Tuesday, December 16, 2008

Let's Not Spend Our Money to Avoid Reality Check

While Washington tries to arrange a bailout, the Detroit 3 auto makers and the UAW keep insisting that bankruptcy would be the kiss of death. Not so: a Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.

General Motors is in need of Chapter 11 bankruptcy reorganization. It needs to shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships. This will give rise to many current and future liabilities that may be worked out in bankruptcy. It may need new management as well. Bankruptcy provides an opportunity to do all that. Consumers have little to fear. Reorganization will pare the weakest dealers while strengthening those who remain.

So why do the Detroit Three managements and the UAW insist that "bankruptcy is not an option"? Perhaps because of the pain that would be inflicted upon both.


The bankruptcy code places severe limitations on the compensation that can be paid to a manager unless there is a "bona fide job offer from another business at the same or greater rate of compensation." Given the dismal performance of the Detroit Three in recent years, it seems unlikely that their senior management will be highly coveted on the open market. Incumbent management is also likely to find its prospects for continued employment less-secure.

Chapter 11 also provides a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules. The process for adjusting a collective bargaining agreement is somewhat complicated and begins with a sort of compulsory mediation process. But if this fails a company can (with court permission) nullify the agreement. This doomsday scenario is rarely triggered, however, as its threat casts a large shadow over negotiations, providing a stick to force concessions.

Detroit and the public has little to fear from a bankruptcy filing, but much to fear from the corrupt bargain that is emerging among incumbent management, the UAW and Capitol Hill to spend our money to avoid their reality check.

~George Mason Law Professor Todd Zywicki in today's WSJ, "Bankruptcy Is the Perfect Remedy for Detroit"

31 Comments:

At 12/16/2008 12:15 PM, Blogger OneCleverCookie said...

I truly pray that this is a true epiphany by Mr. Summers and not a ruse perpetraited to lure freedom loving citizens into a political and economic ambush.

 
At 12/16/2008 12:40 PM, Anonymous Anonymous said...

It is worth noting that due to this credit crisis, GE, who heretofore had been the largest finaning agent for Chapter 11 bankruptcies is O-U-T of that business. Therefore there is almost no one to facilitate a Chapter 11 filing on the scale of GM and any filing therefore becomes a liquidation.

 
At 12/16/2008 2:10 PM, Blogger Michael Smith said...

There should absolutely be no bailout of the Big Three or any other company that gets in trouble.

Simply put, nothing justifies the notion that the mistakes of some should be paid for by others -- others who played no part in the making of those mistakes and had no control over, or influence upon, those who DID make the mistakes. Punishing the innocent for the mistakes of the guilty is the very definition of an injustice -- and nothing can justify an injustice.

Yet such an injustice is precisely what is perpetuated when the taxpayer’s money is seized to “bailout” the management and the employees of a mismanaged, failing enterprise. Thus, not only are such “bailouts” impractical because they merely delay the day of reckoning, they are fundamentally unjust and therefore immoral.

 
At 12/16/2008 2:28 PM, Anonymous Anonymous said...

I see that Toyata has canceled a plna for a new auto plant in the South.

Maybe they figure they can pick one up cheap in Detroit.

Hydra

 
At 12/16/2008 3:00 PM, Blogger Walt G. said...

There's an awful of misinformation about the bridge loan. The transplants have already received their subsidies as shown below:

Tax Fairness for U.S. Auto Makers …. Recently, critics of the proposed loans for the domestic automakers have questioned whether taxpayers should provide temporary loans to American automakers, but have ignored one fact: Our taxpayers already give huge sums of financial assistance to foreign car companies right here in the U.S.


Stephen Collins, president, Automotive Trade Policy Council, writes about this subject in a letter published in The Wall Street Journal today. Collins writes:
“As proposed, the requested bridge loans represent roughly $4 billion in assistance to U.S. auto makers, that is, the cost of a low-interest loan. With 240,000 employees spread among the three U.S. companies, that works out to less than $16,000 in temporary taxpayer assistance per job.”
“By contrast, foreign auto makers receive far more from U.S. taxpayers in various forms of government assistance.

In Tennessee, for example, state and local authorities offered Volkswagen $577 million in lowered taxes and other benefits in exchange for the plants it is constructing, at a staggering cost of $288,000 per job created.”

“Similarly, Toyota is receiving $300 million in support for its plant in Texas, or $150,000 per job created. Alabama provided Hyundai, Toyota, Honda and Mercedes an average of $111,000 in incentives per job. The list goes on. Unlike the temporary assistance GM, Ford and Chrysler are seeking, in almost all the cases, U.S. taxpayer subsidies to foreign companies never need to be paid back.


