Monday, September 08, 2008

Detroit's Big Three Shameless Blackmail Attempt

Philosophically, if the Freddie Mac and Fannie Mae debacles teach us any lesson, it is that subsidizing private profits with public risk is a terrible idea. Implicit government backing has led the managements of these two companies to make reckless investments that have backfired badly. Now government backing has become explicit, and under the plan announced by Treasury Secretary Henry Paulson yesterday, taxpayers likely will pay billions to keep Fannie and Freddie solvent -- with the exact amount uncertain.

The Detroit Three got into their current quandary by making decades of bad decisions, with some help from the United Auto Workers union. Yet despite the current crisis, General Motors is still paying dividends to shareholders, the car companies are paying bonuses to executives, and the private-equity billionaires at Cerberus who bought Chrysler are trying to reap enormous rewards from their risky investment. Meanwhile the UAW's Jobs Bank -- which pays laid-off workers for doing nothing -- remains in place.

Of course, we can all hope that shareholders do well, that executives reap handsome rewards for work well done, that the Cerberus billionaires make more billions on Chrysler, and that workers get paid on whatever terms the car companies agree. But we taxpayers shouldn't subsidize any of this.

Even if Ford, GM and Chrysler were to go out of business -- and it's highly unlikely that all three will simply cease to exist -- there will be plenty of good cars for Americans to buy. And many will be made in America, even if they carry foreign nameplates. Toyota, Nissan, Honda, Hyundai and other foreign car companies have expanded greatly their U.S. manufacturing operations in recent years. They're doing so because Americans are buying their cars. Toyota and Honda, the current leaders in hybrids and alternative-fuel technology, did their research and development on their own dimes.

And what about the precedent the government would set? If we bail out Detroit, where do we stop? The newspaper industry is in financial trouble because more readers and advertisers are turning to the Internet. Newspapers are good for democracy -- Thomas Jefferson said he would choose newspapers over government, after all -- so shouldn't they get low-interest government loans to help them adjust to the Internet? Of course not, and ditto for Detroit.

Any low-interest loans to develop fuel-efficient cars should be made available to all car companies, not just the Detroit Three. The law passed by Congress last year is framed to make this highly unlikely. But if developing fuel-efficient and alternative-energy cars is deemed worthy of taxpayer subsidies for public-policy purposes, it's just common sense not to put all our eggs in Detroit's basket.

~Paul Ingrassia in
today's WSJ

20 Comments:

At 9/08/2008 8:02 AM, Anonymous Machiavelli999 said...

Well, the big 3 already got 25 billion in "loans" in the latest energy bill. Now, they have come for second helpings. And if they get that, have no doubt that they will be back for thirds and fourths.

This is corporate welfare at its very worst. If Democrats want to criticize America for its income inequality, they should point to bailouts like this as perfect examples of why the rich stay rich.

Sadly, they will probably be sponsoring the bailout.

 
At 9/08/2008 10:20 AM, Blogger Walt G. said...

I think an analysis of the economic impact of the failure of one or all of The Big Three would be much more useful than a raving rant in a newspaper. Ingrassia’s message appears as simplistic and uniformed as Nancy Reagan’s slogan “just say no!” Talk’s cheap. Let’s see some numbers.

We have the $50 billion in one column for the maximum potential cost of the loans if they completely defaulted for the maximum amount, but what’s in the other column for the benefit from workers who are paying taxes to build roads and schools and otherwise support our government and businesses? If the benefit is less than $50 billion and all the loans defaulted then the evidence would show that Ingrassia is correct. If that’s not the case; however, it’s a sound investment that appears worthwhile and should be made.

This is simply too important of a decision to be made out of jealousy or annoyances of unions or older corporations who some feel have already served their purpose. Wall Street Journal reporters should do their homework before they write articles that can persuade uniformed people to make poor decisions that could ultimately hurt our country.

Just a thought: If the benefits do exceed the costs, maybe we should not put any of our eggs in the Wall Street Journal’s broken basket. Why support those who do not support you?

 
At 9/08/2008 10:45 AM, Anonymous Machiavelli999 said...

walt g,

First of all, what type of precedent would such an action make. If you become big enough and employee enough people, you don't have to really care anymore about running your business well because government will be there to rescue you. With a precedent like that, the CEO of Wall-Mart should go on a permanent vacation and if his board ever asks him what is going on, he should assure them that if anything goes bad he will get a "loan" from the government, since because Wal-Mart is one of the biggest employers in America, the government will never let it fail.

Second, this is obvious socialism. No one is arguing that. But it is socialism for corporations and rich people, which keep people rich. The rich can always argue that they should never be allowed to fail because of the possible economic and social costs of them and their businesses going bankrupt. This "socialism for the rich" is the true cause of income inequality, not free market capitalism. Rich and powerful people get government to create money for them to bail them out from their failures, while ordinary folks must live with the consequences of their actions.

