Topic: Finance, Banking & Monetary Policy

A Tale of Two Auto Industry Business Plans

As Detroit’s lobbyists rack up the expenses trying to paint the Big Three and the UAW as innocent victims of the credit crunch, American workers cheer the groundbreaking of an American automobile plant in the American heartland by Honda, which has been producing vehicles in Marysville, Ohio for more than a quarter century now.

Let’s not forget that it’s these companies – the one’s capable of making the investments in manufacturing, the one’s who are leading the way in terms of producing fuel-efficient, comfortable, stylish vehicles that Americans have been inclined to purchase – that are implicitly taxed and burdened when their competition is subsidized.

A “bailout” costs taxpayers/consumers in many more ways than one.

Everything Is a Security Issue

Anyone who sells to the Pentagon can claim that theirs is a strategic industry. In a war, enemies could cut off shipments from foreign producers, subsidy seekers say. Government then needs to protect American steel makers, shippers, shipbuilding, and so on. Those making these arguments avoid discussing the long odds that foreign supply will be interdicted or that the United States will fight a war that lasts long enough for it to matter.

Consider Wesley Clark’s op-ed in Monday’s New York Times. Clark notes that the Army buys a lot of vehicles from US automobile companies. Therefore, he says, bailing out the big three is a security issue. But letting US automakers go bankrupt does not mean they will stop making trucks. Even if they did, there are still foreign automakers that manufacture in the United States and would be happy to sell to Uncle Sam. And even if domestic automobile production disappeared entirely, we could still import. No imaginable enemy could close the sea-lanes that we use to bring in vehicles from Europe and Japan. Clark doesn’t address any of these holes in his argument. Nor does he let his lack of experience in the automobile business stop him from telling Detroit how to run its business.

In Sunday’s Washington Post, Joby Warrick offers similarly shaky analysis about the financial crises’ effect on US security.  Economic difficulty impacts every security issue, so you can always find an expert to tell you how the downturn heightens the odds of some particular nightmare.

Warrick suggests that lowered federal revenue could require cuts in defense spending, leaving us more vulnerable. Maybe, but the doubling of non-war defense spending since 2001 has bought us plenty of security to spare, by this logic. Warrick cites specialists who say increased global poverty will cause instability, which will cause terrorism. But there is no clear link between instability and terrorism. 

Warrick says “many government and private terrorism experts say the financial crisis has given al-Qaeda an opening,” which they may use to “probe for weakening border protections and new gaps in defenses.” Does anyone know what that means? The article never explains what defenses we’re talking about, let alone what gaps a downturn will open in them. It does not tell us why we should we view Al Qaeda as a carefully reckoning organization that probes and times its attack to US events, rather than groups of guys who attack when they can. The article cites analysts who say that the downturn could speed the day where China overtakes us economically. But China is not immune from economic distress. Nor it is clear that China’s rise is bad for US security.

The article could be turned on its head: “Global Downturn likely to slow China’s rise, undermine terrorist fund-raising, and eliminate wasteful defense spending, experts say.”

Gridlock Puts Brakes on Big 3 Bailout (for Now)

The Associated Press is reporting today that “Stalemate dims prospects for $25B auto bailout.”

Here’s the lead:

WASHINGTON (AP) - Prospects dimmed Monday for enactment of a $25 billion bailout for the faltering auto industry before year’s end, as congressional Democrats and the Bush administration seemed headed for a stalemate. Help for Detroit’s Big Three, which have been battered by the economic meltdown that has choked their sales and frozen their credit, is falling victim to a partisan fight over where the money should come from. Senate Democrats said they would press ahead with their plan to carve out a portion of the $700 billion Wall Street bailout to pay for the loans, but aides in both parties and lobbyists tracking the plan acknowledged they did not currently have the votes to do so. The White House and congressional Republicans insist that the automaker bailout money instead come from redirecting a separate $25 billion loan program approved by Congress to help the industry develop more fuel-efficient vehicles.

The story is already making me nostalgic for partisan gridlock and divided government, which will officially end on January 20, 2009.

My trade center teammate Dan Ikenson has been ably making the case in recent days that the bailout is a bad idea. What appears to be saving our country from wasting this huge amount of money is the much-bemoaned gridlock.

A key word in the story is “currently.” The plan does not “currently” have the votes to pass, but all that will change in 64 days.

Would an Auto Bailout Lead to National Greatness?