(Source: Wall Street Journal)

 
At 12/16/2008 3:07 PM, Anonymous Anonymous said...

Would you buy a car from a bankrupt company?

 
At 12/16/2008 3:24 PM, Anonymous Anonymous said...

Fire up the printing press and stand back!

We are soon to see deflation followed by inflation.

The old people and the poor people are about to get creamed!

The trap bridge to nowhere is going to get ugly.

Hotrod.
Sacramento Republic of Socialist CA.

 
At 12/16/2008 3:33 PM, Anonymous Anonymous said...

Walt, Come on.

The reason Domestic Autos are at a disadvantage is simple. Transplants did not build their plants in States like California, Michigan, New York or any other Blue State.

Transplants went to Red States.
In California, we were fighting rolling black outs because the Hippies would not allow the building of new power plants. HP, Intel and NEC wrote a letter to the Govenor stating if they were blacked out one more time. They would shut down and move out of State.

Texas told them if they would move to Texas. Texas would build the plants for free and have an energy grid wide open for use.
Michigan, California and other Blue State voters ARE STUPID and should not have ANY industry in their State.

Hotrod.
Sacramento Socialist Republic of CA.

 
At 12/16/2008 4:40 PM, Blogger @sethstorm said...

Then get rid of the adversarial conflict between unions, management, and those who are paid to break the former.

Driving people into bankruptcy is just a bad political weapon as it is an economic one.

 
At 12/16/2008 4:41 PM, Blogger Marko said...

Walt, doesn't Michigan give tax incentives and support to the not so big anymore 3? If not, they are pretty stupid. From what I understand, Michigan has a very high tax rate. That's brilliant.

Weren't the Big 3 supported for a long time by import quotas? Didn't they use the power of the federal government through oppressive regulation to drive their smaller competitors out of business or buy them up? Aren't the workers at the big three heavily subsidized by onerous government union regulations that make them get paid more than the market would otherwise bear?

I know you aren't saying that it is unfair for states to compete for business by lowering taxes, because I am familiar with your posts. You are a smart guy. I also know you can't be saying that the federal government should try to erase any competitive advantage states have gotten by giving money to a high tax state. Say it isn't so!

 
At 12/16/2008 4:42 PM, Blogger Marko said...

If Michigan really wants to compete, they would pass Right to Work legislation!

 
At 12/16/2008 4:43 PM, Blogger @sethstorm said...

Anon 3:33
That kind of talk is largely unproductive and does not deal with the people at hand. It only says that you're more than willing to use political means to force your version of events to happen.

Besides, those small cars mean the hippie/lifestyle environmentalists win.

They're going to have some sort of domestic industry whether you like it or not. Texas would end up going blue with all the people it'd have to move.

 
At 12/16/2008 4:44 PM, Blogger @sethstorm said...


If Michigan really wants to compete, they would pass Right to Work legislation!

No, it would only encourage abuse by union-busting firms.

You would have to make sure the abuses of the law that they use are removed as well.

 
At 12/16/2008 5:00 PM, Blogger 1 said...

"No, it would only encourage abuse by union-busting firms"...

sethstorm wants to make sure that part of the problem, the unions continues to cause problems...

Well its not sethstorm's money so why should he care as long as it helps promote his socialist agenda...

We have to remember where this bailout money is coming from... It either comes from the taxpayers or the government just runs the presses overtime...

Professor Mark posted this once before and maybe its time to take another look at it: Davy Crockett's Not Yours to Give

 
At 12/16/2008 5:13 PM, Blogger QT said...

"the requested bridge loans represent roughly $4 billion in assistance to U.S. auto makers"

4 billion?

According to this article, "GM warns it needs $4 billion by the end of December and an additional $6 billion in the first two months of 2009. Chrysler said it needs $4 billion early next year."

Add it together and you get 14 Billion without even considering Ford which is the amount that was proposed in the bailout legislation that was recently defeated in the Senate.

 
At 12/16/2008 5:19 PM, Blogger @sethstorm said...

1 @ 5:00pm:
So you're saying:
If you give up an inch from the goal of killing unions, you have handed them victory. You don't care to do anything else that would work, but to make sure they are gone?

You're no more productive in the matter than the Pinkertons were in Colorado.

No thanks, but we don't want a national repeat.

 
At 12/16/2008 5:25 PM, Anonymous Rian said...

I wouldn't mind seeing the "bailout" go to finance chapter 11, but I'd really like to know who is going to finance the chapter 11 if there is no bailout.

GE, as someone mentioned above, is out of that business. Who has the ability to finance it?

