The New York Times: Pass the Colombian Trade Pact

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.

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.

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.

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​.free​trade​.org) that I invite you to check out.

Well, not faint exactly. Indeed, it is pretty hearty. But considering the source, I’m not sure it is an asset.

In an article in today’s Congress Daily, key sugar lobby groups praised Senator Obama’s newfound enthusiasm for the U.S. sugar program. As a senator from the candy-making state of Illinois, he was none too fond of the price supports and import restrictions that raised input prices for factories in his state.

Not anymore. In a letter to sugar groups, Senator Obama gave assurances that while he “has concerns” with the program, he would listen to and work with them to “reward [their] hard work with policies that will keep [their] industry and your communities strong”. Oh dear.

One former lobbyist pointed out that “…the candidate now “represents a broader range of interest” than when he was a state legislator…[and] added that Obama has never voted against the sugar program and supported the 2008 Farm Bill.” McCain, on the other hand, would likely have lost the support of formerly Republican-leaning farmers because “…[he] has consistently opposed the program and agreed with President Bush’s decision to veto the Farm Bill.” Another lobbyist said that “Sen. McCain seems to want to radically alter [the farm safety net].”

Considering the woeful sugar policies of the United States, an honorable person should be ashamed to receive Big Sugar’s support.

The Democrat-aligned National Farmers Union is pushing for an increase (that’s right, an increase) in government price targets for agricultural commodities when (very few people seem to be using the word “if” these days) the Democrats take the White House and solidify their majority in Congress this fall.

Apparently, farmers’ production costs have increased above levels assumed by the current government price floors. Those floors therefore need to be adjusted upward so that if “prices stay low” (they are currently off their record highs, but still pretty high by historical standards) the safety net can be “bumped up,” according to the NFU’s president, Tom Buis. The increase in price-linked subsidies would be paid for by reducing direct payments, fiscally offensive but non–distortionary payments to farmers based on historical production. 

Hold on to what is left of your wallets, America.