Just a couple months ago, the nation watched as congress decided not to bailout American automakers, unconvinced that the three companies had sound plans for how to use such funds. Eager not to see any of these companies fail on his watch, President Bush came up with enough funds to tide the companies over for a little while.
Now it is up to the Obama administration to figure out how it will help the ailing domestic auto industry. And it will soon face the same two options that congress contemplated in December: bailout or bankruptcy. Bankruptcy, we are told by the car execs, “is not an option,” because of its debilitating stigma: people just won’t buy cars from companies in bankruptcy. Therefore, it’s bailout or nothing.
This dichotomous choice-of bailout or bankruptcy–will likely rear its head again unless Obama considers a third alternative, one that draws upon the strengths of the bankruptcy process while minimizing its potential stigma, an approach that takes advantage of the insights of behavioral economics, a field that is known to influence Obama’s thinking.
We need to psychologically rebrand “bankruptcy” to prevent it from stigmatizing the big three American car companies.
Some may think that when Detroit automakers warn of the hazards of bankruptcy, they are just posturing to extort federal funds. But let’s assume they’re right – that cars are different and present special problems for bankruptcy. It’s certainly plausible: customers might be willing to buy tickets from an airline in bankruptcy because they know their tickets will be honored and that in any event in at most a few months, their flight will be over and they’ll be back home.
They may not be so sanguine about buying a car. An automobile costs thousands of dollars and requires long-term relationships on warranty and service contracts. There may also be psychology at play, whereby the stigma of bankruptcy contaminates the unique emotional relationship many consumers have with their vehicles.
This brings us to framing. Behavioral science has established that people’s perceptions are powerfully influenced by the way issues are framed. Words like “bankruptcy,” and “bailout,” elicit powerful emotions, causing people to make rapid and intuitive judgments. Given the strength of these emotions, people can know that bankruptcy will strengthen an automobile company while still feeling like the company is thereby doomed. They can know that their Chevy is the same car it has always been while feeling like it has been diminished.
So can we give Detroit the benefit of bankruptcy protection without the stigma?
Of course we can. The Obama administration could work with Congress to create specific legislation for Detroit, drawing upon the most helpful and relevant aspects of bankruptcy law while making sure not to characterize the legislation as a “bankruptcy” bill. Call it, say, “Operation Solvency.”
Under this legislation, the automobile companies would use the holdout-binding power of bankruptcy law to compel all stakeholders to take concessions to restructure the balance sheets, as well as give the companies some breathing time to roll out new, more viable business plans, such as brand reduction. (This is something that can’t be done with mere bailout funds, because there’s always the specter of holdout.)
In fact, we’ve done this before. When Congress was worried about the stigma of personal bankruptcy, they styled what is now chapter 13 of the Bankruptcy Code, which they reframed as a “wage earner plan.” It could do the same thing with Detroit.
This is not just bait and switch; this is recognition of the insight of behavioral science that framing matters. If the stigmatizing effects of bankruptcy for automobile consumers is real (even if they are exaggerated in congressional hearings), then we should be mindful of their consequences when billions of taxpaying dollars are at stake – not to mention hundreds of thousands of jobs.
If we’re going to craft legislative intervention, let’s at least frame the matter right. Then, and only then, can Detroit can get to work on making itself relevant again in the global automobile industry.
Note: I co-authored this post with John A. E. Pottow, a Professor of Law at the University of Michigan and co-publisher of www.creditslips.org, the leading academic blog on bankruptcy.
To see my posts from other sites, or to learn about my book Free Market Madness: Why Economics is at Odds with Human Nature-and Why it Matters, go to https://www.peterubel.com/.
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