Third, the initial economic costs of the failure of the big three is probably going to be large. There will obviously be a huge spike in unemployment. But justifying a bailout because of the short term ramification shows shortsightedness. Such shortsightedness is what keeps politicians looking for a quick fix instead of a long term solution. In the long term, someone will step in to produce the cars that the big three are no longer producing. Whether it is a foreign company or a new domestic one. Existing manufacturing facilities that the big three leave behind will likely be bought up by another manufacturer. The transition will probably be a lot smoother than one imagines once the initial panic and hysteria passes.

The only that will really get destroyed is the bureaucracy and the crippling labor agreements under which the big three operate. And I am not going to be sad to see those go.

 
At 9/08/2008 11:29 AM, Blogger Walt G. said...

First: The government set the precedent by tightening the credit market and imposing stringent regulations that are more difficult to meet for some than for others. We do not have any semblance of a free market. A free market lets the customers decide what they want to buy. That’s not the case now.

Second: Employees aren't rich. And the people they do business with aren't either.

Third: Bailout is a term used to invoke emotions. I think we need to go beyond that, study the situation, and not dismiss it out of hand. I’m willing to concede the Big Three should fail one or all if a thorough analysis shows evidence that it is inevitable in the long run and the economic condition of the country is improved with their extinction. I think we have the resources to make that determination. I think we should try.

You know, the Chrysler loan guarantees of 1979 turned out great for the country and great for the company. Who has even tried to see if that’s the case in 2008?

 
At 9/08/2008 11:40 AM, Blogger like such as said...

"Just a thought: If the benefits do exceed the costs, maybe we should not put any of our eggs in the Wall Street Journal’s broken basket. Why support those who do not support you?"

I'm not even sure what you're trying to say here. As it stands, we're not "putting our eggs" in the WSJ basket in the same way that we are for the big 3, since the big 3, like fannie and freddie, get to reap private benefits based on the risks taken with public funds.

Who isn't the wsj supporting? If by that "thought" you mean that all those who most closely define themselves as union members rather than members of a free society should not support a newspaper who allows this sort of editorial, then sure. The thing is that the way to "not support" the wsj is exactly how it should be - don't buy their product. The big 3, however, get our support with or without our buying their dinosaurs.

 
At 9/08/2008 11:55 AM, Blogger Walt G. said...

like such as,

I was just replying to Ingrassia’s worthless concluding remark with a worthless concluding remark of my own. He has his unsupported opinion and I have mine. Don’t try to figure it out when people are throwing flaming spears at one another.

I was hoping for an intelligent discussion based on facts; not name calling. I can see that is not happening here.

 
At 9/08/2008 11:58 AM, Anonymous Fred said...

"You know, the Chrysler loan guarantees of 1979 turned out great for the country and great for the company."

Chrysler was saved only to be sold to the Germans. I don't remember Lee Iacocca mentioning that possibility while he was campaigning to save his American (wave flag here) company.

Chrysler is back in American hands and continuing its descent into oblivion.

Chrysler is not a model for a GM bailout. Fool me once and all that.

 
At 9/08/2008 12:19 PM, Blogger Walt G. said...

fred,

I look forward to your paying for my pension through the PBGB. I think there are roughly 3 million potential Big Three current and future retirees and spouses. You all are already on the hook for that, and there are probably a lot more potential liabilities out there like that.

Someone might want to do the math rather than making emotional decisions. Can someone supply a ballpark figure of a Big Three auto company bankruptcy cost to the country vs. the odds of the same company’s survival? $50 billion might be a good investment. Don’t dismiss it without analysis, and don't let your anger or jealousy cloud good financial judgment. After all, this is supposed to be an economics’ blog. Why don’t we treat it as such?

 
At 9/08/2008 12:55 PM, OpenID sethstorm said...


There will be plenty of 4 cylinder compact cars for Americans to buy as the other manufacturers refuse to do affordable muscle. And many will be assembled in America, even if they are foreign designs.

(edits in bold for accuracy)

That one is laughable. The last time Japan had anything close to affordable muscle, it was in the 1980's. Now, you have to pull teeth just to get them to go under $30k for what GM/Ford/Chrysler have done easily for decades at far less.



Walt G:
I'd agree on the idea of it being a long term investment. The issue is how do you keep it from turning into just a shell company that churns out foreign designs?

I recall something from Lutz of GM being said about people just wanting to attack GM. That's part of why you're not getting much more than just "We just want to see (GM/Ford/Chrysler) die".

 
At 9/08/2008 1:52 PM, Blogger Walt G. said...

sethstorm,

I'm just asking for a financial analysis between guaranteeing the loans and one or all of the Big Three declaring bankruptcy.

