Sunday, September 21, 2008

Detroit 3 Fail? We'd Just Buy Different Mix of Cars

Ford's assembly plant in Louisville, Ky., is participating in that corporation's struggles. The Toyota plant in Georgetown, Ky., is flourishing as part of the other American auto industry. It is located largely in the South, employs 92,000 Americans and is not in the toils of the cost structure Ford and GM negotiated with the United Auto Workers union. Lemon socialism -- the subsidization of the weak -- is supposedly needed lest a U.S. automaker file for bankruptcy, causing the sort of civil disorder and social chaos that accompanied the disappearance of Studebaker, Packard, American Motors and others.

Detroit is striking for subsidies while the iron is hot -- while the 37 electoral votes of two automaking states, Ohio and Michigan, hang in the balance. Where is the "partisan rancor," which John McCain deplores, now that we really need it? He and Barack Obama agree on the corporate welfare for the three Detroit mendicants. Obama perhaps believes that lemon socialism is better than no socialism at all. McCain, reacting viscerally, sees everything as a moral melodrama; his economic thinking, which really is nothing of the sort, owes more to Moses than to Adam Smith. In McCainism -- the politics of "honor" -- there are no mere mistakes; they must also be dishonorable, because corrupt.

Anyway, taxpayers have been conscripted into subsidizing $25 billion of government loans for Detroit, which says that sum is nice as an appetizer, but hardly a meal. It wants more.

Detroit says, correctly, that some of its problems stem from fuel economy and other mandates imposed by the 535 automotive engineers on Capitol Hill. But that is beside the point, which is: No one thinks that the failure of an auto manufacturer would pose systemic risk to the economy. Americans would just buy a different mix of cars.


~George Will

16 Comments:

At 9/21/2008 11:11 AM, Blogger Walt G. said...

George Will said: “No one thinks that the failure of an auto manufacturer would pose systemic risk to the economy. Americans would just buy a different mix of cars.”

That’s wrong on two counts: 1) There are many people who have stated that failure of one or all of the Big Three would cause great harm to the economy, so they must think that, or they did when they said it. Apparently, he has not done his homework on this one because he overstated his case with “no one.” Of course, whether the economy would be adversly affected could be debated, and 2) Will appears to assume the only risk to the economy would come from selling fewer or different cars. That’s a rather simplistic assumption that ignores other well-known costs to the economy, such as pensions, that the public is obligated to pay.

I realize that GM, Ford, Chrysler, and the UAW are not everyone’s favorite businesses. But you should realize that everyone has a stake in some big or small way in their continued existence, and they have a very good chance of future success—with a little help. Conversley, there’s a good chance $25 billion will seem like chump change when the failout of the failure of one of these companies is fully accounted for in both the short and long run. So, be careful what you wish for.

 
At 9/21/2008 12:01 PM, Blogger holeydonut said...

As someone who is working in the auto industry at a major OEM, I think these bailouts are a bane to long-term sustainability for anyone who receives them. The Big 3 are in their predicament due to their resistance to change and failure to adapt. The loan guarantees will do little to address the systemic problems with the automakers.

The free market is sending a message to the failing companies. At a macro and micro level, the Big 3 need a significant shakeup. Financial handouts are not going to allow this to happen. I find it hard to believe that anyone should be rewarded fir poor business planning with subsidized loans at extremely low interest rates.

A combination of short-term and myopic business decisions at the corporate level are compounded by short-term and myopic decisions at the working level. And the two groups use the failings of each other to rationalize their own poor decisions.

For every bargaining unit person I see sleeping under his desk or milking OT pay, I also see a mostly inept middle-manager type who makes countless selfish decisions because they're holding on in order to hit retirement age. If you add up the small proportion of "bad apples" together, you have a rotten crop.

Similar arguments of catastrophic economic failure were in place a few decades ago when American electronic manufacturing went away (Zenith, RCA, Panasonic, etc). If you go back many more years then the rust-belt had begun to emerge and there were similar discussions.

At least within the realm of automakers - the "enemies" have invested back in America. Where are the Sony and LG assembly plants in the US? And yet somehow people here have adapted and emerged mostly successful.

The most significant systemic risk to the economy is an unwillingness to accept change. The risk expected by a failed automaker is peanuts compared to the continuation of the selfish behavior and short-term thinking that would be encouraged with these bailouts.

 
At 9/21/2008 12:16 PM, Anonymous Anonymous said...

"The free market is sending a message to the failing companies."

Wake up baby, the US doesn't have free markets. We're all socialist now.

 
At 9/21/2008 12:46 PM, Blogger Walt G. said...

