Harvard Economist Advocates Auto Bankruptcy

In a Washington Post op-ed this morning, Harvard economist and McCain adviser, Martin Feldstein, called for the Big Three automakers to enter bankruptcy to rewrite excessive union contracts. President-elect Obama and Congressional Democrats seem set on providing loans with conditions to restore long-run financial viability similar to the bill hammered out by House Financial Services Chair Barnery Frank yesterday.

"The simplest solution is to allow GM and the others to file for bankruptcy. If the companies file under Chapter 11, they would be able to continue producing cars, and the workforce would remain employed while the firms reorganized. The firms would also be able to get short-term credit under bankruptcy protection.

"The bankruptcy court could require the unions to rewrite contracts, bringing wages down to levels that would allow the firms to compete and therefore to maintain employment. Scaling back employee and retiree health benefits would further improve price competitiveness and allow better cash wages. The firms' bondholders and other creditors would have to take losses. Shareholders' fate would depend on how firms responded to this restructuring.

"Restructuring in bankruptcy and resetting wages are measures that have saved airlines as well as manufacturers. The claim that bankruptcy would mean the loss of millions of jobs is nonsense intended to scare the public and force legislators and the Bush administration to throw money at the auto industry's problems.

"Only by reducing wages and benefits will the firms be able to survive and provide good jobs."

Although the House is expected to pass it later this week, I doubt it will get through the Senate because of Republican opposition. Next year, something like it is very likely to be enacted.

Reported by Capital Gains And Games. http://www.capitalgainsandgames.com/