President Bush saved thousands of jobs in the U.S. automobile industry last week when he agreed to provide General Motors and Chrysler with $13.4 billion from the Troubled Asset Relief Program. The low-interest loans will keep the two manufacturers from defaulting on multibillion-dollar payments to suppliers next month, an event that could have triggered a broad collapse. Yet the move hasn't exactly drawn rave reviews. Some economists contend that the administration was simply throwing good money after bad. And United Auto Workers President Ron Gettelfinger complained that the administration had imposed "unfair conditions singling out workers."
The union's gripe stems from the nonbinding conditions that the administration attached to the loans. Each automaker must submit a plan by mid-February that charts a path to long-term health. What goes into the plans was left up to the companies, subject to the approval of an overseer designated by the president (presumably, incoming President Obama). The only guidance provided by the Treasury Department was a set of restructuring targets, which GM and Chrysler were instructed to make their best efforts to achieve. These included lowering the pay, benefits and perks of their employees to match those of the other Big Three in the U.S. auto industry: Toyota, Honda and Nissan.
Gettelfinger correctly noted that the UAW has already made or pledged significant concessions. But it is hardly being singled out by the administration. The restructuring targets call for bondholders -- a group spared in previous federal bailouts of Bear Stearns Cos., American International Group, Fannie Mae and Freddie Mac -- to take a considerable hit, writing off about two-thirds of the value of their loans. Shareholders would receive no dividends until the loans were repaid. The restructurings would have to trim production lines and dealerships. And executives would lose pay and perks.
We think the administration did the right thing under very tough circumstances. As Bush said Friday, the risk was too great that the imminent defaults by GM and Chrysler would lead to a "disorderly liquidation" of U.S. automakers, which would only exacerbate the country's economic turmoil. Having said that, we also welcome the short-term nature of the aid. Detroit has dithered for 30 years while its hold over consumers evaporated, and it's long past time for the Big Three to make radical changes in the way they do business.
But the aid package also exposes the fundamental problem with government intervention in the auto market. The restructuring targets set by the administration would bring the automakers' costs into line with their competitors', in part by relieving the crushing burden of their debts. Yet the cost of making a car is irrelevant if no one is buying.
The main piece missing from the administration's plan is the one government is particularly ill suited to provide: a way to restore Detroit's ability to innovate and improve faster than its competition while also designing models that are more compelling. Those issues are a function of management and marketing skill, neither of which are much in evidence in Washington. Thus far, lawmakers' main impact on Detroit has been to press for more high-mileage cars that the Big Three haven't been able to sell, while also deterring them from importing the small cars they make successfully overseas. Those kinds of political judgments won't help the automakers transform themselves in a way that restores the confidence of consumers, investors or the capital markets. Without their support, GM and Chrysler will never make it off the public dole.