Auto Industry Bailout

So I think I've pretty much had enough of industries that are "too big to fail" and need to be bailed out by taxpayers... but I have to admit that Jon Cohn and Jeffery Sachs have made fairly persuasive cases as to why just letting them go Chapter 11 and restructure won't work in our current situation.

From Cohn, one big problem is the lack of credit:

In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

Without those loans, they close their doors... and when they close their doors, so do many part suppliers, and when suppliers close so do Chrysler and Ford... and maybe even foreign auto makers in the US. As Krugman notes, this might not be the best time to lose a million jobs.

Sachs goes a bit further, and says that even if loans were available, Chapter 11 would kill Detroit anyway:

...any restructuring under Chapter 11 bankruptcy rules would be a death knell. Yes, in some industries, Chapter 11 can provide breathing space. For the automakers, however, it would accelerate the collapse of consumer demand and the mass bankruptcy of parts manufacturers. Consumers choose vehicles in part on their expectation of the long-term health of the companies that make them, which they rely on for parts, service and resale values.

Cohn and Sachs each make the case that, in addition to all the problems with "letting them fail" for the larger economy, the Big Three had also already begun restructuring to face the new challenges of energy independence and climate change... and were making big strides, before the bottom fell out of the economy. Cohn:

According to the most recent Harbour Report, the benchmark guide for manufacturing prowess, Chrysler's factories now match Toyota's for the most productive, while both Ford's and GM's are improving. (A Toledo Jeep factory was actually named the nation's most efficient.) Consumer Reports now says Ford's reliability is approaching that of perennial leaders Honda and Toyota, whose ratings actually slipped last year. In late 2010, GM will introduce the Chevrolet Volt, a plug-in hybrid that can go 40 miles without gas, and the Chevrolet Cruze, a compact that relies solely on gas but that gets 45 miles to the gallon. The Volt would represent a rare leap ahead of the Japanese, who never embraced plug-in technology with the same enthusiasm. It's also typical of the better cars that observers say Detroit has in store. "There's a lot of accumulated negativity about these companies out there," says Wharton's John Paul MacDuffie, who directs the International Motor Vehicle Program. "U.S. consumers gave the Big Three the benefit of the doubt for a long time before turning away from them, and now their reputation is worse than their actual performance and progress toward needed reforms."

So what does that leave us with? A bailout with lots of strings, I guess. Which seems like what Obama is indicating he favors from his interview with 60 minutes last night:

...my hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan what does a sustainable U.S. auto industry look like? So that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere. And that's, I think, what you haven't yet seen. That's something that I think we're gonna have to come up with.

I'm just waiting for the biomedical research bailout... how 'bout we double NIH funding while we've got the wallet out?