David Cole, an automotive expert, and not of GM’s or the UAW’s biggest friends had this to say about the $25 billion loan package, that has already been approved but not funded, on the CNN Money website September 4, 2008:

“. . . David Cole, chairman of the Center for Automotive Research, said the loan package could be enough to keep some plants open that would otherwise be closed.
. . . .

Cole argues the loan package could be a relatively cheap alternative to the economic harm that would take place if one of the automakers were to fall into bankruptcy. The estimated cost of the program is less than $8 billion, which factors in the risk of default on the loans.”

Anonymous 12:16 : We have never had a free market. The U.S. prints money that has no instinct value. It’s worth exactly whatever faith one has in the government who accepts that dollar bill for payment. Accordingly, it’s a matter of perception not reality. We trick ourselves into thinking we have a capitalist system and/or a free market and that the government has a paternalistic role in our lives where we will grow up someday and support ourselves. That is completely false. Our relationship with the government is more like a patient who is on a respirator and thinks he can breathe on his own but can’t. In reality, we are discussing if the oxygen content we are being delivered should be 12% or 16%. Those who want the loans say 16%, and those who don’t are saying 12%. Don’t fool yourselves; we are all on the nut here.

 
At 9/21/2008 12:50 PM, Anonymous Anonymous said...

Wake up baby, the US doesn't have free markets. We're all socialist now.

Kind of... we only socialize the losses.

 
At 9/21/2008 1:09 PM, Blogger Walt G. said...

For those who are so upset about the high figures for the current bailout/loans, you can always re-spin them as a percentage of the GDP. They will seem rather small in that respect.

 
At 9/21/2008 4:22 PM, Anonymous Fred said...

The money that goes to the automakers is money that doesn't go somewhere else. What good companies and people are you hurting with the bailouts?

Uh, there's water in the boat.
Well, we just drill some holes to let the water out.
Uh, there's more water in the boat than before.
Well, then we just drill more holes, dummy.

 
At 9/21/2008 5:03 PM, Blogger Walt G. said...

Fred, why are you so pessimistic? Unlike many boondoggles, the U.S. has never lost a penny making a loan to an automaker. Are you still grinding that ax?

 
At 9/22/2008 3:15 AM, Blogger juandos said...

Hmmm, walt g poses what I think is a questionable statement: "That’s a rather simplistic assumption that ignores other well-known costs to the economy, such as pensions, that the public is obligated to pay"...

Why is the public obligated walt g?

Another comment by you walt g that I think needs fleshing out: "Conversley, there’s a good chance $25 billion will seem like chump change when the failout of the failure of one of these companies is fully accounted for in both the short and long run"...

Care to give out a few reasons this 'fallout' will have a wide reaching influence?

I have some ideas why you might be getting at but I want see a few of your thoughts on this...

holeydonut says: "The free market is sending a message to the failing companies. At a macro and micro level, the Big 3 need a significant shakeup"...

Hmmm, I think you are on target but that's just me...

 
At 9/22/2008 7:22 AM, Blogger Bruce Hall said...

It might be interesting to categorize the way "bailout" funds are being spent by the government. Is the government "giving away" money or "buying" bad assets or "loaning" money? Perhaps it is irrelevant.

The real problem is government's continual manipulation of the marketplace for political purposes. Restrict domestic oil supplies and refineries and then "bailout" citizens with a "tax rebate" to offset the high cost of gasoline. Demand that lending institutions offer "fair" loans to the unqualified and unable-to-repay and then "bailout" the financial community when the cards tumble down. Create unneeded and onerous CAFE requirements and then "bailout" the automobile industries when customers suddenly shift product preferences, can't afford to purchase... or can't get loans to purchase, and manufacturers are stuck scrambling to meet unrealistic mileage mandates requiring significant added cost to vehicles... which make them even more unaffordable to customers.

Does anyone see a pattern?

 
At 9/22/2008 12:40 PM, Blogger OBloodyHell said...

> Anonymous 12:16 : We have never had a free market. The U.S. prints money that has no instinct value.

Walt, the idea that paper money is somehow different from gold money is itself ludicrous and in particular has no reflection on the aspects of the "Free Market" which holds sway here. I think you can certainly argue as inadequate the level of "Free Markethood" in the USA, but it never has, and never will have, any real connection to paper money vs. the Gold Standard.

As far as the Paper-v-Gold, the only advantage Gold has is that it makes it difficult to artificially inflate the money supply. Since that's also the advantage of Paper, it's mainly a question of which is more beneficial.

What is money?

I'd argue that it's a placeholder for assets. The alternative is a barter economy, where there is no placeholder.

Money allows three-way, four-way, and n-way deals with comparative ease. If I want your chickens, but you don't want my beef, I don't have to go find someone who wants my beef AND HAS WHAT YOU WANT. I just trade my beef to someone who DOES want it. They give me money, and I take that money and give it to you for your chickens. And you go find the guy with the beef and buy whatever of his you want for the money I gave you.

