Don't Bail It--Rebuild It!

There is certainly a great deal of anger over the bailouts, and particularly over the proposed bailout of the Big 3 automakers. Of course, the major problem is that they are no longer the “Big 3” worldwide, and even domestically. The public, or a large portion of it, perceives the management as arrogant and unresponsive, and the unions as lazy and overpaid. A bailout seems to violate the basic principle of capitalism. Further, it is felt that a chapter 11 bankruptcy is not the end of the company, it is merely a reorganization which will allow the company to abrogate its labor contracts and drive down the labor costs to be more competitive with third world competition (where many of the parts are made). Many feel that even if the auto companies disappear, foreign auto plants in America would simply pick of the slack and there would be as many jobs as before.

There is a partial truth in all of this, but as with all partial truths, they hide more than they reveal. Japan's American plants would probably not expand their production, they would simply import more cars. Honda and Toyota have assembly plants in America mainly for political purposes. And these plants help to keep factories in Japan open because they mainly assemble Japanese parts. There would be no need to expand their American production, since there would be no domestic competition to exert a political threat. Further, the profits from these plants are repatriated to Japan to help their economy, not outs. And it is somewhat odd to see people urging that the union contracts be violated, since this call generally comes from that political quarter which professes to believe in the sanctity of contract. And in any case, the situations between American producers and the Japanese are not comparable. The so-called “legacy” costs for health-care and retirement are socialized costs in Japan; they do not appear on the company's books, but are paid for by taxation. And despite the claims of a lazy workforce, the opposite is the truth; the American workers in general and the auto workers in particular are the most productive in the world.

Finally, there is a great deal of doubt that people would buy a car from a company in Chapter 11, which means that an “11” would go quickly to a “7”; that is, into liquidation. Cars are not a momentary purchase, but involve a “life-of-the-car” relationship for parts, service, warranties, etc. So long as there are doubts about the future, there will be few sales in the present. This means that a large part of the already-shrinking industrial base of America would simply vanish.

Policy makers are thus faced with an almost impossible choice: they must either bail out “private” business, or they must witness the significant and near-fatal contraction of America's ability to make things. The problem is that only by making things can a country hope to be prosperous, and no reasonable person believes that there is any industry capable of replacing the auto industry. Of these two choices, no principled policy maker will want to do the first, and no responsible policy maker can afford to do the second. So what are they to do?

Let me suggest that this presents a great opportunity for a new model of industrial organization in America. A radical model, to be sure, but nevertheless a working model, and one that has shown itself to be highly successful over a long period of time. I am speaking of the model used by Europe's largest supplier of automotive parts, the Mondragón Cooperative Corporation. We would thus replicate a tested model and bring new opportunities to rebuild America's industries.

The biggest liability the automakers have is likely to their own employees in terms of pension obligations. Employees should be able to exchange these debts for ownership of the companies. They would become employee owned and operated, a model that has proven to have both social and competitive advantages. Competitively, employee-owned companies often prove to be more productive, more agile, more creative than their corporate competitors. Socially, the Mondragón corporation has been able to run its own social safety-net programs, its own banks, its own school system, its own R&D, training institutes, retirement programs, and even its own university all without government support. If one is looking for a true libertarian model, one that actually works, and has worked for 50 years, than look to the Basques of Spain for your model.

The devil, of course, is in the details. I think it would be a mistake simply to continue the current organization and merely replace the owners. One of the problems is that the industry, with only three companies, is “too big to fail,” and can thus hold the economy hostage, as they are doing. And bigness works against the cooperative spirit. In Mondragón, they get around this by organizing the corporation as 250+ individual cooperatives, each with its own product line, management, books, etc. The individual worker does not get swamped by the sheer size of the overall corporation (close to 90,000 worker-owners). Scale is as important a factor in industrial organization as anything else. The vertically integrated car companies are in fact dinosaurs. The new companies could be organized as final assembly and distribution companies, engine companies, transmission companies, finance agencies, etc., each with their own products and research.

A reorganization along these lines would allow a rethinking of American industrial practice. For example, companies could be encouraged to use standard parts, thereby lowering the cost of maintenance. No longer would you pay an exorbitant amount for a bolt that is only used by one company and carries a monopoly price. Assembly plants could be dispersed throughout the country, placing them closer to the end markets and lowering costs.

This plan would not reward current management for their mistakes, and would make America more competitive both domestically and globally. However, there is one group more than any other that is likely to oppose such a plan, and that is the UAW. When workers become owners, the need for a union evaporates, and they are left without a function. Union officials then have to go back on the line to make a living, one with far fewer perks than they now enjoy. This is not to disparage the idea of unions; workers need to be represented in bargaining. However, unions, whatever other virtues they may have, institutionalize an opposition between capital and labor. But as John Paul II noted, a labor system is just precisely to the degree it overcomes this opposition.

Sometimes a disaster is also an opportunity, and this is one of those times. We can bail out failure, or we can watch the nation's industrial capacity shrink to third-world levels, or we can use this as an opportunity to build a new American model of industrialization. True, it will be a model we borrowed from the Basques and from Emilia-Romagna (where 40% of GDP is from cooperatives, and enjoys one of the highest standards of living in Europe), but this only shows that we start with a working model, and adapt it to American needs. It would be a great shame if we let this opportunity pass.