Compensating creditors

In reply to my suggestion to send depositors to the head of the queue when allocating funds to failed banks (thus vitiating the issue of runs), the Fearsome Comrade commented about the Obama plan to make the unions senior to bondholders in baling out the car manufacturers. Of course, this is complete nonsense as a scheme, not that that should stop the President of the Known World. But why is it nonsense? Legally, of course, the answer is obvious (although the President can evidently nobble judges in the States, which is nice to know given it happens so regularly over here), but is there a case from something a little stronger than a simple appeal to law?

Look at a bankruptcy this way: people have stumped up something in the running of the car firm, it has gone bust, now we work out who is owed what and how to compensate them. Some people supplied their labour, others capital, still more inputs like steel, plastic and rubber. Those who supplied goods can either be compensated by return of the shipments or by cash where those cannot be recovered, simple enough. Those who supplied capital can themselves be compensated by the supply of capital, although probably not to the same extent as the capital they risked (creditors can easily get less than fifty pence in the pound). But ought labour to be compensated?

I say no. The people who lent money to the car firms had stumped up their own capital as an investment in that manufacturer, but the workers had not put their own capital at risk. They had simply supplied labour at an agreed price. Their "capital", if you will, is the skills and abilities they bring to their work, and those skills were not at risk, those skills have not been lost in the bankruptcy. They still have their skills, but do the creditors still have their capital?

That is why labour does not need compensation in a bankruptcy: there is no loss to compensate.

EDIT and POST-SCRIPT: while I remember, Division of Labour has news that major US investors are starting to re-think their ideas of lending to American, unionised industries. Too much risk of government meddling, you see. Yes, Mr. President, that's one heck of a successful policy to save US industry. Well done, sir.