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America’s Big Three carmakers – Chrysler, Ford and GM – are facing very difficult economic times.  Sixteen million cars were sold in 2007 but that already below-average number has sunk to ten million this year.  Without a bailout Chrysler and GM may go under and the consequences for the many businesses in the supply chain could also be disastrous.  That is the argument for the bailout and why President Bush is now considering using a portion of the already-agreed financial bailout to help the car companies.

The special bailout was scuppered on Thursday, however, by Republican lawmakers who worry that the bailout culture is becoming a monster (whole nations are next in the queue) and that union power needs to be checked.  Key conservative commentators compare the unionised car industry with the much more successful car manufacturers of the ‘right-to-work’ states (although Jonathan Rauch makes the case that GM is far from a hopeless case, noting that it is finally producing better cars and has cut employment by 40% since 2004.)

The Unions, increasingly confident of more power with the Democrats controlling the White House and both halves of Congress, discovered the limits to that power when Republican Senators made it clear that they would not support a "bailout without strings".  Republican Senator Bob Corker from Tennessee insisted upon a "date certain" in 2009, by which time the hourly labour costs of those working for America’s Big Three car makers would be reduced to the average of foreign-owned car companies operating in the USA.  The United Auto Workers (UAW) offered to look at wage costs but not until 2011.  Republican Senator Mitch McConnell replied that that sounded like "taxpayer money today for reforms that may or may not come tomorrow."

The Wall Street Journal sees Thursday as an important milestone for the Republicans:

"Thursday’s showdown marked an important political moment for the Republican Party. By refusing to write a blank check to Detroit, Senate Republicans have started to reclaim some credibility on fiscal policy and the role of government in the economy. They did so standing up to a Republican President who doesn’t want any more bad headlines, as well as to Democrats who will blame the GOP if the auto makers collapse. They also stood up for the right reasons. No bailout will ever restore the car companies to profitability without a restructuring. Yet an explicit UAW goal is to use the bailout to avoid any such thing. The union and their Democratic protectors want to avoid the discipline that a bankruptcy could impose under Chapter 11. A government-directed salvation would also give environmentalists huge leverage over the cars Detroit builds, a power they and Democrats have wanted for decades."

There are big political risks for the Republicans in this strategy and Dean Baker is one of many to accuse
the GOP of double standards: "None of the Wall Street executives, who
make millions, was forced to take a pay cut to get their bailout."  But
the GOP also eyes political gain in reasserting fiscal responsibility
and positioning itself as an opponent of ‘Big Labor’.
American unions hope to see ‘card check’ passed in the early months of
the Obama administration; legislation that would greatly increase their power in workplaces.  As Politico has noted, the unions may have got the Democrats in office but "a bigger Democratic majority in the Senate has come at the expense of
some moderate Republicans who have long been allies of organized labor,
leaving unions with just a handful of reliable GOP votes next
Congress."

> The general case against bailouts is made at BeyondBailouts.org and most persuasively by Professor Russell Roberts in the WSJ:

"Politicians
have destroyed the rules of the game. There is no reason to invest, no
reason to take risk, no reason to be prudent, no reason to look for
buyers if your firm is failing. Everything is up in the air and as a
result, the only prudent policy is to wait and see what the government
will do next. The frenetic efforts of FDR had the same impact: Net
investment was negative through much of the 1930s… The information
about who needs to be bailed out and who needs to fail is too
complicated. Inevitably, such decisions will begin to be more about
politics than economics. The banks were first. Then the insurance
companies. The car makers are getting a cut. Who’s next? The governors,
probably. Homeowners are waiting. Then there will be the hedge funds.
Once the line forms, companies will stop trying to save themselves and
focus on being saved by Washington. The resulting spiral will be
devastating."

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