Seeking a less insane auto industry

Insanity: doing the same thing over and over again and expecting different results. — Attributed to physicist Albert Einstein

The WSJ Monday had two incisive analyses of the insanity of the Big Three bailout being discussed by some Congressional leaders.

Former WSJ Detroit bureau chief Paul Ingrassia continues his habit of speaking truth to power (to coin a phrase) in exposing the failings of Detroit’s management, labor, business model, cost structure and overall strategy. In a Monday op-ed, he wrote:

Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.

In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver -- someone hard-nosed and nonpolitical -- should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.

That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.

These are radical steps, and they wouldn't avoid significant job losses. But there isn't much alternative besides simply letting GM collapse, which isn't politically viable. At least a government-appointed receiver would help assure car buyers that GM will be around, in some form, to honor warranties on its vehicles. It would help minimize losses to the government's Pension Benefit Guaranty Corp.

But giving GM a blank check -- which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant -- would be an enormous mistake. The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end.

In effect, Ingrassia says that bailing out GM (or Ford or Chrysler) is like enabling an addict to continue on its a self-destructive binge. Except that these three addicts have multibillion-dollar habits, and billions more that taxpayer might end up paying if the (taxpayer-backed) Pension Benefit Guaranty Corp. has to bailout auto industry pensions.

The unsigned WSJ editorialists take a more political focus, attacking Congress for how mileage standards are calculated and its efforts to protect Big Labor from having to compete in the global market.

In their letter, Ms. Pelosi and Mr. Reid recommend such "taxpayer protections" as "limits on executive compensation and equity stakes" that would dilute shareholders. But they never mention the UAW contracts that have done so much to put Detroit on the road to ruin. In fact, the main point of any taxpayer rescue seems to be to postpone a day of reckoning on those contracts. That includes even the notorious UAW Jobs Bank that continues to pay workers not to work.

If their attacks on labor appear partisan (or futile) in the Obama Era, the editorial writers end up with the same conclusion as Ingrassia — Detroit’s way of doing business must be wiped out, with a clean slate, if there is any hope to making the American auto industry self-sufficient ever again:

If our politicians can't avoid throwing taxpayer cash at Detroit, then they should at least do so in a way that really protects taxpayers. That means handing a receiver the power to replace current management, zero out current shareholders, and especially to rewrite labor and other contracts. Anything less is merely a payoff to Michigan politicians and their union allies.

Perhaps the call to wipe out shareholders is why GM stock fell 23% today, down 87% for the year.

If we accept Einstein’s definition of insanity, then Ingrassia’s penultimate paragraph demonstrates the insanity of funding the auto companies on the trajectory they’ve maintained for decades:

Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. “Since the mid-Seventies,” one Detroit manager recently told me, “I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out.”

Change is hard, and dinosaurs that fail to change deserve their eventual fate. Ingrassia notes that the post-9/11 government bailouts of airlines brought at least some much-needed change. I think we (i.e. taxpayers and our “public servants”) need to be more ambitious for the auto industry, if we only get one chance every 50 years to fix things.