With the PBGC, the taxpayers are potentially on the hook for a lot of autoworkers’ pensions. Depending on the worker’s age, that’s around $3 thousand per month for the rest of their lives, and there are survivor benefits on top of that. The pension guarantees start at age 45, and there are millions of current and future retirees and their spouses. And that’s just one example of taxpayer liability that’s already exists. Is there more? And how much is the estimated loses to the U.S. economy?

Tough questions need to be asked and answered without all the name-calling and finger- pointing. If a final analysis means auto companies go bankrupt, so be it. I’m sure actuaries and economists could quantify some scenarios. Let’s be smart about this.

 
At 9/08/2008 2:48 PM, Anonymous Fred said...

"With the PBGC, the taxpayers are potentially on the hook for a lot of autoworkers’ pensions. Depending on the worker’s age, that’s around $3 thousand per month for the rest of their lives..."

You are going to be very surprised when the PBGC doesn't buy into that.

 
At 9/08/2008 2:56 PM, Blogger Walt G. said...

Fred:
That's why I said "potentially." I doubt I will see Social Security, too. Regardless, there will be taxpayer money spent. The question is: How much? It's sort of like changing the oil in your car or letting your engine blow up. Do we have a case like that here? Let's see some estimates from our experts before we make the call.

There's a lot of people grinding axes; I hope they don't cut themselves when they are finished.

 
At 9/08/2008 3:04 PM, Blogger the buggy professor said...

1) I agree with Walt: the Chrysler loan guarantee worked out effectively, so much so that by 1996 --- just before Chrysler merged with a dominant Mercedes --- it happened to be the most profitable of the US car manufacturers.

....

2) Its subsequent problems were bad managerial decisions about the kinds of vehicles Chrysler was committed to building: lots of gas guzzlers, with no low mileage sedans that the public was willing to buy in large numbers.

....

3) The problems of management don't stop with Chrysler: the other two big US manufacturers, Ford and GM, have been run way too long by self-congratulatory old-boy types. Chrysler at least has a new co-CEO, a former high-up for decades with Toyota.

Whether Chrysler will survive is another matter.

It doesn't seem to have committed itself to alternative fuel engines, even standard hybrids --- never mind lithium-ion batteries like GM's Volt, to say nothing of hydrogen-driven engines. If Chrysler fails, some other investors --- maybe a foreign company like Renault-Nissan --- will likely take control.

All the better then.

......

4) I can understand how free-market theorists and enthusiasts oppose any loan guarantee --- which requires them to postulate, essentially, quickly adapting labor markets and a reallocation of capital swiftly to more productive outlets in case the Big-3 companies go under.

The fact is, we have been living in a highly subsidized economy in several sectors for decades, whether under Republican or Democratic Congresses and administrations: in all energy areas, in agriculture galore, in infrastructure built and maintained by taxes for airlines and highways and roads and ports and trains (Amtrak) . . . and now, obviously, what with the failures of new financial innovations to improve social well-being, rather than hurt it, more and more government regulation and subsidies for banks, brokerage houses, and mortgage-market dealers and backers.

For that matter, the energy bill this year contained a provision for loan-guarantees to the US car industry worth $25 billion . . . half of what it is asking for right now.

And increasingly, let us not forget, government at both the Federal and state-levels has been involving itself in the health-care industry.

.

5) It would be nice, of course, if markets were as efficient, flexible, free of failures --- information problems, public goods, monopoly, certain kinds of negative and positive externalities --- and rewarding American workers of all sorts the way the US economy did for decades until 1980.

Since then, essentially the top 1% of individual US income-earners has seen their income rise 200%, and the bottom 90% an average of 10%. For average wage-earners, there has been a real 2.0% increase for males in the same period.

.

6) One way or another, a new kind of populism has been emerging --- just as it has repeatedly in past periods of economic flux, usually driven by big technological and institutional changes, with a sense of unfairness driving these populist rebellions: they started with the Whiskey rebellion among small farmers in the 1790s, expanded to include most farmers in the Andrew Jackson era --- with his own campaign against bankers and other alleged villains; then continued in a wave of agrarian protests throughout the Mid-West, plains states, and the South in the latter part of the 19th century --- compounded by the Progressive movement, more middle class, before WWI (headed eventually by Teddy Roosevelt); then continued in the 1930s with the CIO union movement; and --- with 80% of Americans saying for a year now that the country has been directed in the Bush era the wrong way, with 80% now saying the economy is very bad or fairly bad --- a new populist wave is now surging anew.

Whoever wins the presidential race in November --- Republicans look like taking a beating no matter what for Congress --- this new populist wave won't go away.

.....

Michael Gordon, AKA, the buggy professor

 
At 9/08/2008 3:08 PM, Anonymous QT said...