Where will the money come from that will facilitate a chapter 11 restructuring as opposed to a chapter 7 liquidation?

 
At 12/16/2008 5:32 PM, Blogger 1 said...

"If you give up an inch from the goal of killing unions, you have handed them victory. You don't care to do anything else that would work, but to make sure they are gone?'...

What are you saying here? It really doesn't make sense...

The fact of the matter is that the unions are part of the problem but YOU are seemingly loath to acknowledge it...

The other problem you seem even more loath to acknowledge is that federal government interference (emissions, cafe standards, safety crapola) into the automobile industry was the start of the really big problems for both the unions and the auto industry...

So letting them go bankrupt is better than letting the incoming administration and the Congress take senior ownership in the auto industry...

Didn't you learn anything from Bush's massive, socialist mis-steps?

 
At 12/16/2008 5:44 PM, Blogger misterjosh said...

Walt,
The Big 3 were eligible for those same subsidies if they moved their production facilities, or even opened up new ones in the south. Why didn't they? Ask @sethstorm.

 
At 12/16/2008 6:05 PM, Blogger David said...

If the problem is post-bankruptcy (debtor-in-possession) financing, one approach would be for the federal government to provide that financing to take effect *after* the Chapter 11 filing, just as GE or another financing agent would in a normal Chapter 11. The government could also guarantee the warranty claim reserve so that buyers need not fear being left with an unsupported product.

 
At 12/16/2008 6:41 PM, Anonymous Jim said...

Walt,

I was in Fort Wayne when this the GM plant went in:
http://www.local2209.org/default19.asp

See July 1984 "The automaker announces it will build a $500 million pickup plant if its list of incentives can be met".

More recently, $99M for the new GM plant in Lansing:
http://www.state.mi.us/migov/gov/PressReleases/199905/GMMEGAPR.html

Who got how much, when and why may be a topic for discussion, but over the years, the Detroit 3 have certainly received the same assistance that Mr. Collins selectively points out has gone the foreign automakers.

 
At 12/16/2008 6:45 PM, Blogger Walt G. said...

QT: The $4 billion is the value of the below interest-rate loan and a market interest rate loan. It assumes that the automakers will pay back the loan including the charged interest.


You all can assume the bridge loan will not be paid back; however, you have nothing to base that on. GM has always paid their bills, and they are a law-abiding corporation. GM has provided billions of dollars to the economy over the last hundred years. GM was instrumental in jump-starting the economy after 9/11. And GM was written off as dead by “experts” in 1982 and 1991, too. You can look all this up yourself if you do not believe me.

Look, you guys can think the UAW and GM have not changed, but they have. You all really need to read the new agreement. If half of our workers hire in at the new rate, parity with the transplants will mean increasing—not decreasing—wages and benefits! The experts predict, even ones who do not particularly like us, that our current business plan is sound. So, what happened? Well, the world economic crisis did not help. People just are not buying cars, and that includes the transplants; they are hurting big-time, too. My inside source says that Nissan is keeping their core workers in the plant this week even though no cars are being built—is that a jobs bank like we are getting rid of?

I realize we have a lot of people that don’t like us. Just make sure you look at the whole picture and weigh ALL the alternatives. Doing nothing might be a huge and costly mistake.

Marko and Jim: Sure, all governments give money for companies to locate in their jurisdiction; however, the amount of money spent per worker in the South is much larger than usual.

 
At 12/16/2008 8:59 PM, Blogger @sethstorm said...


The fact of the matter is that the unions are part of the problem but YOU are seemingly loath to acknowledge it...

That does not mean that you exterminate them in a manner that is politically expedient to you.

This is the time for solutions, not people trying to channel the dark side of Reagan.


I realize we have a lot of people that don’t like us. Just make sure you look at the whole picture and weigh ALL the alternatives. Doing nothing might be a huge and costly mistake.

It's a shame that there are people who would rather run for the political expediency route. It's easy to do nothing and get applauded for it. It is another when you take the road less traveled and go towards a solution.

It's a shame that they can't bring out people who have bought from the Big Three who want to see more of their products.

 
At 12/16/2008 10:07 PM, Anonymous Anonymous said...

The frustration is hearing all of these arm-chair "economic savants" complaining that it's the Union that is the problem. THEY ARE NOT THE SOLE PROBLEM. They have made concessions, and they came to the table recently to make even more.

It is true, however, that the UAW is almost as responsible as GM/Ford/Chrysler for inflating the cost of building a car. Obviously, it's not as much as the Union Busters would have you think.

