Car-Nage or Industrial Policy?

06/15/2009 05:12 am ET | Updated May 25, 2011

As GM slides toward Chrysler-style bankruptcy it is brutally obvious that we lack a national industrial policy. There is no debate that we need one. The screaming lack of any coherent macroeconomic plan is obscured by face-offs that pit union fans against bond holder rights advocates. The national media debate is staffed by 'Obama is always right and working for the little guy' people screaming back and forth with 'Obama is always wrong people'. In these confrontations ratings are the focus and understanding becomes the first casualty of cable news. The death of America's manufacturing economy, large swaths of the upper Midwest and a way of life demands closer attention. GM and Chrysler will produce far fewer cars in the future. Wages and benefits are being slashed. Over 100,000 people are likely to directly lose their jobs as a result of Chrysler and GM bankruptcies with an addition 200,000-300,000 likely to indirectly lose work.

The deal the U.S. government offered Chrysler bondholders, like the deal being offered to GM bondholders, is terrible. The terms and conditions offered make clear that the Federal Government wants -- or can live with -- Chapter 11 filings. Chrysler bondholders were offered 29 cents on the dollar with greater offers being made to the UAW employee trust despite its being a lesser creditor in standard Chapter 11 proceedings. Thus, this group had nothing to lose but Obama tongue-lashing if they refused the deal. They did refuse and the tongue-lashing came full of statements about those unwilling to make sacrifice. The political game is to blame another party -- perhaps with good reason -- for the ultimate bankruptcy. Public relations theater has gotten all the attention. We should be looking at the destruction of a region, an industry and the shocking lack of industrial policy. This matters. Who may or may not be at fault for the closing act in this tragedy is not of vital or lasting import. The terms and conditions for the UAW and workers are terrible. The impacts on communities -- already in dire straights -- will be cataclysmic.

At least 800 Chrysler dealerships and 2600 GM dealerships will be closed. Urban areas and the Midwest are likely to be particularly hard hit. Losses will run above 100,000 total jobs and be spread far and wide. Likely there were too many dealerships and some needed to be shuttered. Rapid geography-based mass closures risk lash-back, further damage to the brands and will spill hundreds of thousands more cars out into markets defined by lack of demand. The "summer breaks," lay-offs and closings are an expensive commitment to having a much smaller US auto industry. We are actively choosing rising importation of parts, growing market share for foreign makers and carnage in the industrial heartland. We so completely lack an industrial policy that we are presently working to spend money to maintain our car market while decimating US domestic car producers. Perhaps the goal is to be the first developed country with neither significant American car production nor, public transit?

Subsidizing, choosing sides and failing to plan are not the stuff that phoenix-like recoveries are made of. We have used billions in public funds to preside over the aggressive downsizing of GM and Chrysler. Much of these billions have vanished. We are thus paying to fire tens of thousands of Americans, de-industrialize the country and smash lives and communities throughout the nation. It is very true that real trouble has been long in the offing and the Obama Administration faced few palatable choices. They were handed a thankless job at the worst of times. They have not performed well. Every other major developed country offering assistance does so with stricter job retention demands. Every other state seems more concerned not to damage production capacity and subsidize foreign rivals. Maybe the rest of the world is not wrong?

Chrysler received $7.2billion in direct assistance over the last year. None of this will be paid back. The US government will retain an 8% interest in the firm. The Canadian Government will get the balance of the equity against the loans it has made. Thus, when Chrysler/Fiat becomes a $90billion company, the US government will break even less inflation and transaction fees. The UAW President has already pledged to sell into stock strength to fund the now speculative employee trust fund that traded cash for stock. What do we get? A lot less than Fiat. We get Fiat's small and gas efficient technology. We hope that Fiat will do well and Americans will want to buy small, fuel efficient cars made for other markets. Fiat will get 20% ownership and $500 million at no direct out-of-pocket cost with incentive options that allow Fiat to possibly own 35% of the new Chrysler at no direct cost. Fiat can raise its stake to 51%. What do we lose? The UAW employee trust will own 55% of Chrysler/Fiat when the dust settles. They will pay roughly a dollar a share from the employee fund. They need the firm to be worth $10 billion in short order -- that sounds really bad until you recall Uncle Sam is betting it will be worth almost 9 times as much! This calls into question the $15billion lent to GM. Employees are giving up security in the retirement fund, dental care, eye care and risking the future. Job banking will be drastically reduced or removed and the UAW has pledged not to strike before 2015. The UAW employee benefit association will own 55% of The New Chrysler/Fiat but have only 1 of 9 seats on its new board of directors. In addition, it is not free to vote its 1 share against the majority of the board's independent directors.

GM is poised to announce similar deals with the UAW, creditors and the Government in the very near future. $1billion in hourly wage savings are likely to be announced as GM closes 16 of 47 assembly plants in the U.S. and reduces its labor force from 61,000 to 38,000. GM agreed to fund a UAW employee benefit association with $35 billion. It will now get $15 billion to $20 billion topped off with up to 39% of the shares in a new company. Common share holders will get 1% of the new company -- in other words close to nothing. Bond holders will be offered cents on the dollar. We will wait as angry voices deride Obama as a socialist for taking a large ownership position in GM. Many will claim the UAW has done well. Meanwhile, workers present and retired will suffer. Communities will lose jobs, tax bases and hope. Dealerships will close, towns will find rising demands for assistance and falling revenues. All of this will go on until we devise and implement a national industrial policy. It is a choice between carnage and policy.