Bankruptcy Would Be Tinkering Around the Edges of Detroit's Problems

Bankruptcy talk for the troubled automakers GM and Chrysler is accelerating, and President Obama—as well as the companies themselves—is raising the frightening prospect of mass layoffs and plant closings.

If the car companies are too big to fail, too poorly run to put right, it’s time to take them over. But Obama made a point of ruling out a takeover this week, saying that the government doesn’t want to run the companies. If they can’t present turnaround plans that restore them to profitability, he prefers bankruptcy—which, without significant alterations, will be a disaster for wide swaths of the Midwest.

Obama insists that GM and Chrysler submit to “fundamental restructuring.” He issued a call for the auto industry to remake itself along the lines seen in World War II. Then, the U.S. desperately needed war material, and Detroit had the factories and the willing workers. Within weeks the “Arsenal of Democracy” was churning out machines of war instead of four-door sedans, and the government poured money into Michigan to make it happen, spending $56 billion in today’s dollars over the war years.

The Arsenal of Democracy resulted not from private initiative, not from patiently waiting for the “ingenuity” of executives, but because government demanded it.

TOO HALF-HEARTED

This moment is crying out for that kind of resolve, not the half-hearted jawboning Obama described on Monday. GM’s problems can’t be solved by a symbolic (and well-compensated) firing of the CEO. What’s needed is to transition shuttered auto plants into a new transportation and energy sector that can wean us from oil. Obama should insist that the dozens of excess auto factories be put to work building clean cars, mass transit, and those 6,000 components of a wind turbine.

While he’s at it, he should dump the employer-based health care system that, at the Big 3, is about to collapse.

That’s because our jobs, health care, energy, environment, and transportation problems are all linked, and solving them means connecting the hip bone to the thigh bone: With car sales plummeting 41 percent last month and no bottom in sight, Detroit’s automakers could shutter upwards of 30 factories and still meet current demand. Auto workers face tens of thousands of job losses and billions of dollars in benefit cuts. A million retirees and their families could lose health care. The highways and bridges we depend on are falling to pieces. Those highways feed sprawling suburbs brimming with foreclosed homes.

Let’s address all those problems at the same time. In other countries, it’s called an “industrial policy,” a comprehensive strategy to make sure we’re investing wisely. (It’s no accident that Spain and Denmark make the world’s wind turbines now, and that France and Japan make its railcars.)

WHAT’S THE ALTERNATIVE?

The alternative is putting failing auto companies through what industry insiders are calling a “quick rinse”: a pre-packaged bankruptcy that would start by tearing up the contractual obligations made to former workers as they labored for decades. First on the chopping block are “debt obligations,” the code name for money promised for retiree health care through the voluntary employee beneficiary association (VEBA).

Obama furthered the likelihood of bankruptcy this week by guaranteeing that service warranties would be honored if that happened. GM, too, has softened its tone on bankruptcy recently.

Company executives must be coming to understand what other corporations have long known: a trip into Chapter 11 has been the excuse for airlines, steelmakers, and other companies to gut union contracts, impose layoffs, and destroy the jobs that promised a pension, health care, and decent wages in exchange for 30 years of intensely demanding work.