Big Three Automakers Hand Keys to the Government

Donald Lambro

12/12/2008 12:01:00 AM - Donald Lambro

WASHINGTON -- A burst of bailouts that has led to increasing federal control and ownership of big businesses has set off alarm bells among free-market critics who fear that it's putting America on a slippery slope to a government-run economy.

The recent bailout bill to rescue U.S. automakers from insolvency -- which proposed giving a government "car czar" unprecedented powers over the companies -- was the latest move that had critics sounding the alarm.

"The moment you extend large taxpayer subsidies to an industry or a company, you develop a fiduciary obligation to the taxpayers because their money is at risk. That leads to a slippery slope that is very disturbing to us," said Mike Franc, vice president and government policy analyst at the Heritage Foundation.

"The slippery slope is that once you become a part owner and develop an equity stake in the company, then it becomes logical to want to run the company on a day-to-day basis, and that's the worst possible outcome," Franc told me. Not only would the proposed bailout of Detroit's automakers establish a federal overseer to govern their day-to-day corporate decision-making; it would give him broad authority over its transactions and even prohibit the carmakers from challenging state environmental laws in court.

That would prevent the car companies from freely challenging federal policies they do not support -- an extraordinary expansion of government power over basic constitutional rights. "That's a huge First Amendment price to pay for a government bailout," a top trade association executive told me last week.

"I think we are in a consequential historical debate that goes way beyond just saving individual companies. I mean, where does it stop? The majority of the public does not support this stuff," said Dirk Van Dongen, who heads the 40,000-member National Association of Wholesaler-Distributors, which opposed the bailout.

The NADW's board supported the Bush administration's $700 billion plan to pump money into the financial sector as the economy teetered on the edge of catastrophe. That was a systemic crisis that threatened to bring down the financial network upon which the entire economy depended for credit to function and survive. "We saw it like a utility that was needed to power the entire system," Van Dongen told me.

But he and many free-market groups now worry that the government's buyout frenzy is in danger of becoming a trend and that the automotive bailout bid was a sign of things to come should the economy worsen and other business sectors come to Washington seeking further handouts.

In the shallow, shorthand, 30-second, sound-bite reporting we have on the nightly news, few Americans understand how deeply the government has become financially intertwined in the financial system's balance sheet.

The government is not just holding hundreds of billions in debt but also equity stakes in major banking institutions, which were required to put it up as collateral. The deal with the Big Three automakers called for "warrants for equity" equal to at least 20 percent of the loans. It doesn't take much imagination to see how the current situation can easily tumble from stock ownership into demands over how things are run.

One need only look at the money-losing enterprises that government has tried to run -- Fannie Mae, Freddie Mac or Amtrak -- and it quickly becomes apparent that bureaucrats do not know how to run a profitable business.

The car companies are in enough trouble, but the prospect of a federal "car czar" running them would be even worse. These are "the same kind of people who run the Department of Motor Vehicles or the Post Office, not the most reassuring image for most Americans," Franc said.

Last week, Democratic leaders argued that if the automakers went bankrupt, it would cost hundreds of thousands of jobs among suppliers that are tied to the industry as well as for numerous banks that hold their corporate bonds.

But a Heritage Foundation study says that if the car companies were to enter bankruptcy protection, where a judge would force their creditors and unions to make concessions, they would emerge leaner and stronger as a result of needed downsizing and restructuring.

Eventually, other automotive manufacturers here like Nissan, Toyota and Honda (the only major car companies building plants in this country) would see their sales rise and expand their workforce and supplier contracts accordingly -- cushioning the impact on the economy.

The plight of U.S. automakers is one of their own making. They failed to listen to the market's demands for smaller, fuel-efficient, dependable cars. They gave away the store to militant labor unions that demanded huge wage hikes, retirement plans and other benefits that the companies could not possibly afford.

Toyota, Honda and other "made in America" foreign car companies did listen to the marketplace. They rarely changed their model designs; they paid their workers well, improved fuel efficiency and pushed hybrids; and Americans flocked to buy them.

They are also victims of the recession, and sales are down for them, too. But they are better positioned to survive the current economic decline, and we will likely see them expanding their production here when the recovery takes hold. You don't see them whining and coming to Washington, hat in hand, asking the government to bail them out.

There's a lesson here for the Big Three that remains unlearned.