Bailouts for white, not blue collars?

by Frank James

Have the federal bailouts been biased towards white-collar and against blue-collar workers?

That question was starkly raised by Rep. Barney Frank, chair of the House Financial Services Committee, which yesterday heard the chief executives of the Big Three automakers beseech Congress for $25 billion in taxpayer-funded loans.

Frank, the committee's chair, said:

I have been struck, not happily, in the time that we've been discussing this, at what frankly seems to me an inherent cultural bias. There's a double standard here. Aid to blue-collar employees is being judged by a standard different than white-collar employees.

... But while there was some talk about CEO compensation, there was none about the compensation of the people who work at these financial houses. And I am sure that even before the concessions in the recent contract, the hourly wage of people at the financial houses that have received assistance through the federal government are a good deal higher than auto workers. I think the average AIG worker gets a good deal more than the auto workers -- probably not the clerical people, but the people at AIG.

There is apparently a cultural conditioning that's more prepared to accept aid to the white-collar industry than to the blue-collar industry, and I think that has to be confronted honestly. Look, the $700 billion and this much smaller amount have in common the following: The justification for them has to be the impact on the broader economy. We have no right trying to help an industry for that industry's sake.

One point to make is that when Frank in September argued for the $700 billion bailout package in September, he said it was important to pass in part because it would help blue-collar workers among others.

On Sept. 22, he told reporters:

The issue here is that the credit system of the country is clogging up. I've had people in the business of providing automobile finance say that they may go out of business. If people can't buy cars, salesmen can't sell cars, automobile workers can't make cars. There's a real clog from all these -- from these kinds of things.

Another point. It's not exactly blue-collar versus white-collar since the automakers all have large white-collar workforces as well.

The $700 billion bailout for the financial industry and the AIG bailout were also qualitatively different than the proposed auto industry bailout, addressing substantially different problems.

There was a consensus among economists that the financial institutions' main problem was not having enough money to lend.

As some of the assets the institutions held onto like mortgage loans and more sophisticated instruments lost value, the institutions held onto cash in part because regulators require them to keep enough cash in reserves. So banks stopped lending money or made loans extremely difficult to get.

Injecting cash into the banks and other institutions was meant to ease their cash crunch and get them lending again. That hasn't worked out quite the way federal officials had hoped.

With AIG, the fear was that if AIG failed, it could take the entire global financial system with it since the company had insured a broad range of investments and financial bets ranging into the trillions of dollars.

But with Detroit the problems are different. True, their current crisis in terms of burning through their cash is in part related to the difficulty companies are having getting credit now. And if they fail, it would be a massive real and psychological blow to the nation at a very fragile time.

Detroit, however, has real, longer-term structural problems, including higher built-in costs than the Japanese transplant automakers like Honda and Toyota it competes against and a less fuel-efficient fleet than those Japan-based companies.

It's those structural problems which have critics questioning whether infusing $25 billion into the Big Three automakers is actually a good idea, if doing so would only prolong the the time before one or more of the companies has to seek bankruptcy protection.

So it's arguably not a bias against blue-collar workers that has many questioning an auto bailout, although there is obviously no love lost between Republicans and the United Auto Workers union. Critics have real questions about whether it's the best use of taxpayer money, whether it wouldn't be a case of throwing money down a rabbit hole.