BY MATT HUTCHINS
The NBER declared this week that the nation’s economy has already been in recession for a full year. One economic hit after another is pushing the country into the deepest contraction in almost a century. While I agree that orthodox economic theory teaches us to have faith in the market as the soundest driver of efficiency, I believe that necessity should guide our choices in this critical, historic moment. The bridge loans being asked for by the auto industry are a reasonable response to the crisis which is currently going on throughout the economy, and I believe these loans are the best way to handle the reorganization of an industry which has admittedly failed to remain competitive.
Our nation has many tools in its arsenal to keep markets efficient, and one of the most powerful is its antitrust regulatory powers. Breaking up a market-dominating conglomerate is the best way we can inject competition into the economy. When we look at the current crisis in the auto industry and financial sectors, we should consider that the government’s regulatory laxity may have allowed systemic instability to spread through our economy. These too-big behemoths have profited by pulling the weight of our nation, but now they have become sick on their own excesses.
The solution to the too-big-to-fail problem is not to ride the beasts until they are dead and then eat them. We need to look beneath the skin of these corporations and carefully examine the multiple tiers of the national and regional economy which depend on the central control of executives in Detroit. With this comprehensive view of the auto industry in mind, I believe that the web of economic interactions which depends on the Big Three cannot be allowed to fail while the country is already in a recession.
My colleague, Mr. Fotouhi, begins his article by asking if you have driven a Ford lately. I would ask instead if you have driven a Buick, Cadillac, Chevrolet, Chrysler, Daewoo, Dodge, Ford, GMC, Hummer, Jeep, Lincoln, Mazda, Mercury, Pontiac, Saab, Saturn, or Volvo lately. I would guess that a few more of you would respond yes. If so, then you had better hope that there is a part already sitting on the shelf to repair the next break-down you suffer, because the shutdown of production at the Big Three would cascade through the parts production industry surrounding each of these brands.
I find it shocking that all of the brands I mentioned have been allowed to crowd under three corporate umbrellas. Some would argue that the economies of scale to be had in having a single company produce many products justify this consolidation, but to my mind it is a shocking example of monopolistic competition that a street lined with more than fifteen car dealerships could serve only three masters. Indeed, the statement that 54% of the domestic market is served by non-Big Three makers belies the fact that 46% of the market is dominated by domestic manufacturers. If the Big Three go into bankruptcy, it will send the entire economic complex surrounding automotive production, sales and service into a tailspin. Although it is impossible to know how hard this would hit the nation as a whole, those areas where manufacturing activities were shut down would be sent into full-scale depression.
The consolidated nature of the automotive and financial industries in America has created conditions in which the government must consider how it can best serve the people in the long-run. The laissez-faire answer would be to just let the failing businesses collapse and allow the next capitalist to come buy the distressed assets and put them to work. This approach epitomizes one of the great weaknesses of the limited liability company: when stockholders fail, stakeholders are left holding the bag.
Consigning GM to bankruptcy would result in the invalidation of fairly negotiated employment benefits, default on billions of dollars of outstanding debts, insolvency for suppliers to the industry, and the unemployment of hundreds of thousands of hard working Americans. What is worse is that the capital assets sold in bankruptcy would be brands and machines that would probably be sent to a different state or country before the successor corporation began production. Local economies would essentially wake up with the rug pulled out from beneath their feet. We should give all these groups time to work with the auto industry to negotiate an agreement which keeps people at work, protects pensions and benefits, compensates creditors, and gives the communities that depend on factories a chance to avoid the ghost-town fate of Flint, MI.
I have no sympathy for the CEO’s and stockholders of the Big Three. Their failure to innovate has pulled down a once proud industry. But part of their failure is our own failure to police the markets and ensure that competition was strong enough that a domestic innovator would counter the threat of foreign producers. Part of their failure is the whole nation’s foolish belief that our economy could continue to grow forever. Part of the solution is the intervention of our government to ensure that until the current liquidity crisis has passed, the auto industry has an opportunity to reorganize at a measured pace. A sudden rebirth in bankruptcy is simply not a real possibility.
Matthew W. Hutchins is a 2L and the Publisher of the Harvard Law Record.
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