Tue, 31 Mar 2009 17:02:04 +0000 – By Kevin HassettSenior Fellow and Director of Economic Policy Studies, American Enterprise Institute
President Obama has a huge political debt to the unions and that's why he's avoiding the obvious solution to the auto crisis.
GM is in deep trouble mostly because the United Auto Workers have festooned the company with rigid work rules and extravagant costs.
Bankruptcy reorganizations are painful for stakeholders. Hard-nosed judges give workers, managers and debtors severe haircuts in order to reshape a firm into a new organism that can thrive again. But bankruptcy can work. Most everyone has flown on an airline that has emerged from a successful bankruptcy.This economic crisis is unique in history in that troubled firms have sought protection from politicians, rather than bankruptcy courts. Why? Because if you're politically connected, you can expect a much better deal from politicians than you would ever get from a worldly and experienced bankruptcy judge.
GM is in deep trouble mostly because the United Auto Workers have festooned the company with rigid work rules and extravagant costs. The 2007 collective-bargaining agreement, for example, required the automaker to pay up to $140,000 in severance to a worker whose position was eliminated. And that is nothing compared to the enormous health-care costs these companies are laden with. The average cost of employing a worker at the Big Three, including benefits, was nearly twice that of Japanese automakers. No wonder the automakers are hemorrhaging cash.
Editor's Note: To read Kevin Hassett's full commentary on this topic, click here.