So bailout or bankruptcy for America’s bed-ridden auto industry?

Opponents of the Bush administration’s $17 billion lifeline to General Motors and Chrysler say it’s not an “either/or” question.

For many, the bailout simply defers the inevitable day when the carmakers will be obliged to swallow a much more unpalatable pill – and file for Chapter 11 bankruptcy. In other words, it’s a matter of bailout – and then bankruptcy.

Bailout boosters, on the other hand, argue that a government rescue provided with strict conditions is the best way to prevent total panic from spreading across the industry.

Bankruptcy administration, they say, could trigger a chain-reaction of other failures as those dependent on the automakers – from parts suppliers to dealerships – suddenly find their oxygen supply cut off or severely restricted.

The Center for Automotive Research in the US state of Michigan estimates that two million jobs could be lost in the ensuing fallout – and that’s assuming that The Big Three continue to operate at just half their operating capacity. The Center figures revenue losses could total 275 billion dollars.

And then there are the creditors who presumably would not be paid – or would be paid a mere fraction of the debts owed – by GM and Chrysler while under Chapter 11.

As France’s Le Figaro daily points out, there’s also the risk that Americans would balk at buying new cars from an automaker in bankruptcy – a fear that would feed on itself, leading to a further collapse in their already tanking sales.

But this may be overstating the psychological fallout from a bankruptcy filing. For one, other US companies such as Delta and United Airlines subjected themselves to Chapter 11 – and lived to tell the tale.

And Chapter 11-bashers also tend to minimize the fact that the terms of the government bailout are often equally stringent. It requires the automakers to slash labor costs, reorganize their debts, promote cleaner, more fuel-efficient cars for the future and limit executive pay, among other measures.

In other words, it severely restricts the carmakers’ autonomy, and at great cost to the workers, represented by the UAW union.

Barack Obama drew support from the UAW during his campaign. And he’s now promising to do whatever he can to make sure they don’t have to bear alone the brunt of the burden from the restructuring. At the same time, he is keen to encourage the industry to shed its bad, old habits and retool for the future. In other words, he’s caught between a Barack and a hard place when it comes to saving the automakers.

Among those who see a bailout as merely postponing later pain is the Nobel economics laureate, Joseph Stiglitz.

According to the DC Economic Policy Examiner, he feels “a bailout would benefit shareholders and bondholders as much as anybody else. These are not the people that need help right now. In fact, they contributed to the problem.”

Stiglitz blames the failure of the industry on “the managers of US carmakers and America’s financial markets, which failed in their oversight and encouraged short-sighted behavior.”

For those in the anti-bailout brigade, Washington is throwing good money at bad management – at taxpayer expense.