It's a placeholder (There's another associated point to this I won't go into).

Gold is a largely fixed quantity -- both its strength and weakness.
The problem we have, if the economy is rapidly expanding, is how do we expand the Gold supply?

A: We can't.

So you have to "deflate" the value of gold to keep up with its representational quality as to what it represents -- which is the amount of assets floating around out there.

If we make 1 trillion in goods this year, and gold is "x" dollars an ounce, then what happens next year, when Gold supplies are much the same and we make 1.25 trillion dollars of NEW GOODS.

We have to reassign the value of Gold to match that new wealth, which means an ounce of Gold has to be worth notably more dollars.

The problems with this should be dawning on you. If you can't consistently value the money over time, there are all sorts of wierd problems possible in the economy. That's one of the reasons we don't like inflation all that much. Ideally, there shouldn't be any, as it means that the available money supply is exactly matching the increased assets over time.

Now, back when we had an agricultural economy, Gold was an ok thing -- most of the assets produced were of the perishable variety -- food and the like -- which meant that the money supply didn't have to change much over time to represent the amount of newly created assets.

Once you switch to an industrial economy, though, the problems with Gold, as I noted above, become more visible, and the advantages of paper take hold.

By decoupling the money supply from a fixed value, you gain the advantage that it can rise and fall so as to match the circumstances -- hopefully, always rising, but the reverse does happen in rare circumstances.

More critically, you can control the SPEED of its rise so as to match the growth of the economy.

Theoretically, if the USA produces 1 trillion dollars in goods this month (think about that -- it's actually LESS than the actual amount... LOL), then the money supply should expand by a percentage of that which represents the actual, true end result of "assets_created less assets_destroyed" (some goods are food, and are eaten or go bad. Some things wear out, and are tossed away -- what is the value of that which remains?).


You just can't do that with Gold.


The danger, of course, is that it offers an option for the government to ignore that actual connection (increase in money ties to new assets created) and just "create" as much money as it wants.

In this case, of course, you have a scenario much like that of the Gold issue... where the amount of wealth is not in sync with the amount of money.

So something has to give, this is a real system with real properties.

Essentially, it Robs Peter to pay Paul. And you're more likely Peter, not Paul.

I can go on, but
a) I *think* that is a valid summary (Dr. Perry? Any comments, disagreement, or additions?)
b) Is enough to think about, assuming I'm correct.

 
At 9/22/2008 12:48 PM, Blogger OBloodyHell said...

> Is the government "giving away" money or "buying" bad assets or "loaning" money?

I do consider bruce's point to have relevance. I'm less concerned by loans than I am by gifts in the form of "bad buys" or "giveaways".

But I also concur with juandos, etal -- it's not necessarily good for the companies in question in the long run. Unless it shakes them up substantially, they really, really have done nothing but put off a big problem.

And most companies don't shake things up that much when they get bailed out, unless that's part of the bailout rules.

At the very least, they ought to do something -- "25% of existing management at all levels must quit and find new jobs".

 
At 9/22/2008 1:24 PM, Anonymous QT said...

The other element of gold is the environmental consequences of a massive increase in strip mining.

The usual "gold standard" argument fails to recognize that it's a done deal. Public policy has been decided on this question and the agenda has moved on. There is no possibility that the world is ever going to return to the gold standard just like we are all not going back to subsistence farming.

Time to let it go.

 
At 9/22/2008 2:13 PM, Blogger Walt G. said...

I did not mean to imply that I support a gold standard. But when our measurment of wealth is determined by perceptions and the full faith of the U.S. goverment based more or less on whims instead of the marketplace we are not really "free." How much government is too much? How much goverment is too little? None obviously won't work.

 
At 9/22/2008 2:28 PM, Anonymous qt said...

"How much government is too much? How much goverment is too little? None obviously won't work."

Sounds perfectly reasonable to me. Given that this crisis is being spun into a rejection of markets, I also am concerned at the shift toward massive governmental intervention ala FDR. We may regret the trend towards an expanded governmental role more than any loans to the Big 3.

Should we not be concerned about Feddie being the largest bank in the world particularly given our recent concerns with enterprises "too big to fail"?

 
At 10/04/2008 1:52 AM, Blogger Bloggerista Babe said...

George Will is wrong: Dr. David Cole, Center for Automotive Research, told Huffington Post's Diane Tucker how the failure of the Detroit automakers poses a systemic risk to the U.S. economy.

Here's the link:
http://www.huffingtonpost.com/diane-tucker/wall-street-monkey-wrench_b_131404.html

 

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