December 22, 2008

Is bankruptcy so bad?

The Big 3, no longer face the imminent threat of bankruptcy that they should be facing thanks to yet another Bush betrayal of conservative principles. Bush, by saying he'd like to stick to his principles but these are not ordinary circumstances so to resolve it let's throw money at it.

If you abandon your principles when the going gets tough, are they really your principles? I don't think so. They are convenient talking points to placate your party faithful. But they don't placate those who listen closely.

Conservatives believe in the free market system. That system entails both risks and rewards. Innovation comes from America more than any other nation because it rewards that innovation. It has made America a wealthy and powerful nation. If you contrast that to the direction of many European nations who chose a socialist leaning path, clearly the United States has fared better. That's the upside of the system. People are willing to take risks because the payoff can be well worth the effort.

The Big 3 automakers revelled in that reward for decades, while over time making foolish decisions that deteriorated their ability to continue to innovate and prosper. And that's the downside of the system. Risk. Trying to innovate, trying to run a business does not guarantee success. There is typically no safety net. You try because the reward, you try work hard to avoid the risk, but the risk is always there. As it should be. Risk and reward guide market efficiency.

If you privatize profit and socialize failure the mixture cannot possibly succeed. The numbers just don't add up. Businesses have to be allowed to fail. It's the responsible course of action. Efficiency comes from investing where it makes the most sense. Larry the liquidator said it best:

Yes, there will be jobs lost. But if you continue to prop up an unsustainable business, you are maintaining jobs that really aren't efficient. Why can foreign auto makers run their plants so much more efficiently than the Big 3? It doesn't matter - they just do. But the government wants to reward failure and support its continuance. As an investor in America, is that what you want with your money? I wouldn't.

The thing is, in this case, bankruptcies would not be an all-out shutdown. And perhaps this is where a compromise can be reached. If the auto makers were to have a managed Chapter 11 protected restructuring, bankruptcy protection, they could reverse so much of the damage they have caused themselves, allowed themselves to be subject to and they could perhaps even entreat government to standardize the CAFE 'standards' so that the external forces buffeting their ships could be calmed somewhat.

They would not shut down. They would continue. The jobs would exist. And if a worker is unhappy about making a combined $44 per hour instead of a combined cost of $71 per hour then let them see if they can find that pay working at some other employer. I'm sure there are thousands of capable people who would be happy to be gainfully employed at the lower rate.

As for the American public perception of a bankrupt Big 3, it's a canard. A ruse. I'd still buy a Chevy if GM were under bankruptcy protection. Woudn't you? And if the answer is no, would you have been a potential customer of GM in the first place? Is the reputation of GM so fragile that the perception would be any worse under Chapter 11 than it is today? I really don't think perception would change substantially. In fact, I bet it would inspire a bit of patriotism, perhaps even guilt, and people would be willing to give them a shot at their business. And even if they don't, remember the words of Larry the Liquidator, 'who cares'?

I've always said America needs a strong manufacturing base. I don't think being a service economy has a future. A mixed economy that has both elements is absolutely required. When Rome started outsourcing it's military it was doomed. Today's armies are both military and economic. Offshoring everything is the first step down the road to being a dependant nation.

But why is so much being offshored? Efficiency. Well guess what, the only way to fix that is to fix efficiency at home. If Toyota can make a car here cheaper then so can GM, so can Ford. If you are willing to let them. The same is true in a broader sense. Government has to stop making it difficult to manufacture in the United States. Social engineering is a major detriment to free market efficiency. The efficiency has been grossly distorted in so many industries by government interference that business has become unrecognizable. Union employees continue to operate with a 1950's mentality in a 2000's world, distorted by damning laws that their votes helped create. Sorting that out is the only real way out of this mess.

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