Walt g,

Your point about public assumption of pension obligations is right on target. A loan guarantee to a reliable borrower may indeed be a far lower risk to taxpayers.

These arguments do tend to devolve into rants. The WSJ should be providing a comprehensive financial analysis but I guess that type of reporting went out with Harrison Salisbury.

One of the hot buttons is the rubber room. Hate to mention it but would very much like to know what is happening with this.

 
At 9/08/2008 3:12 PM, Blogger randian said...

What makes GM more special than Pan Am? The right thing to do is let GM rot. The economic resources wasted on GM can be better spent elsewhere. In the long run we'll all be better off.

 
At 9/08/2008 4:52 PM, Blogger OBloodyHell said...

> You know, the Chrysler loan guarantees of 1979 turned out great for the country and great for the company.

Really? Why is the company in trouble YET again after such a short time -- and, no, "30 years" is not the figure -- 5-odd years getting vaguely profitable, then another 10 getting back to where they are in trouble again -- so they might have had maybe 15 years of better than half-assed management.

> Now, you have to pull teeth just to get them to go under $30k for what GM/Ford/Chrysler have done easily for decades at far less.

Funny, it looked to me like Hyundai and Isuzu, Suzuki and Scion were the ones doing the quality low-end stuff, not the USA's Big Three (OK, maybe Saturn from the Big 3). I've never heard anyone personally have that much good to say about any of the Big 3's low-end offerings (excepting Saturn). What do the J.D. Power rankings on "Overall Dependability Ranking" say about lower-end cars?

JD. Power Compact Car:
Only Two of the Top 10 are Big 3. And the best one ranked fifth.

Subcompacts (only 5 entries, 1 Big 3):
The Big 3 entry: "It sucks -- 2 out of 5".

Compact Multi Activity Vehicle:
Two out of 10, once again. Best ranking: fourth

Midsize Car:
OK, here we actually make a good showing -- Five out of 10, and the #1 AND #2 spots.

So, four smaller, "affordable" categories, and the Big 3 do well on "overall dependability" in exactly *one* of them.

Maybe this is what explains why the Big 3 are having such a problem selling cars?

And explain, please, how it is that a bailout is going to help this?

 
At 9/08/2008 5:11 PM, Blogger Walt G. said...

qt,

I assume the rubber room you are referring to is the Jobs Bank. It still exists on paper, but was neutered by the 2007 contract by removing the limitation of how far away an employee can be forced to move for GM employment. There may be some people in it now because of the slow market sales, but GM can quickly remove them in a market upturn by forcing employees to accept jobs far away from their home plant, or refuse the assignment and voluntarily quit or retire.

The Jobs Bank was a good idea when it started. Earlier downturns in the industry were accompanied by corresponding upturns that resulted in all the employees returning to work. The Jobs Bank retained employees who otherwise would have sought work elsewhere. Contrary to popular opinion, these are not unskilled jobs anymore, and the majority of workers were worth keeping.

Obviously, the market shifted and we permanently need fewer workers today than we did in the past. Although that might change in the near future. Our new contract is very competitive, and we are already getting work back that we lost ten or twenty years ago. I believe our new competitiveness is one of the best kept secrets around. It’s difficult to shake the stigma of the past, and yes, we still need to get better; however, I would not count any of the Big Three out of the game at this point. Nineteen of GM’s next twenty vehicle launches are cars instead of trucks and SUVs, and GM has more cars that get over 30 miles-per-gallon than any other U.S. automaker. The situation is not as dire as some people may think, and in normal times loan guarantees would not be needed.

Again, I am not saying the loan guarantees should be blindly approved without merit, but they also should not be turned down without looking at all of the financial ramifications. Cool heads need to make this important decision based on financial analysis and not out of anger or jealousy. I am not seeing that depth of analysis here or elsewhere. We can do much better than that.

 
At 9/08/2008 6:37 PM, Anonymous QT said...

Walt g,

Thanks for your reply. It does help to get some background on this issue since one tends to hear very negative (and not very objective) comments on GM.

Agree that there is not much analysis here and you are the only poster with in depth knowledge of this subject. Words like bailout tend to be bandied about despite the fact that this is a loan made under unusual circumstances in the credit markets. A loan is still a loan.

Good luck with GM.

 
At 9/08/2008 10:50 PM, Anonymous Fred said...

"There's a lot of people grinding axes; I hope they don't cut themselves when they are finished."

Walt, you keep saying these things as though they only apply to others.

 
At 9/09/2008 5:58 AM, Blogger Walt G. said...

OK Fred. You have a problem with GM and the UAW, and I get that. Just realize that the taxpayer will pay if GM or one of the other Big Three fails. The costliest option might be to do nothing, but I guess it’s hard to quantify the benefit or the glee some might have in that situation.

Cheers,
Walt

 

Post a Comment

<< Home