The UAW does have its demons. In fact, Toyota was planning on opening a plant here in Michigan until the UAW reared its head in protest and soured the states image. Now those same protesters who pride themselves on their accomplishments should be gnashing their teeth and wetting their pants in face of the lay-offs and looking to a state government who is half a billion dollars in the hole for unemployment benefits.

The problem is not solely the state and local governments. Michigan and Tennessee are the same in that they made a lot of concessions to bring/keep business in their states.

It is true, however, that Granholm has been VERY slow acting. She inherited a horrible government from Gov Engler, and played all her cards too cautiously and with an eye on preserving as much as she could of the day to day functions of the state government as well as catering to her liberal party.

The problem isn't just the Federal government. However, the Feds REALY need to do what they can to get out of the way and let the automakers make cars that people actually want to buy. Because...

THE MAIN PROBLEM IS THAT THE BIG 3 ARE NOT MAKING PRODUCTS THAT PEOPLE WANT TO BUY OVER FOREIGN COUNTERPARTS.

The Big 3 hang their hats on Fleet Car Sales, SUVs, and their flagship Trucks. Guess what: LET THEM. They've closed down lines like the Oldsmobile line. They shut down every plant within Lansing and moved to a plant just outside of town. That plant makes better cars that people actually buy. The Big 3 HAVE made the cuts. They HAVE closed their plants. They HAVE been wearing down the UAW in negotiations.

Honestly, you Union Busters are seeing a wounded duck and are going for the jugular, and it's completely misplaced. It's a GLOBAL economy that we are living in, and we have a chance to take away power from our rivals in Asia and The Middle East.

What can the Feds do to really help?

1. Get out of the way. Remove CAFE standards, Ethenol Requirements, bullying refineries, etc.

2. Reduce taxes and GREATLY reduce spending. Quit dicking around with Tax Rebates, et. all.

3. ????

4. PROFIT


- Babblin' and Bustled

 
At 12/17/2008 2:58 AM, Anonymous Ian Random said...

I keep hearing lots about incentives for plants to be built, I wonder if the value of the incentive is equal to the value of the government interference.

 
At 12/17/2008 8:01 AM, Blogger Michael Smith said...

Walt G: quoted:

Our taxpayers already give huge sums of financial assistance to foreign car companies right here in the U.S.

In the first place, a cut, deferral or suspension of taxes is NOT a subsidy. If an armed robber decides not to take your money, he is in no way subsidizing your existence.

What's more, even if some auto companies HAVE been granted such a cut in taxes, that certainly does not justify seizing my money to give to other companies that were not granted such cuts. Nothing on earth justifies the notion that the mistakes -- or the misfortunes -- of some should be paid for by others, others who played no part in causing the problem and who bear no responsibility for it.

It's obvious that the unions are a huge part of the problem. They've succeeded in doing what they all (generally) try to do: use force, or threats of force, to get wages and benefits above what they can earn in a completely voluntary, free exchange of their labor for those willing to hire them. Their unwillingness to agree to wage cuts -- even as they face impending bankruptcy and/or liquidation -- is stark testimony to their irrational belief that FORCE will always get them what they want.

 
At 12/17/2008 9:05 AM, Blogger Walt G. said...

I agree that labor unions need to change with the times; they have not always done that well. And I defend anyone’s right to either belong to a union or not belong to a union. Freedom of association is a constitutional right that people have fought and died for. I think what is missing in the conversation is the power balance that unions provide to the workforce—both union and ESPECIALLY non-union.

Power corrupts—always—and unchecked power absolutely corrupts. Do you non-union folks think that your employer is treating you well out of the kindness of his or her heart? Economic theorists will say employers treat employees well to make money or go out of business. Human theory says a lot of employers will mistreat their workers on their way of going out of business. The threat of a union checks that mistreatment.

Corporations want unions gone so they can lower ALL workers’ standard of living and increase their profits. By design that is how they operate—that’s always their mission and reason for existence—make money—make more money. Businesses currently pay a premium to their employees and treat them well to deter unionization. Toyota, in a leaked document, stated they plan on pulling their wages back to market wages and employing union busters as their new strategy to keep unions out. I am sure other will do so as well: especially if unions are gone. Non-union workers: Are you next? Sure you are. There’s no doubt about that. Profit maximization is ALWAYS a company’s foremost initiative.

People can think what they want about unions, and I realize they are considered “evil” by many people. The media have done a good job promoting that propaganda, and a lot of people have bought into that myth. However, don’t forget that many of the benefits you currently enjoy, whether you belong to a union or not, were initially bargained by unions. And those benefits can just as easily be taken away by the power vacuum that will exist without unions. Don’t wish unions gone too hard because you might just get what you want and all workers will suffer as a result. Unions need to change and be able to compete in the 21st century, but we do not need the worker carnage that will undeniably result from their complete absence.

