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Rauh and Zingales on G.M.’s Best Hope

INSERT DESCRIPTIONMercedes-Benz plant in Tuscaloosa, Ala. (Photo: Gary Tramontina/The New York Times)

My University of Chicago colleagues Josh Rauh and Luigi Zingales have written an insightful essay on G.M.’s plight and what the government should do about it.

They, like virtually all economists, think the auto industry bailout under consideration is not the right solution. They believe the best option is a Chapter 11 bankruptcy, in which the government takes a special role in providing financing during the process. They also emphasize the need to relieve G.M. of a heavy burden of retiree pensions and medical obligations.

One thing that surprised me is that they are mostly silent on bloated labor costs. The union labor that the Big Three automakers employ is far more costly than the non-union labor used in automobile production facilities in the U.S., but as far as I know, the union labor is no more productive.

Consequently, the Big Three cannot be competitive. I often heard it said that Detroit is making cars that nobody wants to buy. The more accurate statement is they are making cars that no one wants to buy at current prices. If they could produce the cars 20 percent more cheaply, there would be many more buyers.

The U.S. automakers have dramatically increased quality in response to the challenge of the Japanese imports over the last 20 years. My guess is that if their labor costs were on equal footing, they could compete effectively.

To me, one of the greatest benefits of bankruptcy is that the bankruptcy judge could break the unions in a way that will likely never happen otherwise. It seems to me that if the Big Three are going to survive, either their labor costs will have to fall sharply, or their labor productivity has to increase dramatically without a change in wages. The latter might actually be the easiest path to follow, but it will require labor and management working together creatively. That’s not likely to happen, but mutual destruction is a pretty effective motivator.