Topic: Trade and Immigration

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.

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.

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.

Border Biometrics: “Zero Benefit?”

ZDnet ran a story last week citing how security guru Bruce Schneier slams the US-VISIT program, which collects biometrics from people entering the country, saying that it has “zero benefit.”

I respect and like Bruce — he will be a participant in a major counterterrorism strategy conference we are having at Cato in January — but I have to voice my disagreement with him on this score. My belief is that border biometrics have an extremely small benefit — a benefit that rounds to zero, and one that is more than canceled out by the costs. But not zero.

As of 2006, US-VISIT had cost about $15 billion and was responsible for the apprehension of about 1,000 criminals.

“Take that $15 billion number,” wrote Schneier in a 2006 blog post. “One thousand bad guys, most of them not very bad, caught through US-Visit. That’s $15 million per bad guy caught. Surely there’s a more cost-effective way to catch bad guys?”

He’s right, but that’s an illustration of the costs overshadowing the benefits, not zero benefit. (Net benefits are actually negative. We’d be better off letting those 1,000 criminals remain free to do their hundreds of thousands  of dollars in damage, or using conventional law enforcement methods against them, than spending $15 million each to catch them.)

In defense of border biometrics, the article cites Robert Jamison, undersecretary at the Department of Homeland Security’s National Protection and Programs Directorate, which oversees US-VISIT:

“There have been several instances of someone applying for entry under one name, being denied, applying under another name, and again being denied [due to biometrics records],” said Jamison. “In a few cases, criminal activity and, in some cases, terrorist activity have been prevented.” Jamison declined to say exactly how many terrorists had been caught as a direct result of the program, saying the information was classified.

Rather than granting Jamison’s assertions and accepting the existence of benefits, Schneier has probably done in shorthand what any good judge in a court would do: find unproven a fact that a party won’t present reliable evidence for. Though the average American (and reporter) probably does, Schneier doesn’t grant as proven whatever a self-interested national security bureaucrat claims to be true but secret.

But for the sake of argument, let’s grant that a few people with some level of terrorist intent were turned back by border biometrics. This is prevention of “terrorist activity” in the sense that a person with terrorist intent was prevented from doing something he wanted to do. But entering the country is only a small part of doing any damage once inside the country.

There’s a terrific example written up here of a man turned away at the U.S. border (not by US-VISIT but by a program called ATS-P) who later became a suicide bomber in Iraq. The implication DHS officials would like you to take from this is that preventing his entry into the country prevented a suicide bombing in the United States. In fact, it’s just as likely, if not more, that this individual became suicidal because of being turned away — he had already lived in California for two years without incident. And one can’t exclude the possibility that he was coerced to commit a bombing through threats, a hostage-taking of a family member, or some other way.

Anyway, turning someone away from the border is a trivial security against terrorism because terrorists are fungible. Turning away a known terrorist merely inconveniences a terrorist group, which just has to recruit someone different. The 9/11 attacks were conducted for the most part by people who had no known record of terrorism and who arrived on visas granted to them by the State Department. Biometric border security would have prevented none of them entering.

(Another option is physical avoidance of the border — crossing into the United States from Canada or Mexico at an uncontrolled part of the border. I know of no instance of this occurring (successfully), but it could. And, most importantly, there’s no cost-effective way to prevent it.)

In summary, border biometrics have some benefit! They are at best a mild inconvenience to terrorists — an inconvenience that the 9/11 attacks mostly anticipated. But that’s not zero benefit! It’s just negligible benefit.

In May 2007, I testified in the Senate Judiciary Committee about the costs and benefits of the REAL ID Act, a similar identity-based security system — and similarly expensive at about $17 billion. Because avoidance of identity-based security is so easy, its benefits are quite small, though I allowed it generous assumptions at every turn:

Assuming … that a future attack would be on the scale of a 9/11 — an exaggerated assumption unless all the rest of our security efforts have done nothing — REAL ID might be assumed (generously) to delay such an attack by six months. The value of delaying such an attack, and thus the security value of REAL ID, ranges from $2.24 billion to $13.1 billion. REAL ID offers less in benefits than it does costs — even using very generous assumptions.

But, again, that’s not zero benefit. It’s a very small benefit, a benefit that is far outstripped by costs. We’re doing ourselves more harm than we’re preventing with border biometrics — and that’s just on a static dollar-for-dollar basis, not accounting for lost tourism, trade, and goodwill.

More Debunking of DHS E-Verify Claims - and the Bureaucrats that Make Them

In past months, I spent a good deal of time debunking advocacy for E-Verify from the Department of Homeland Security.

The National Immigration Law Center has been in the fray for quite a while, too - they have a wealth of materials online - and recently added to it with a short, sweet primer on what it takes to comply with E-Verify: more than DHS wants to believe, that’s for sure.

That’s typical of bureaucrats, by the way. They study their programs all day every day - unaware of the challenges and priorities of real businesspeople - and come away finding it impossible to believe that someone could find their product complex.

Well, guess what? When your job is running a plumbing business, a grocery store, a restaurant, or a manufacturing plant, you don’t have all day every day to figure out your compliance issues. They’re burdens that destroy productivity.

E-Verify has been offered up as a panacea for immigration problems, but the cure is worse than the disease. I wrote at length about the regulatory burdens, complexities, and principled reasons to oppose electronic employment verification on principle in a paper called “Franz Kafka’s Solution to Illegal Immigration.”

