Auto bailout: why hit the workers and not the dealers?

A bankruptcy judge can stick it to the workers and the retirees. But the dealers are just as big a problem, and their racket is protected by state laws, which only Congress could sweep away.

I could be wrong about this, and I invite correction, but as I understand it:

– The legacy dealership problem the Big Three have is a bigger barrier to their recovery than the legacy health and pension costs plus wage gap between union and non-union auto plants plus the inefficiencies due to work-rules. And that problem is created not by contract but by state law: it would be illegal in all 50 states for GM to sell cars-to-order the way Dell sells computers-to-order.

– A bankruptcy can deal with the contract issues: i.e., stick it to the workers and the retirees. But a bankruptcy judge has no power to change state law.*

– Only federal legislation could deal with the dealer issue: i.e., stick it to a bunch of millionaires.

So the people, right and left, who favor bankruptcy over legislation are making what seems to me like a very odd choice of targets. And even those who favor legislation haven’t, as far as I know, proposed to use the Congress’s Commerce Power clause to get rid of the inefficient dealership system.

*Update I asked for corrections, and I got one:

You’re technically right in this sentence, but you’re wrong about how it plays out. State laws controlled how the dealership/automaker contractual relationship had to be drawn. For the most part bankruptcy will void that relationship and then dictate what the voided party’s creditor rights are. The bankrupt company is not required to reestablish a new relationship with all the dealers. What will almost certainly happen is that in states with ridiculous dealership laws, GM will just cut the unprofitable ones loose entirely. It will reestablish relationships only with the currently good dealers. In states without ridiculous dealership laws, that could still happen, but it they can be more flexible. In states with smart legislators, this should cause a loosening of rules so that they don’t lose as many dealerships.

But your essential premise, that bankruptcy won’t be able to deal with the dealerships, is wrong.

At least that means that the Big Three would no longer be at a competitive disadvantage compared to their transplant rivals, which currently run much leaner dealer operations (fewer dealerships per million cars sold). Correction noted.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com