The Key Issue In GM's Debacle

Holman Jenkins wrote a searingly insightful, clear editorial in the Wall Street Journal yesterday.

As usual, he cut to the core of the current mess involving GM by observing,

"Keep that in mind amid reports the administration favors a "quick and surgical" bankruptcy. It's a bluff. The same administration that inserted itself into GM's corporate governance to order the resignation of a CEO is hardly likely to defer to the prescribed legal order for a failing company, namely bankruptcy. Even a "prepackaged" filing runs too much risk of a judge imposing more "sacrifice" on the UAW than the administration is prepared to tolerate.

GM bondholders understand this: They've been intransigent precisely because they calculate the UAW is too important to Democratic electoral politics for Mr. Obama to risk losing control of the reorganization process to a bankruptcy judge." (my bold)

That's the issue in a nutshell. Democrats feel a need to defend the UAW's benefits, as I noted in this post,

"The truth, of course, is that Chapter 11 is crucial to force such negotiations. Gettelfinger is scrambling to hold out for pre-bankruptcy negotiations, because, in bankruptcy, his union will have its benefits and wages slashed unilaterally.

In fact, one Democratic Senator explicitly accused, but not by name, some Republicans and pundits for using Detroit's problems to break the UAW. But the UAW is doing that all on its own. It doesn't need help."

As I wrote in another recent post, I don't like to mix politics and business on this blog. But when politics is the major force behind a business story, it's unavoidable.

Congress, as Jenkins notes in his piece, created some of the problems GM currently faces,

"The Wagner world was given a second lease on life by a peculiar feature of Congress's 1975 fuel economy law. Known as the "two fleets" rule, it effectively forces Detroit to make its cheap small cars in high-wage domestic UAW factories, even if it means losing money on every car. The rule has no fuel-economy function. Its only purpose is to shield the UAW monopoly inside each Detroit auto maker from global labor competition.

You wouldn't have noticed, but a legislative accident two years ago almost stripped away the two fleets rule. A couple of Republican senators from the South took the lead in crafting the Senate's new fuel economy bill, and built it to please Nissan, which had railed against two fleets for its own reasons.

In the final bill, to no one's surprise, two fleets was quietly restored by Rep. John Dingell and Illinois Sen. Obama (among others) as a political favor to the United Auto Workers.

The UAW's Mr. Gettelfinger had testified, coyly, during Congressional hearings that failing to renew two fleets might cost 17,000 auto workers jobs building small cars. He didn't say that two fleets is in fact the fulcrum by which, for the past 30 years, the UAW has been able to defeat globalization.

He didn't say two fleets was the sine qua non for the past generation of the UAW's power to suck the Big Three dry."

As I noted in today's prior post, undue governmental meddling in the private sector, including choosing winners and losers among companies, unions or sectors, is expensive and ultimately disastrous for taxpayers.

Government fostered the GM mess, although the company's own management stood by silently as it happened. We'd all be better off had the Bush administration simply told GM to file Chapter 11, if necessary, because our government is not in the business of picking winners and losers among sectors, companies or unions.