 
At 12/17/2008 10:24 AM, Blogger Marko said...

My last comment about unions here is that a smaller amount of a bad idea does not change it into a good idea. This is true of socialism and also of government laws that protect unions (above and beyond the protections given to any citizen, association or corporation). To be clear, I believe any union protection laws are a bad idea. If workers want to get together to lobby a coporation for higher wages or whatever, that is fine, but the company should be free to fire those employees if it wants. I like the free market, which goes both ways. Good enough for most workers. These laws cause all kinds of distortions and I argue they ultimately hurt workers, but that is too long an argument to lay out here I guess.

I know many of you disagree. I will try to persuade you that you are wrong, but that is a long road, I know.

 
At 12/17/2008 10:38 AM, Blogger johnsal said...

This observation by Nathaniel Branden in 1963 sums up the Big 3 situation today pretty well:

"...[E]mployers must bid competitively for the services of workers, just as they must bid competitively for all other factors of production. ... [I]f, other things being equal, an employer pays wages which are above the market level, his higher costs will put him at a competitive disadvantage in the sale of his products, and again he will be compelled to change his policy or go out of business. Employers do not lower wages because they are cruel, nor raise wages because they are kind. Wages are not determined by the employer’s whim. Wages are the prices paid for human labor and, like all other prices in a free economy, are determined by the law of supply and demand."

Wage gains in the early decades of the 20th century were a result of sharply rising productivity facilitated by the assembly line, modern management techniques and technological advancement in machinery and equipment. Labor unions DO NOT improve industrial efficiency and thus DO NOT promote productivity gains. Please read the history of U.S. airlines and their relationships with labor unions. Eastern Airlines is the classic case of labor union induced bankruptcy.

The recently revealed chart showing that the sale of vehicles by Toyota and GM, in gross amount, is essentially equal. One of these companies loses approximately $10B and the other earns approximately $1.5B. Why? Because GM does not know how to make competitive vehicles or that it's plant and equipment is outmoded? These, after 30 years of direct competition, cannot still be major factors. That leaves inflated labor costs and inefficient work rules instigated by labor unions as the principal cause of the Big 3 troubles.

The Big 3 must be put out of their misery through bankruptcy. And the stranglehold that labor unions have must be released and these firms, in whatever form they take, must be allowed to reorganize to compete efficiently. This can only be accomplished if the UAW is banished from the shop floor. There is a reason why labor union representation in the private sector workforce has declined steadily. They are not in the employer's, employee's or larger economy's long term interest if the goal is increased productivity, firm-level [and macro-economic] growth and, thus, increased wages.

 
At 12/17/2008 12:02 PM, Blogger Walt G. said...

Marko,

Do you really believe that unions have more protection under U.S. law than corporations? Maybe we can get Professor Perry to weigh U.S. corporate law books and compare them to the weight of U.S. labor law books :)

 
At 12/17/2008 10:15 PM, Blogger @sethstorm said...


THE MAIN PROBLEM IS THAT THE BIG 3 ARE NOT MAKING PRODUCTS THAT PEOPLE WANT TO BUY OVER FOREIGN COUNTERPARTS.

Then why is there a certain political expediency to run them into bankruptcy? Why is this downturn affecting everybody?


People can think what they want about unions, and I realize they are considered “evil” by many people. The media have done a good job promoting that propaganda, and a lot of people have bought into that myth. However, don’t forget that many of the benefits you currently enjoy, whether you belong to a union or not, were initially bargained by unions. And those benefits can just as easily be taken away by the power vacuum that will exist without unions. Don’t wish unions gone too hard because you might just get what you want and all workers will suffer as a result. Unions need to change and be able to compete in the 21st century, but we do not need the worker carnage that will undeniably result from their complete absence.

Well said. They provide a check to all industries. One place that I know that has done this is NCR. In my knowledge of their history, they have not been unionized in the US. However, that has been by their belief in being responsible to the community in which they reside.


Toyota, in a leaked document, stated they plan on pulling their wages back to market wages and employing union busters as their new strategy to keep unions out. I am sure other will do so as well: especially if unions are gone. Non-union workers: Are you next? Sure you are. There’s no doubt about that.

Well, with no true-domestic competition from Detroit, they'll do what they wish. That's why they want to bash Card Check, but leave their own abuses open to use.

Perhaps this is part of why there seems to be a message from the South that speaks from the transplant's playbooks. Bankrupt Detroit, screw 'em all.

 

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