The GM bailout from a different perspective

Jonathan Rauch takes an insightful look at the mertis of bailing out General Motors. Rauch extends the analysis further than I’ve seen it taken, and his piece should be considered whether one favors the bailout (as Rauch seems to, on balance) or opposes it (as I tend to). Among his points are these:

It’s the almost unprecedented economic downturn that has GM reeling. Auto sales appear set to decline from 16 million units last year (already low) to 10 million this year. Is GM inherently unviable, or just unviable in the face of what may be a depression?

If it’s the latter, then there may be a case for buying GM an extra year or two. As Rauch notes, “sooner or later demand will return to something more like normal [and] at that point, GM might stabilize, or the economy might be able to absorb its loss.”

GM is changing. According to Rauch, it has shed more than 40 percent of its jobs and about 1,000 dealers since 2004; negotiated fully competitive wage scales for new hires; extinguished the Oldsmobile brand; and transferred retirement and health costs to its unions. It has also built some very impressive cars, notably the 2008 Chevy Malibu. Unfortunately, all of this wasn’t enough. But again, it might well have been in a less catastrophic economy.

GM executives want more change. As Rauch puts it, the company’s rescue proposal to Congress “practically begged for a strong federal overseer with the power to force unions, dealers, and creditors to accept further retrenchment.”

In essence, says Rauch, GM is asking for the stick of a bankruptcy-like arrangement without the stigma of the real thing. The bailout issue boils down to whether it makes sense to grant this. Bankruptcy provides a bigger, more effective stick, but it is not without risk. GM might not survive the loss of confidence associated with a bankruptcy, and its failure could take down much of the supplier base, with severe consequences for the larger economy.

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