The GM and Chrysler bailout announced on December 19^th will keep the two auto makers in business until spring. This is great a gift of time for the new administration.

Many argue that closure of GM and Chrysler will cost lots of U.S. jobs – but bankruptcy does not mean closure. Indeed, the purpose for bankruptcy laws is so that a company can continue to operate while it fixes the problems that made it unprofitable in the first place. Some also argue that bankruptcy will cause buyers to shun GM and Chrysler because of fears of a valueless warranty. This is silly. Once the bailout talks began, only irrational buyers expected the companies to avoid bankruptcy. The damage here has been done (and recent sales data from GM and Chrysler suggest there aren’t many irrational buyers). Despite its claims, this bailout won’t fix the problems at GM and Chrysler. I think a bankruptcy of these companies is nearly inevitable. It might also spell the demise of the UAW. Here’s why.

A very rapid paced set of contract negotiations should now be under way. For GM and Chrysler to avoid bankruptcy, the companies are going to have to emerge from this process looking a lot like Honda and Toyota. They need to make high quality, energy efficient, low priced cars and be able to pay back significant debt. However, there are now five groups of folks involved in the negotiations: taxpayers, stockholders, dealers, workers and the UAW.

It is unclear who will represent the taxpayers (I vote for Dick Cheney). Shareholders, who own the company, should be represented by the Board of Directors, though it is difficult to see how the Board has been effectively representing shareholders as their stock dropped to the value of a cup of coffee today. Dealers are simply in a bad spot. At least the negotiating goals for all these groups are obvious.

Workers and the UAW are also involved in the negotiations. The problem is that the goals of the workers and the goals of the UAW differ significantly and labor costs are at the heart of the problem.

I assume that workers at GM and Chrysler want to keep their jobs. Any negotiation which places their best interests at heart will keep them working. While there will be concessions on fringe benefits and working conditions the folks at the factory could emerge from this with only modest changes.

The problem is that in order to stay relevant, the UAW cannot allow this. To become competitive, both GM and Chrysler have to get rid of job banks, ease a greater share of health care and pension costs to workers, and have more flexibility in their labor contracts. In short, they have to craft a company that is as competitive as the foreign imports. The real question is whether, once UAW workers have contracts that are the same as their non-unionized neighbors they will still want to pay union dues?