Guest Post: Bailout Or Bust

I’m pleased to post a guest blog posting from Professor Alan L. Feld of Boston University School of Law. Two disclaimers are in order. First, the views expressed herein by Prof. Feld are his own, and not those of B.U. Second, he is my Dad — a matter on which I am quite pleased and proud.

For his position on the proposed auto industry bail out, see below . . . .

Folks inside the Beltway appear ready to rush a bailout for auto makers. The Democratic leadership and President Bush disagree only on whether to use federal money set aside to unfreeze credit markets or to divert $25 billion voted for research and production of new alternative energy cars.

The rest of the country (Detroit excepted) disagrees. Everyone recognizes that GM, Ford and Chrysler could hardly be less deserving of federal largess. For several decades they have chosen the short term over the future and marketing pizazz over quality. But, the argument goes, they matter too much to the economy to fail.

What would happen if one or more of these companies went into bankruptcy? The real assets, like factories, would not evaporate. Control would shift from the managers who brought us here. New managers would operate the businesses more efficiently, sell off some of the assets to investors who could use them better, or both. The public would not lack for new automobiles, some made in the existing facilities by new investors and some made in the United States by U.S. workers employed by Honda and Toyota.

Bankruptcy likely would terminate or severely modify the existing union contracts. Many claim the contracts have helped to make these companies higher cost producers than their competitors. If the contracts go, the thousands of workers who have relied on their jobs will need assistance. Generous settlements with these workers will cost less than the proposed $25 billion package now touted to keep these corporations afloat.