There have been plenty of criticisms here of neoconservatism and “national greatness conservatism,” but two of the occasional targets, Charles Krauthammer and David Brooks, have just published devastating critiques of the auto industry bailout. Here’s Krauthammer in the Washington Post:

First, the arbitrariness. Where do you stop? Once you’ve gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?

The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. Is this not precisely the kind of lobby-driven policymaking that Obama ran against?

Second is the sheer inefficiency. Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping to shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations and unworkable work rules such as “job banks,” a euphemism for paying vast numbers of employees not to work.

The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It’s the ultimate in lemon socialism.

Democrats are suggesting, however, an even more ambitious reason to nationalize. Once the government owns Detroit, it can remake it. The euphemism here is “retool” Detroit to make cars for the coming green economy.

Liberals have always wanted the auto companies to produce the kind of cars they insist everyone should drive: small, light, green and cute. Now they will have the power to do it.

And David Brooks in the New York Times:

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler?

It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state.

Hear, hear. The intellectual case for the bailout–if there was one–surely can’t survive these two clear and analytical critiques in the nation’s most influential newspapers. But then, protectionism couldn’t survive the analytical critique of Adam Smith in 1776, and yet it persists. So we can’t assume that members of Congress will read Brooks and Krauthammer and sheepishly drop the idea of handing a big pile of taxpayers’ money to corporate managers, stockholders, and unions who have dug themselves into a deep hole.

Krauthammer and Brooks both make a careful distinction between the financial bailout and the proposed auto industry bailout. Krauthammer posits the Wall Street intervention as “an emergency measure to save the financial sector on the grounds that finance is a utility. No government would let the electric companies go under and leave the country without power. By the same token, government must save the financial sector lest credit dry up and strangle the rest of the economy.” But bailing out Detroit is put forth as a scheme to save jobs, and where does that process stop? Krauthammer warns that the “drift toward massive industrial policy threatens to grow into the guaranteed inefficiencies of command-economy maximalism.”

For those of us who opposed all the taxpayer bailouts, starting back with Bear Stearns―or with Chrysler in 1979―all these bad ideas may seem to run together. Bear Stearns, AIG, the general financial industry, the auto industry―it’s all government intervening with taxpayers’ money to favor some businesses or industries that made mistakes. Perhaps because they weren’t so critical of the measures to deal with the financial crisis, Krauthammer and Brooks find it easier to see what’s very different about the Detroit bailout. And they both make crucial points: the dangers of political allocation of resources, the benefits of bankruptcy and restructuring, the industry’s partially self-inflicted wounds, the desire of some Democrats for political power over corporate decisionmaking, the dangers of corporate capitalism. Let’s hope members of Congress read and underline both columns.

A Cancer on the Big Three

If you’ve followed developments in the auto industry at any time during the past couple couple decades, you’ve probably heard of GM’s “Jobs Bank.” This nausea-inducing scam was the concoction of the UAW in the 1980s. Rather than allow GM to layoff workers when conditions warranted, the UAW had GM assign workers to the Jobs Bank, where they were paid almost full wages and benefits NOT to work. The Jobs Bank was pitched nominally as a retraining program, where workers would acquire the skills and train themselves in the technologies and techniques of the future, or where “workers” could perform community services.

Alas, the Jobs Bank became little more than a casino and lounge, where workers would report for a full day of leisure, reading newspapers, playing cards, and generally not adding value to GM’s vehicles. (Sounds a bit like my job description, actually.) Now you know why a handle falls off or you hear a tinny sound when you slam your Chevy’s door.

Understandably, GM and the UAW generally don’t like to talk about the jobs bank. It sort of undermines the credibility of the argument that a bailout would save hard working Americans’ jobs. But it still exists and estimates are that thousands of workers report there for duty every day.

Mark Perry over at Carpe Diem is an economics professor at the University of Michigan, Flint. Among other issues, he covers the auto industry with a rightful dose of skepticism. Although he has lots of good data and links, this chart explains it all. Why is GM (and Ford and Chrysler) seeking taxpayer subsidies when Toyota, Honda, Nissan, Kia, BMW, Daimler, Hyundai and other foreign nameplate producers, who are facing the same contracting demand and credit crunch quietly weathering the storm, are not? Because the latter have costs structures that haven’t been made obsolete and uneconomic by ludicrous union demands.  And, of course, they make cars that Americans want to buy.