Proposal for GM

So I am against a bailout. What's the solution to the problem?

Those supporting a bailout are right about one thing: GM is too big to fail.

The bailout is wrong because it is not a mechanism for keeping GM from failing, only for putting off the failure and dragging out the pain of failure.

GM is a bad company run by incompetent management and burdened by absurd union contracts. It needs to shed its management, rip up its union contracts, and be broken into smaller pieces to succeed.

Bankruptcy won't make that happen. This situation is not the kind of situation in which a company enters bankruptcy, reorganizes, and comes out leaner. This situation is a liquidation event. Either way, good companies that have been serving GM will be put out of business because they won't see a dime of money that GM honestly owes them.

A bailout, however, has two equally bad paths:

1. It will perpetuate bad management practices and leave in place labor contracts that make no market sense. 
2. The government will put strings on the bailout. You know what's worse than bad businesses people managing a company? Government managing a company. 

There is an alternative. A bailout of the workers and vendors that have done nothing wrong while throwing out the management and bad corporate structure that made this situation possible. Here's how we do this:

1. Let GM enter Chapter 11 or Chapter 7. 
2. Any vendor or other creditor who is validly owed money at the time of bankruptcy will receive a government backed loan for all amounts owed by GM to them.
3. Any GM worker laid off will receive 6 months severance from the government.
4. Any GM worker without a college education or who has worked for GM more than 10 years will receive government paid education to re-skill themselves.

As a result, vendors and workers will receive reasonable protections against the bankruptcy, but the company itself will be broken up and its assets restructured in accordance with the market. The market-based restructuring will enable new companies to emerge than can make the US automative industry competitive again.

Let the Big Three Die

All of the consequences of GMs failure that proponents of a bailout use to argue support the bailout idea are true. If GM fails, people are out of jobs, good companies that have done nothing worse than offer services to GM will suddenly be saddled with bad receivables and the prospect of not making payrolls, and the state of Michigan will plummet in despair. 

But those arguments do not justify a bailout. Ford, GM, and Chrysler are poorly run companies with bad products. They have not continued to operate over the last 20 years by innovating and meeting consumer demand; they have remained in business by chaining the state of Michigan to their well-buying and spending money lobbying the US government for regulations that favor the folly of their product offerings.

Few industries have the luxury of seeing a trend coming for 30 years. The auto industry has had that luxury. We have all known that the price of gas would eventually go through the roof (and it will again). Japan, Germany, and the other auto-making countries recognized this and have a number of different products on the road today to match that need.

But not Detroit. 

In the past election, we had a number of silly discussions about "socialism" and "capitalism"—as if a 4% difference in tax rates on the highest 5% of income earners was somehow that dividing line. Bailing out the Big Three, however, is actual socialism. The worst of socialism. It says that employing people is more important than the value they add to our society. It also ignores what we know is a failure of socialism: if you save a job today that should not be saved, you will have to save it again tomorrow, and the next day, and the next day. And they will become less and less worthy of having a job as time goes on.

So, the bailout people have clearly illustrated a short-term impact. It's devastating and real.

Here's the long term outlook:

GM fails and sells off its assets, probably to a foreign car marker or a silicon valley company. Ford fails and sells off its assets. Chrysler sneaks by. Michigan goes into a severe depression and hordes of people leave Michigan for good. The auto-makers no longer control Michigan politicians and, amazingly enough, Michigan finally diversifies its economy. It learns how to survive without the auto-makers and eventually starts to see a prosperity that is actually earned prosperity. Detroit is no longer the cesspool of the nation.

On the other hand, if the Big Three are bailed out, we will save some jobs (there will still be a lot of layoffs), executives will get their golden parachutes, and we will be back in this position again in the future. You know why? Because these are bad companies. They must fail.

And if they truly are too big to fail, they must be broken up.