Three Blind Mice

There they were yesterday, testifying before a Senate panel -- Ford's Alan Mulally, Chrysler's Robert Nardelli and GM's Richard Wagoner. They were on bent knees, arguing that without $25 billion, the US auto industry would die forever. As I watched them in their natty suits, crying the blues, I thought that they are our own version of “Three Blind Mice,” the leaders of an industry that seemed blind to improving innovation and the challenges of globalization.

Two of our mice say that their companies, GM and Chrysler, are on the brink of disaster and without government handouts, they will fail. Perhaps you are sick of hearing about corporate failures and their disastrous effect on the broader economy—I know that I am, but this is where we are -- no amount of wishing it weren’t so will get us out of this mess, so let’s talk about what we can do now.

The first question to ask is whether a bankruptcy might help the auto industry get its act together after 25 years of fighting the larger trends of globalization (which created enormous competition, especially in the form of cheaper labor) and fuel efficiency/smaller cars. The pro-bankruptcy camp cites the ability of the airline industry to file, reorganize and renegotiate long-term contracts (slashing pension plans and health benefits for the large union employee base). Many airlines successfully re-emerged from bankruptcy stronger and better able to compete. The bankruptcy advocates note that handing over $25 billion to the Three Blind Mice would lead to the same conclusion—bankruptcy, but in the bailout scenario, taxpayers lose $25 billion for the same outcome.

Those who support helping the automakers with government aid note that the industry is vital to the national interest as both an employer and as the base of the nation’s manufacturing sector. GM Chairman and Chief Executive Richard Wagoner said that "This is about much more than just Detroit, it's about saving the U.S. economy from a catastrophic collapse."

On this point, it is important to understand where we are in the economic cycle. In more normal circumstances (i.e. if we were simply experiencing a mild recession), I would probably be in the “let them fail” crowd, but these are not normal circumstances. The economy is fragile from the effects of the housing and credit busts and after already losing 1.2 million non-farm jobs this year, my concern is that the failure of GM and Chrysler (it looks like Ford is going to survive) may simply be too much for the economy and perhaps of greater importance, the national psyche, to handle.

It seems reasonable to help the Three Blind Mice see their way through for another couple of quarters, so that they can restructure accordingly. This may mean a government-orchestrated bankruptcy down the line, whereby the companies can reorganize and potentially survive. This middle ground might mitigate some of the obvious near-term economic ripple effects, while allowing the Three Blind Mice to see their way through the crisis.