Why the Dems' Drive to Aid Detroit Is Stalling Out

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Jeff Haynes / AFP / Getty

General Motors' headquarters in Detroit

The Bush Administration and congressional Republicans have gone out of their way to be gracious since Democrats won the White House and expanded their majorities in both chambers of Congress earlier this month. President George W. Bush has already invited Barack and Michelle Obama to the White House — the earliest such visit for a President-elect ever — and on Monday Obama met with his former rival John McCain in Chicago. But just because the Republicans are proving to be good losers doesn't mean that they are willing to get rolled in this week's lame-duck session of Congress, and that's apparent in the deadlocked talks to help the auto industry.

Although they have presided over the largest expansion of U.S. government since the Johnson Administration, the GOP has apparently reached its line in the sand when it comes to economic bailouts. Senate majority leader Harry Reid introduced legislation on Monday that asked for $25 billion of the $700 billion bailout fund Congress approved in September to be redirected for use by General Motors, Ford and Chrysler in the hopes of helping the faltering industry avoid going under. Republicans immediately balked at the idea.

"It does no good for taxpayers to pour $25 billion into the car companies and find that a year later that money has been spent and yet nothing has changed to diminish their obligations. Where will they get the next $25 billion? And the $25 billion after that?" Senator Jon Kyl, an Arizona Republican, said on the Senate floor. "The reality is that they've got to change the way that they're doing business in order to, I think, warrant asking taxpayers for anything." (See pictures of the 50 worst cars of all time.)

Reid is in a particularly tough spot, and he knows the chances of his bill passing are slim to none. Though the Dems will hold at least 57 seats in the next Congress (Alaska, Minnesota and Georgia are still undecided), the Nevada Senator currently doesn't enjoy much of an edge at all. In fact, since Obama resigned his seat on Sunday and Delaware Senator Joe Biden, the Vice President–elect, is unlikely to come to the Hill for votes, reaching the filibuster-proof 60-vote barrier is tougher than ever.

In their effort to sway at least a few Republicans, Democrats did take some of their concerns into account — including demands for long-term financial plans from loan recipients, increased oversight and taxpayer protections. But for most Republicans the moves don't go far enough. The GOP is asking for assurances that the taxpayers will be repaid — like the assurances given by the banking industry — and for a commission to ensure that the money is spent wisely, especially since all three companies are already so deep in debt (GM alone owes $48 billion). To that end, the GOP wants a change in leadership at all three companies. "I have yet to see any semblance of a plan for General Motors to become viable," Senator Arlen Specter, a Pennsylvania Republican, said on the Senate floor. "General Motors and the auto industry have been on notice for a long time that they were in a very difficult, competitive situation."

Instead of providing a new injection of funds, many Republicans believe Detroit should simply tap the $25 billion that was already appropriated earlier this year to help the companies develop more fuel-efficient technologies for the future. The White House, at pains to show that it is not simply giving up on the nation's entire domestic automobile sector, pushed that approach again on Monday, saying the Administration "does not want U.S. automakers to fail."

That idea, however, is not very popular with the Republicans' counterparts on Capitol Hill. "Both Speaker [Nancy] Pelosi and Reid have raised concerns about that," says Jim Manley, a senior adviser to Reid. "It robs the industry's future to pay for the present. We shouldn't have to choose." And unfortunately for Detroit, automakers would need congressional approval to access those funds on an emergency basis.

Not everyone believes the situation is so dire or that the Democrats' efforts are so pure. Some observers speculate that GM, the weakest of the Big Three, can likely hold out until January. Still others say that even if GM doesn't make it, the fallout might not be all bad for the Democrats, who can blame the GOP for inaction without having to put more taxpayer money on the line. "If there's a bankruptcy between now and then, the spin would be that the Republicans let it happen," says Greg Valliere, chief political strategist at the Stanford Financial Group, which tracks government actions for private-sector clients. "This is very frustrating. The economy is rapidly decelerating — this will be a long and deep recession — and the political posturing still dominates."

Obama has said lifting up Detroit is one of his top priorities, but even he might have mixed feelings about throwing his weight around before he takes office. In that respect, the stalemate is a bit reminiscent of the economic crisis Franklin D. Roosevelt faced in 1932 as President-elect, says Brookings Institution historian Stephen Hess. While Roosevelt could have done more to step in, he chose to wait to take office and exercise his full power — making a clean break and effectively laying all the blame on the previous Administration of Herbert Hoover. As Jonathan Alter writes in his book The Defining Moment: FDR's Hundred Days and the Triumph of Hope, "Roosevelt wanted to make sure that the people remembered that it was Republicans who had forgotten their interests. If this meant sitting by idly while the economy sunk lower, FDR could live with that."

Still, there were two key differences then: Hoover was actually eager to work with Roosevelt, while Bush has little interest in helping Obama push through an auto-industry bailout. Also, Roosevelt's Inauguration was not until March 4, while Obama's is set for Jan. 20. "That was a much longer period in which the Depression and other things went on," Hess says. "So the delay was much more serious. Whatever happens now, they're just postponing things for a few weeks."

There is no denying that the risks of letting GM fail are high. Economists warn that if it fails, GM is more likely to end up with Chapter 7 bankruptcy liquidation than Chapter 11 restructuring. Given the current credit crunch, the traditional bridge loans available to companies in Chapter 11 are all but impossible to obtain. And few consumers would be likely to buy a car — the sale of which depends on long-term warranties, service and parts — from a company in a bankruptcy reorganization. The Big Three and their affiliated suppliers account for 2% of the U.S. workforce, or more than 2.5 million jobs. GM alone employs more than 100,000 workers, the same number of autoworkers that have been laid off so far this year. And that's not to mention the hit the Federal Government would take if GM dumps its pension, insured by quasi-governmental agency the Pension Benefit Guarantee Corp.; with nearly 1 million participants, it is the largest private defined-benefit pension plan in the U.S. Some experts estimate that that hit alone could cost taxpayers more than $100 billion, with another $100 billion in lost tax revenues and $10 billion in increased Medicaid expenditures annually.

"The fallout of a single manufacturer like GM failing is huge because of the tightly knit web between manufacturers and suppliers," says Dave Cole, chairman of the Center for Automotive Research, an organization with ties to the industry. "Given the fragile state the supply base is in today, with a lot of them already in bankruptcy, it would likely take the entire industry down. Not because the other manufacturers would fail but because the suppliers would go down. We've been concerned about the cascade effect."

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