(This is a long and multi-layered post. Stick with it. It goes somewhere.)
I've not done well on the academic job market, partly because of my own deficiencies and partly because the academic job market is in shambles. Between near-broke state governments closing their wallets to public schools and the panic induced by the Harvard-Yale-Stanford hiring freezes (way to put your endowments balls-deep in hedge funds, geniuses!) among private schools, there simply aren't many jobs available. Accordingly, much of my near-to-medium term life planning involves trying to figure out when the economic malaise will dissipate.
Optimistically, we may be at rock bottom right now. In the financial sector much of the bad news has already hit home. Everything that needs to be written off has been or will be by the end of 2009. In this view, the job market (academic and otherwise) will continue to be horrendous or non-existent for 12 more months. But by 2010 the banks will be done vomiting red ink; normal lending may resume. State governments will have taken their big hits in tax revenue. The tentative private sector will start to invest and hire again. Consumers will start to spend. Thus by mid or late 2010 we will finally be on the upswing – I, like many millions of Americans, might reasonably expect to find some job opportunities.
This optimistic but realistic recovery scenario makes one key assumption: the economy will not be dealt additional crippling blows. Like a patient recovering from a serious illness, the prognosis for recovery is good if and only if the worst truly is over. Already weakened, one more big aftershock could turn a bad situation into a complete disaster. Unfortunately I think that such an event is imminent.
It is becoming increasingly obvious (to me, although it certainly is a matter of conjecture) that General Motors and Chrysler are in a race to see who files Chapter 11 bankruptcy first. At the beginning of the auto "bailout" talks I believed that government intervention could save the Big Three. After careful consideration of the facts, notably the speed with which they burnt through the first $15 billion in bailout funds, the failure of the industry (probably beginning with GM) is inevitable. Two quotes help make my case:
The last thing I want to see happen is for the auto industry to disappear, but I'm also concerned that we don't put $10 billion or $20 billion or $30 billion or whatever billion dollars into an industry, and then, six months to a year later, they come back hat in hand and say, `Give me more.' (Obama, 12/7/08 Meet the Press)
My fear is you're going to take this money and continue the same stupid decisions you've made for 25 years. (Rep. Michael Capuano, D-MA, 11/19/08 House hearings)
The automakers have presented no credible business plan suggesting that they can be competitive now or at any point in the future. The initial $15 billion allocated by Bush via Executive Order was nothing but a cynical and transparent effort to let the Big Three wheeze along for another month until Obama took over so that the history books would not say that they went belly-up on Bush's watch. GM couldn't even make it to Inauguration Day before publicly declaring that its plan to remain financially solvent throughout 2009 is to ask for more Federal loans – "loans" belonging in sarcastic quotes as they will almost certainly never be repaid. This company literally needs tens of billions of dollars just to keep running for another twelve months.
What GM is attempting to do is incrementally trap the government in the Concorde Fallacy. They figure that once Uncle Sam forks over the first $15 billion, Congress will pony up another fifteen, twenty, thirty, forty billion dollars. If not, the company goes bankrupt then all of the money Congress has already spent will have been wasted. So rather than making a single huge, painful rip-the-Band-Aid request for a one-time payment (like ING Groep did from the Dutch government) GM and its colleagues are attempting to draw Congress into a trap. They obviously have every intention of returning repeatedly, hat in hand, asking for more. Why? Because they are inefficient, redundant companies making products consumers do not want to buy. We can't avoid that reality.
The alternative is bankruptcy. For the sake of simplicity I am going to assume that GM goes first, although we have no way to gauge the financial condition of privately-owned Chrysler and it may in fact be in worse shape. What happens when GM goes into C11?
1. Ford and Chrysler immediately follow suit. As the wave of airline BKs from 2001-2006 proved, as soon as one company enters C11 all of its competitors are immediately at a competitive disadvantage. So the competitors file to level the playing field. The attitude will be "If GM gets a bankruptcy judge to rip up its labor contracts and dump its pensions, we can't compete without getting the same." Oh, that reminds me…
2. The first thing the bankruptcy courts will do is tear up contracts with the UAW and parts suppliers. The courts will also protect GM as it dismantles its ridiculous, bloated network of 6,000 dealerships which are currently protected by state laws which punish efforts to close franchises. This will lead to a rapid cascade effect as parts suppliers (including tire makers and what remains of American-based steel) and dealers plunge into bankruptcy with the loss of their GM/Ford/Chrysler contracts.
3. With labor contracts in the shredder, somewhere in the neighborhood of 250,000 people with good, median incomes will be out of work. Many hundreds of thousands more will see their jobs rapidly change from well-paid with benefits to the kind of $11/hr, no benefits jobs that the Republicans insist we should all have.
4. The Big Three and their bankrupt suppliers will immediately welch on their pension obligations (as the airlines did in bankruptcy), shifting the burden to the taxpayer. The Pension Benefit Guarantee Corporation – a kind of FDIC for pensions – will be insolvent overnight. Like the airlines, auto workers who paid into pensions for 45 years will end up receiving pennies on the dollar.
5. The companies' much-publicized millions of retirees and dependents who receive health and pension benefits from their former employers will see benefits disappear of shrink by 80-90 percent. These millions of people will be added to the rolls of state, local, and federal social services, providing a potential death blow to already reeling public budgets.
6. Several million people including auto workers, retirees, and their dependents will stop spending money, apply for welfare/unemployment, drain whatever meager savings they have from banks, and default en masse on mortgages, credit cards, and car payments. In other words, banks that are already on death's door will see another tsunami of defaults and withdrawls. Retailers will be faced with several million more people who won't be doing any shopping for a long time. Another million people will be dumped on the non-existent job market. Businesses in cities with a big auto presence will disappear as their customers hit the dole.
7. All three manufacturers lose whatever ability they have to sell cars. Regardless of their inevitable PR campaigns to insist that they'll still be around to honor warranties, nobody is going to buy a car from a bankrupt automaker except for a small group of consumers who are already and will remain fanatically loyal to the brand. As sales plummet overnight, whatever survival schemes they concoct in bankruptcy court will be rendered untenable.
When the Big Three fail they will take a lot of us down with them. Unfortunately I no longer see a reasonable way to sustain them. Congress and the President can lecture them to no end about how they have to present a strategy for long-term viability; they can respond by saying all the right things that we've heard before (blah blah alternative fuel blah blah smaller cars). In reality all we will get are excuses, SUVs, shitty products, closed factories, demands for more money, and contracts shredded with the Courts' blessing. If any of these dipshits had a strategy for long-term viability they'd have long since implemented it. The truth is that a viable strategy involves doing things that only bankruptcy protection can allow – voiding Union contracts, moving production overseas or to low wage/no benefit states, giving millions of retirees the finger, welching on pension plans, contracting brands and dealer networks, and so on.
Congress and the new President, then, are in a no-win situation. Their options are to continuously and indefinitely pour tens of billions of dollars into a lost cause or to let them fail and make the next five years resemble 1933. All of us, regardless of whether we have spent the last 20 years as free market cheerleaders or the as the people being called socialists by the free market cheerleaders, are going to suffer for quite some time on account of a criminally mismanaged industry whose failure has been decades in the making.Tags: auto industry, bailout