The real Fiat scandal

But making more Jeeps and Dodge Durangos is — to use a motoring cliché — sort of like reinventing the wheel. Some other competent CEO could have figured that one out. Yet Chrysler being tied to Fiat’s deepening European woes makes it less and less likely that much of the profit will be reinvested in the U.S. It’s likely that the bulk of that profit will instead be plowed into Fiat’s sinking Italian ship.

In June, The Wall Street Journal painted a devastating picture of Fiat’s bloated workforce at its Turin headquarters. “Too many inefficient plants, coupled with a plunge in consumer demand, have left not only Fiat, but other car makers … bleeding cash.” Yet Fiat, which employs 63,000 Italian workers, “says it has no plans to cut jobs.” Instead, due to antiquated Italian labor laws (that Big Labor champions in the U.S.), it “furloughs” workers when it idles plants and pays them two-thirds of their salaries.

Because of the dysfunction of its Italian operations, Fiat must squeeze all it can out of its new Chrysler cash cow — bequeathed to it by U.S. taxpayers at the Obama administration’s behest. That may mean lowering costs on profitable vehicles like Jeeps by moving operations to lower-cost nations such as China (though Chrysler insists that it will only do so for vehicles sold in China). Whatever the case, Fiat will be reluctant to put many more American workers on its payroll with so many mouths to feed in its native Italy.

Had Chrysler gone through a traditional court-approved bankruptcy before it received any government money (as Massachusetts Gov. Mitt Romney advocated in a 2008 New York Times op-ed), its investors and workers would have had the opportunity to ask questions about Fiat’s financial viability. Even in 2009, Fiat was showing strains as its credit rating had already been downgraded to “junk,” so a good bankruptcy judge might have blocked such a merger.

Both Romney and Obama backed some form of government guarantees for American auto companies. Government aid to a specific business is something free market advocates can never support. But Chrysler’s politicized bankruptcy took away a more fundamental guarantee — the rule of law — and many American workers will suffer as a result.

John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute. Mark Beatty, a senior majoring in political science and economics at Case Western Reserve University in Cleveland, is a former research associate at CEI.