Nationalize GM -- Or at Least Think About It

With the U.S. government offering trillions of dollars in supports for
the financial sector, it is startling to witness the casual way in
which many policy makers and opinion leaders suggest the U.S. auto
companies should be allowed to go bankrupt.

In considerable part, this attitude reflects an anti-union and
anti-blue collar animus. It also reflects the diminished economic power
of what was formerly known as the Big Three (General Motors, Ford,

The stakes are too high for policy to be influenced by misinformation
and ideological bias. The auto companies need to be saved, on terms
that protect workers and communities, and advance public objectives.
Congress and the country should be debating those terms, not dithering
with unrealistic discussions of bankruptcy or demands to reduce already
shrunken union wages and benefits.

How can we look at these issues sensibly?

First, one must note the awesome disparity in treatment for the auto
industry and Wall Street. Government agencies have thrown literally
trillions of dollars at the financial sector, with very light
conditions, and virtually no discussion of industry salary structures
(aside from limited restraints on top executive compensation). By
contrast, there has been endless fulmination about supposedly
excessively generous wages for unionized auto workers, and much more
severe financial and oversight conditions proposed for an industry

Second, the costs of inaction to support the auto industry dwarf the
cost of a bailout -- even if much more than the requested $25 billion
is needed. The industrial Midwest has already been hollowed out by
deindustrialization. Auto industry bankruptcy would be a crushing blow.
A complete collapse of the U.S. auto companies would cost 3 million
jobs -- about 240,000 employees of the companies, a million supplier
jobs, and 1.7 million jobs lost from the overall economic effect --
according to the nonprofit Center for Automotive Research. In this
scenario, the federal government would lose $60 billion in tax revenues
and other costs in the first year alone. Even assuming something less
than a complete collapse, costs would be devastating. And, as economist
Thomas Palley has noted, industry bankruptcies would dramatically
worsen the financial crisis.

Third, the idea that United Auto Worker members are receiving
exorbitant wages putting the U.S. auto companies at competitive
disadvantage is a lie.

In general, the Japanese plants in the United States ("transplants")
pay wages comparable to those at unionized U.S. facilities. This has
been central to their anti-union strategy. In some recent years,
workers at the transplants have actually made more than their
counterparts at the Big Three, thanks to profit-sharing deals.

The Big Three employers do have nontrivial healthcare and pension
"legacy" costs for retirees, and this is the main employee-related
difference in cost structure (the other is more generous healthcare for
current Big Three workers).

It is true that, historically, auto industry jobs have paid well. Going
forward, however, this will be less and less true. The concessionary
UAW 2007 contracts call for many new hires to start at $14 an hour, and
the UAW is preparing to offer even further concessions.

Fourth, manufacturing wages and salaries don't contribute much to the
cost of a car. Total labor costs are less than 10 percent of list
price. If UAW workers donated their time and all savings were passed on
to consumers, it would only lower the cost of a car by $2,400.

Fifth, although the Big Three have done just about everything possible
over the last decades to undermine their strength -- including making
disastrous long-term product mix choices, and fighting against fuel
efficiency standards -- but the proximate cause of their desperate
status is the economic crisis. It is not true, as has been frequently
suggested, that the Japanese companies are doing just fine. Overall
auto sales in the United States have fallen by more than a third in
just a year, and Toyota, Honda and Nissan have seen drops of 27
percent, 22 percent and 35 percent. It is true that the Japanese
companies have a stronger base and are better prepared to weather the
storm. But the storm is pouring rain on everyone.

Sixth, bankruptcy is no answer for fixing what ails the industry. It is
almost certainly true, as the industry argues, that consumers will
refuse, or at least be very reluctant, to buy cars from a company in or
recently emerged from bankruptcy. Would you?

But at least as important for those who want to see the industry
aggressively adopt fuel efficient and zero carbon emission technologies
is this: Bankruptcy would limit the automakers' flexibility, and make
it much harder for them to make expensive, long-term investment
decisions. This is particularly true while oil prices are depressed.
Things were different six months ago (and likely will be again in the
not-distant future), but right now the market signals are wrong for
investments in energy efficiency.

Focusing on the imperative to rescue the industry, there are two rational policy responses.

One is to give the industry loans and other supports, with tight
conditions. Under consideration now in Congress is an oversight
structure that would give the government authority to veto any
investment over $25 million. In contrast to the free hand given to Wall
Street, this would help ensure government funds are not diverted into
inappropriate purposes. The existing proposal would also require the
government be paid back with interest, and/or the right to benefit from
subsequent improvements in company share value.

But more should be done. There should be requirements that the bailout
beneficiaries invest in energy efficiency and safety technologies, with
demands that they do much more than required by existing law. To give
them a level playing field, these improved standards should be adopted
as law, and required of all auto companies. And protections should be
built in to protect workers' interests -- a key objective should be to
preserve good-paying jobs, not drive everyone to Wal-Mart wages

The second rational policy approach is simply to nationalize the
companies. General Motors now has a market capitalization of $2.8
billion. Ford's market value is $6.1 billion. These are relatively
small amounts compared to the $25 billion the companies are requesting
-- and they are likely to come back for more later.

The government has certain advantages over the companies. It can access capital more cheaply, for example.

The biggest advantage of buying the companies is that it would enable
the public to exert control over the companies commensurate with its
investment. There would be no need to negotiate with management, or
carefully monitor managerial actions, to review 9-point plans for
viability, or create incentives to have them invest in fuel-efficient
technology. It would make it possible to undertake long-term,
transformative investments in R&D and new transportation
technologies, irrespective of today's oil price.

It is true that nationalizing the companies implies a commitment to
support them despite unknown future challenges. But a commitment of $25
billion itself implies a readiness to do more if necessary, as it
likely will be.

On the other hand, nationalizing the companies would entail many
complications and difficulties, including managing relations with
workers and plants around the world, fair dealing with suppliers and
workers at suppliers, and the inherent complexity of running
multinational auto companies.

Is a true nationalization the best option? Maybe, maybe not.

But the public would be a lot better off if there could be a serious
discussion of the reasonable policy choices, and a lot less breath
wasted on overt and disguised attacks on unionized blue-collar workers.

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