WORKFORCE FAIRNESS INSTITUTE

The politics of bailing out the big U.S. car companies is proving a bit more complicated than the firms' managers or the United Auto Workers expected. A lot of the public seem skeptical, if not hostile. Things are tough all over, is the prevailing view, and if Detroit is in worse trouble than most, it has only itself to blame. Even those advocating new public money for the industry want to see strings attached. In the end, more aid will likely flow. If the opportunity to impose a thorough restructuring on the companies can be grasped, and the objections of management and unions faced down, it might not be a total waste.

Sometimes the only way to force radical restructuring on a badly run company is to let it go bankrupt -- and that might well be the only way in this case, too. If a bailout comes first, the main thing is the terms. Even a fiscal hard-liner could live with financial support if it is designed in a way that forces a Chapter 11-like reorganization. But if, in the end, the money is simply handed over, taxpayers will have been robbed.

The intelligent case for any kind of bailout is that under current circumstances, ordinary bankruptcy will not work. Usually, when a firm goes into Chapter 11, it gets protection from its creditors while it reinvents itself: Contracts with workers and suppliers are rewritten, creditors are repaid only a portion of their loans, shareholders most likely lose their shirts. The point is to preserve whatever value can be preserved. There is a chance to create a viable firm, and to protect some jobs as well.

On the face of it, a restructuring of this kind is exactly what General Motors -- first in line, since it appears to be in worse shape than Ford or Chrysler -- needs. And it is where the company appears to be heading in a matter of months, unless the government intervenes.

Yet some of those advocating a taxpayer-funded rescue say that bankruptcy will not work as it is supposed to. One problem is specific to the industry. Car firms sell expensive and long-lived products: Buyers want to know that the firm will be around next year and the year after to honor warranties and provide spare parts. A bankrupt airline can still sell tickets because customers will take a chance on getting their flight a week or a month from now. But a bankrupt car company might see its sales stop altogether -- or would have to lower its prices so much to make a sale that it would not be viable whatever the terms of its restructuring.

In coming to the rescue, the government should demand a bankruptcy-like restructuring of the car companies and a share in the upside.

Another problem is specific not to the industry but to the times. Bankrupt companies typically need debtor-in-possession financing. These are new loans: The lenders get first claim on the company's assets if it has to be liquidated. The car firms would need to borrow a lot, but little or no such lending is happening at the moment because the financial system is so stressed.

Taken together, it is argued, these two factors mean that if GM or the others go into Chapter 11, they are unlikely to come out.

Now, bailout advocates say, consider the consequences. A note on this by the Center for Automotive Research (which you could say has a vested interest, but let that pass) has been widely cited in the past few days. It says that 3 million jobs could be lost. How does the center get to this number, when all three companies employ about 240,000 people, or less than one-tenth of that figure? It adds about 1 million more jobs at firms that supply the car manufacturers. Then it tacks on 1.7 million in "spin-off employment," which means jobs lost across the economy as a whole because of reduced spending by workers with Detroit's Big Three and their suppliers.

It would surely take more than the bankruptcy of GM to shut down all three companies and wipe out the industry's supplier network (which, remember, serves foreign-owned companies as well). The failure of one firm would help the survivors. The most-valuable assets of the failed company would most likely be acquired by its competitors. The technology for the forthcoming Chevy Volt -- the plug-in electric vehicle that some enthralled commentators seem to think justifies a $50 billion bailout all by itself -- would be snapped up by another company if it is as promising as its supporters say. Fiscal stimulus could reduce any spin-off unemployment. The collapse of GM would be a heavy blow all right, but not the end of life as we know it. Even if all three firms collapsed, the claim that this would destroy 3 million jobs is far-fetched.

Nonetheless, the view that the normal Chapter 11 process is likely to fail in this case has some weight. At a time when the economy is weak and the bankruptcy system impaired, when a good independent case can be made for a second fiscal stimulus of $500 billion or more to sustain demand and preserve jobs, it is difficult to argue with conviction that employers the size of the Big Three should be denied all help. But in coming to the rescue, if it does, the government should demand both a bankruptcy-like restructuring of the companies and a share in the upside.

In exchange for loan guarantees, the government would get shares or warrants. As quoted in The Wall Street Journal, Robert Reich, President Clinton's Labor secretary and an adviser to President-elect Obama, summed up the rest this way: "Every stakeholder needs to sacrifice. That means creditors should take a haircut. Shareholders should sacrifice; executives should put something on the table and also employees."

The UAW is resisting what it calls "further concessions." Its last big contract negotiations let the industry cap its obligations to retirees by creating a trust fund under the union's control. It also sanctified a two-tier pay structure allowing new hires at lower rates of pay and benefits than existing workers, whose hard-won privileges the union was intent on protecting.

If there is a further bailout -- in addition to the $25 billion already promised to help the industry invest in the production of more fuel-efficient cars -- the money should not be spent on paying high and uneconomic wages, nor on making good the managers' $35 billion promise to finance pensions and benefits in retirement. The UAW's members had a good run for a long time -- so good it brought the industry to its knees. Now they should be told that they, too, will have to shoulder some of this burden.

Beyond the debate about whether and how to rescue the U.S. carmakers, this points to an even bigger issue -- and a connection that has received less attention in this debate than it deserves. The Democratic Party is allied with the unions, a marriage of head and heart. Obama has promised to support the "card-check" legislation that the unions see as vital for expanding their membership and bargaining power. The state of American auto manufacturing -- an example of union power in action -- ought to give him pause.

No doubt there is plenty of blame to go around for the mess that the industry is in. Epic management incompetence has played its part. So has shortsighted economic policy, which kept the price of gasoline in the U.S. at a fraction of what it was in other industrial countries. (If fuel is dirt cheap, you cannot fault consumers for wanting to drive SUVs, or car manufacturers for selling the vehicles that buyers want.) But on top of that, the unions raised wages and benefits to insupportable levels, and for years blocked efforts to cut costs and increase efficiency. Worst of all, by anointing themselves co-managers, they reduced the domestic industry's ability to react promptly to shifts in demand. Is this how the Democratic Party intends to strengthen the economy?

By their own standards, admittedly, U.S. car producers have raised their game recently, and they have done it with the unions' help. Productivity in some of the domestic producers' plants is now as good as in nonunion plants run by foreigners. But this came late, and only under duress. It took the imminent collapse of the industry to moderate the unions' demands.

Unions destroyed Britain's car industry, and during the 1960s and '70s they accelerated the decline of British manufacturing and of the wider economy as well. Of course, they were far more powerful in those days than U.S. unions have ever been. Unions in America today are weak and getting weaker -- a trend that they hope to reverse with the incoming administration's help.

The point of the comparison is not to suggest that America might get a case of the pre-Thatcher British disease, but simply to question the Democrats' conviction that stronger unions serve their voters' wider interests. Look at GM, and tell me that strong unions are good for the economy.

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