auto workers to have above-market compensation and benefits that have drained their employers
  

• Fuel efficiency standards have forced them to make more fuel efficient cars at a loss with expensive UAW labor

• State franchising laws have made it more difficult and expensive to reduce the number of dealers as their market share has declined
  

If the government said it was eliminating all of these constraints, then there is a case that the auto makers can be viable and a bailout would be less offensive. Of course, if the government eliminated these constraints, investors might be willing to provide the capital to get over the current period of stress. But no private investor wants to touch such profoundly unsound businesses, given these constraints and knowing that politicians see the auto makers as part of their ideological agenda to produce green cars with expensive union labor.

It is deeply sad what has befallen the industry, particularly to GM. It was once the great innovator, overtaking the early industry leader (Ford) through aggressive competition and new product innovation. It was the world's largest industrial enterprise for many decades, during which it took a principled stand for free markets in its lobbying efforts. And its vast industrial capacity helped us win World War II.

So by virtue of its strengths, it became a target for government regulations to extract concessions and be the vehicle for pursuing political goals.

Its current state is a tragic and profound example of the results from this politically-driven looting, with no end in sight.