I had a friendly chat with Stewart Baker, the foil in many of my “debunking” posts linked above, the other night. Affable as ever, he reported unawareness of my writings on this blog. If true, this illustrates another problem with bureaucracy: Decision-makers are insulated to the point of ignorance. Privacy advocates “can’t and won’t tell you precisely how [things like] REAL ID [and E-Verify] threaten[] privacy” if you’re not paying attention.

Correspondence with a Presumed Proponent of Auto Bailouts

As a supporter of free trade, I’m used to getting angry letters and emails whenever I do media. Below is one of the more civil, reasonable emails, which I received following my appearance on last night’s Lou Dobbs:

I would have liked to see the rest of what you said about the auto industry on the show but what I did see angered me. You said something to the effect that bad business decisions by the Detroit automakers should not get them a bail out and that one of them should be allowed to fail is what I heard you say. I am assuming that the out of control greed that has run unchecked for years and terrible government policies have allowed the investment banks to basically destroy thousands of peoples lives should deserve a bail out. My thinking is that none of them should get one penny. As for the auto companies failing. Lets see. The banks fail then they will not lend to anyone now. I with a 780+ credit score can no longer get a loan for a car which then hurts the auto company is one cause. The fact that people are losing their jobs by thousands is not helping, the people losing their houses and high gas prices are killing the sales of cars. I don’t know if you know that if lets say GM goes under 100’s of thousands jobs could be lost. Engineers, designers, line workers, computer guys, and so on, not to mention all the other business that supply the automakers. Did you give any of this any thought? I also would like to know what you think about the good paying jobs that go overseas. Plus can you tell me one benefit to this Global economy has had for the USA. Please don’t give me the cheaper prices line either.

Here’s my response:

Thanks for your thoughtful comments.  More often than not, the messages I receive from people who disagree with my perspective tend to be nasty and poorly articulated.  So, yours is a welcome dissent.

I am opposed to interventions of any kind. The Wall Street bailout and the subsequent partial nationalization of what were private U.S. financial institutions is in essence a penalty on prudent behavior and a subsidy for risk taking. It is patently unfair and grievously unwise to use taxpayer dollars to insulate people or institutions from the consequences of their actions, as it is unfair and unwise to deprive risk takers of the full fruits of their efforts.

The story is no different in the auto industry. Yes, the industry employs thousands of workers and there are many jobs in related industries that depend on a healthy (or at least functioning) auto industry. I am sympathetic to your suggestion that auto’s woes are at least in some part attributable to the credit freeze, which is a response to, among other things, circumstances beyond its control. But there’s much more to the picture than the one you seem to want to paint of the auto industry as an innocent victim. 

The fact is that much of the Big Three’s problem is self-made. The credit crunch and the contraction of demand is just the latest dark cloud, and a problem that affects all industries, not just autos. Thus, if there is a bailout for Detroit, where, how, and why do we draw the line to exclude other manufacturers, home builders, coal miners, and masseuses, who are all suffering from the same contraction in demand caused in part by the credit crunch? Don’t tell me we should bail everyone out. For starters, we can’t afford that.

Detroit’s problems predate the financial meltdown. Management and labor, together, consigned the Big Three to a future of troubles when ridiculously liberal work rules that flew in the face of basic economics were agreed upon, requiring management to pay workers at 90% of their salaries when they were laid off. The “Cadillac Platter” of health and retirement benefits granted to the UAW also dramatically raised the cost of producing vehicles at unionized auto plants in the United States. And let’s not forget about the far-in-excess-of-average manufacturing wages that auto workers “won” through concessions by management over the years. Management agreed to all of these conditions — and labor pushed them — because both sides assumed that the U.S. governent would come to the rescue (that the industry was too big to fail) when the chickens came home to roost over this inefficient, uncompetitive cost structure. That, to my mind, reflects labor’s and management’s greed.

On the demand side, Big Three management demonstrated an egregious failure of imagination, if not downright dereliction of duty, in assuming that large pick-up trucks and SUVs would never fall out of favor. Of the top 10 selling cars (not trucks or SUVs) in the United States, Big Three offerings have barely made the list this decade. Not one has been a top 5 seller. Shouldn’t producers try to make things that people want to consume before scapegoating their failures and seeking government bailouts?

One of the points I made in my interview with the Lou Dobbs show that didn’t make it to air is that a bankruptcy and liquidation or two in the auto industry wouldn’t be the end of the world. In fact, it would be a welcome development for the producers and their workers who remain in operation. They would be able to compete for a larger share of a pie that is currently shrinking, but will again expand. Which companies remain and liquidate should be determined by market forces, not by the coercive, thieving actions of the Michigan congressional delegation and Governor Granholm. 

I think an instructive example for the auto industry is the U.S. steel industry. During this decade, the steel industry responded to waning fortunes and dozens of bankruptcies by finally allowing unproductive, inefficient mills to shut down. As a high fixed cost industry with dozens of producers at the time, the industry finally did what is should have done long ago: it consolidated. In 2001, 12 firms accounted for 75% of U.S. hot-rolled steel production. In 2007, 3 firms accounted for over 80 percent of hot-rolled steel production. The consolidation has afforded the steel industry an alternative to requesting bailouts in the face of declining demand: it curtails output, which affects prices favorably for the mills. If there were fewer automakers in the United States making products Americans wanted to buy, and if labor costs were more variable and less fixed by unaffordable contracts, the auto industry might be similarly equipped to weather storms.

As to your questions about my views on trade, there is plenty of commentary and analysis on our website (www.freetrade.org) that I invite you to check out.