Bailout or Investment In he Future Of American Industry?

By Peter Bearse



What are the keywords to emerge from debates on bailout policy thus far? They are, first, that “bailout” is the wrong word. It represents only what the first economic stimulus (call it Stimulus I) represented: A highly inadequate quick fix -- like passengers trying to bail out the Titanic with pails rather than the Captain of the ship avoiding the iceberg, or others trying to shift the distribution of weight on board or redesigning the craft to be safe. The right keys to emerge are: Long-term strategy (vs. short-term, knee-jerk reactions), Shared sacrifice (vs. not-shared), and Innovation (vs. business-as-usual or same-old/same-old).  

Those to blame for the economic crisis?: Large, multi-national corporations together with Big Labor, big Government and Big-media. They have all sold us bills of goods, turned us into little more than “consumers.” They have deskilled and diminished us as producers. We have been all too willing accomplices, suckers like those that P.T. Barnum used to refer to when he said that there was at least one “born every minute.” We have allowed those in positions of power, from Presidents to Congress to titans of industry on down, to make us accomplices in their corruption of American politics, government and society. So, you want to know who to blame? Look in the mirror, like Pogo, and repeat after me “I have met the enemy and he is US.”  

For in a democratic republic, it is “We the people” who bear ultimate responsibility. Thus, among elected agencies, it is the Congress and, especially, the House of Representatives that is to blame. We have sat by and watched as the House has become part of the best Congress that money can buy. The examples of Congressional corruption, fecklessness, foolishness, short-sightedness and self-serving would fill at least a few books. In recent years, these qualities have been amply in evidence, for example, in Members handling of Fannie and Freddie, energy policy, the “War on Terror,” campaign finance reform and the federal budget, plus (or minus) their non-handling of Social Security reform, Medicare reform, education, accountability and many other issues.  

The last two paragraphs may seem like a diversion from “bailout” but they are not. For some of the country’s biggest businesses have been knocking at Congress’ door to get big pieces of the bailout pie on the basis that they are “too big to fail.” A case can be made that letting big failures actually fail may be the best thing for the long-term health of the nation’s economy. Yet, the reason why the Congress needs to act to loan money to the Big 3 auto companies has to do with helping workers rather than companies. Estimates of the job losses of the companies failing range up to 3 million. That would be a really “Big 3” addition to already long unemployment lines.  

If our country had a program of wage insurance plus much more effective programs for job training and retraining for displaced workers, then we could seriously consider giving the auto companies over to the tender mercies of the bankruptcy courts. But we don’t. Reorganization under bankruptcy would also not be a viable option without federal insurance to guarantee that car buyers’ warranties would be honored. Otherwise, who would buy the cars of a bankrupt company? Warranty insurance needs to be part of any package of loans to the companies. If the experience of federal loans to the airline industry is any indication, some auto companies will end up in bankruptcy court sooner or later, anyway. 

So, keeping in mind that we’re really concerned about employers’ workers, what would a program of federal aid look like to help the Big 3? 

First, make sure the program fits into the new President’s emerging strategy to revive our economy. This calls for a carefully tailored auto company aid program, not a bailout blanket, The Big 3 are not triplets. The aid also needs to serve long-term national objectives, not seen as just a quick fix.

Second, recall that the $700 billion “TARP” program to bailout financial companies was intended to get them lending again. Thus, most loans to the Big 3 should be provided by Citibank and other TARP recipients, with loan default insurance supplied by AIG.

Though there’s been a lot of discussion of also similarly using the “136” Energy Department money to help the Big 3, the money would be better used to help smaller, innovative, electric car competitors and suppliers.

The program should demonstrate shared sacrifice; that is, federal money shouldn’t be the only “skin in the game.”

Federal loans should be provided only if several conditions are met, including: 

Company commitments to establish Employee Stock Ownership Plans (ESOPs), plus UAW pledges that part of workers’ pension funds would be invested in the Plans.

An immediate rise in federal gas mileage standards of at least 15 miles per gallon higher than current levels.

Company and union support for a carbon tax.

Federal loans in first position for payback.

At least one position reserved on each company’s board for a member appointed by the federal government.

No additional or other aid to be forthcoming.

Any additional federal monies devoted to workers’ health insurance and pensions. 

The new President’s stimulus package would also help the companies to the extent that assistance is provided to state and local governments for light rail, bus, rail and other mass-transit programs. Presumably, they would then order such vehicles from the Big 3. A carbon tax would not only be a major weapon in the fight against global warming but would also help prevent a repeat of the experience in the late ‘70’s, when falling gas prices led us to abandon energy conservation projects and goals. Thus, federal aid to the Big 3 might not only give the companies a chance to survive, it would help hundreds of thousands of workers and support national longer-term goals as well. 

PETER BEARSE, Ph.D., International Consulting Economist , December 8, 2008