Can Obama Draw the Line?

Now that the election is over, the American auto companies, with GM in the forefront, have come to Washington with their hands out. Their message is the same as their predecessors' in the financial services industry, Donald Trump's to his creditors over a decade ago, and Chrysler's to Congress in the 80's: You can't afford to let us fail.

But that's debatable. Bailing out the banking and credit industries was justifiable to restore the circulation of credit throughout our economic system. Bailing out manufacturers who, after 30 years of foreign competition, can't make profitable cars, is just throwing good money after bad.

How can a car company make money when, according to their own spokesmen, $1500 of every card sold pays for retiree benefits? How can they be competitive when their cost structure is so out of step, not only with their foreign competitors, but with other industries?

Most American workers in private industry today have to rely on 401K plans and other thrift-based instruments to fund their retirement. They don't have the benefit of private pensions that pay a percentage of their highest salary -- let alone a percentage above 50%.

Wouldn't it be nice? Sure, but not if such benefits killed the golden goose. Sometimes, unions don't understand that they, too, have a stake in the success of a business.

Who's next to belly up to the bailout bar, the newspaper industry? I had a front row seat at the demise of that institution, another situation where entrenched unions conspired with over-confident owners to ride a successful business model into obsolescence.

I am sad that the newspaper industry is in demise. But they are suffering the consequences of their own business decisions and strategies, and it is unthinkable that they would ask the American taxpayer to bail them out.

But lots of things were unthinkable a few months ago.

Perhaps Uncle Sam should have bailed out the buggy whip business too, blunting the creative destruction of markets that transformed the transportation industry into something much more prosperous. Now GM has come to its own precipice.

When Lee Iaococa came to Washington 28 years ago to request government-backed loans (yes loans, not cash) to bail out Chrysler, he went to the unions and extracted concessions. He was quoted in the papers as saying something like, "It's a new game, boys." Columnists wondered if Ronald Reagan had gone soft. But he hadn't.

Here is Obama's first test: Can he tell them, "Cut a deal, or pound sand"? If the government helps GM, will GM fix the unsustainable cost structure at the heart of its business by putting its pensions and benefits in line with its competition - not to mention building cars that people want to buy? Can he compel them to do that, or will he payoff his union campaign supporters by subsidizing their failure in the marketplace? Or blame GM's failure on the lack of national health insurance, and use their bailout as an excuse to drive that agenda?

Here's how Jackie Calmes put it in the International Herald Tribune today:

"As the auto industry reels, rarely has an issue so quickly illustrated the differences from one White House occupant to the next. How Obama responds to the industry's dire straits will indicate how much government intervention in the private sector he is willing to tolerate. It will also offer hints of how he will approach his job under pressure, testing the limits of his conciliation toward the opposition party and his willingness to stand up to the interest groups in his own."

Going bankrupt would at least permit GM to renegotiate its union contracts -- and put some of the pressure on the UAW to keep its cash cow alive. Perhaps, over time, they would become solvent and sell out to an actual money-making enterprise. But Obama's apparent preference is to fuel GM's bottomless tank with bailout money -- money that was intended, as far as most voters know, to right the financial system. The result would be nothing more than an indirect transfer of wealth from the taxpayer to GM's management and unions, via the federal government.

Bush does not get off the hook here, either. Before setting the precedent for unsecured bailouts using taxpayer cash, he should have thought about how that power would be used by his successors -- and the temptation to expand its uses beyond the current crisis.

For a good read on GM's situation, check out the Post article in Must Reading, or click here