The administration reports that they will deny billions of dollars in bailout money to GM and Chrysler because their business plans were not convincing enough. The White House has set a deadline of 30 days for Chrysler and 60 days for GM to come up with better plans. At stake: $16.6 billion more for GM and $5 billion for Chrysler. The Treasury has already surrendered billions to these companies and is even offering Chrysler and Fiat S.p.A., an Italian auto company, $6 billion to conclude ongoing partnership negotiations before the deadline. While all of this might sound like the Obama administration is finally going to allow the market to dictate the life or death of companies in this country, in my opinion this is merely a game of multi-billion dollar chicken with taxpayer money (or just a plain old bluff). It’s all but certain that Obama will flinch. He can’t afford not to.

Imagine if you will a scenario where the White House says no to giving money to these companies. If we let GM fail, which employs around 325,000 people, the political, social, and economic ramifications would be terrible for the party in power, particularly the Democrats. With a GM bankruptcy we can expect to see massive layoffs, which will draw the ire of the once supportive United Auto Workers union and everyone in the state of Michigan. Sales would invariably crash. Suppliers and companies that depend on GM throughout the Midwest will be hurt and we may see a region that was trending Democratic fall into the Republican column for the next decade or more. Billions of dollars in pensions will be in jeopardy and the government will have to pick up some of that slack (or rather the federal Pension Benefit Guaranty Corporation), meaning that even if we don’t bail out the company, we will still be obligated to bail out the employees. And even then, their pensions will be significantly smaller. Stockholders will probably see their investments go up in smoke. Even the CEO, on March 17th, indicated that bankruptcy would mean liquidation of the company (here’s another good article). For Chrysler, we can expect similar problems. All in all, the far reaching consequences of letting them fail would be politically difficult to survive for the party in power… meaning that Obama will probably not let that happen.

What’s the upside of a bailout for the democrats? Pretty much everything they want: to exert more influence over private enterprise, help unions by softening the blow of the recession and retaining their benefits (business revenues go down but unions insist on keeping their benefits the same or disproportionately higher than other auto workers around the country), and use inflationary-politics to gain support (printing money to fund every liberal project they can). All of this as part of the Left’s war on free enterprise.

I would be surprised to see Obama follow through on his threat if in fact these companies do not submit substantially better plans. It’s a good move to hold the CEO of GM accountable and asking for his head, but this is not enough. In the long term, restructuring and streamlining of operations is the only thing that can help these companies. If we take a look at the business strategies of the Japanese automakers that have broken through the U.S. car market and hurt American automakers’ sales, we see that they were able to produce more fuel efficient cars, keep costs low, and mount effective marketing campaigns. The Obama administration should focus on making their restructuring and refocusing more orderly and have less of an impact on the market and the American economy rather than just handing out money like no tomorrow. Our children and grandchildren will thank us…

-AG