Saturday, November 15, 2008

Big 3 Bailout: The Ultimate in Lemon Socialism, Leading to The Encroaching Command Economy

With almost 5 million workers supported by the auto industry, Democrats are pressing for a federal rescue. But the problems are obvious.

First, the arbitrariness. Where do you stop? Once you’ve gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?

The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. Is this not precisely the kind of lobby-driven policymaking that Obama ran against?

Second is the sheer inefficiency. Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48, see chart above, data here and here), massive pension obligations, and unworkable work rules such as “job banks,” a euphemism for paying vast numbers of employees not to work.

The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It’s the ultimate in lemon socialism.

If you think we have economic troubles today, consider the effects of nationalizing an industry of this size, but now run by bureaucrats issuing production quotas to fit five-year plans to meet politically mandated fuel-efficiency standards.


At 11/15/2008 9:47 PM, Blogger PeakTrader said...

Chrysler received a government loan about 30 years ago and paid it back. That didn't seem to promote moral hazard in the transportation industry (e.g. railroads, tractor producers, aircraft manufacturers, etc.).

It's not only high labor costs hurting the Big Three, but also perceived lower quality, leading to lower prices (although, there have been substantial quality improvements, to where many U.S. models are now almost equal to the world's best in some auto classifications).

The benefits and costs of U.S. auto production to U.S. society should be weighed. The theory is to allow U.S. automakers to fail and then shift the freed-up limited resources (e.g. labor, capital, raw materials, energy, etc.) into U.S. emerging industries or profitable industries.

However, the U.S. auto industry has "barriers to entry," unlike the high-tech industry. Consequently, start-up costs for auto manufacturing are high, including branding and advertising. Moreover, it may take many years to improve quality enough to be competitive globally.

It should also be noted the financial crisis originated in export-led economies, which created severe global imbalances, which are now correcting suddenly rather than slowly. The financial crisis is a government problem, i.e. created by the poor policies of foreign governments. Adam Smith summed up those policies well:

"Wealth of Nations represents a highly critical commentary on mercantilism, the prevailing economic system of Smith's day. Mercantilism emphasized the maximizing of exports and the minimizing of imports. In Wealth of Nations, one senses Smith's passion for what is right and his concern that mercantilism benefits the wealthy and the politically powerful while it deprives the common people of the better quality and less expensive goods that would be available if protectionism ended and free trade prevailed."

At 11/16/2008 12:04 AM, Blogger save_the_rustbelt said...

So what is the source for that chart?

And Charles Krauthammer? He is still crowing about our great success in IRaq, duh.

At 11/16/2008 3:58 AM, Blogger juandos said...

"Chrysler received a government loan about 30 years ago and paid it back. That didn't seem to promote moral hazard in the transportation industry (e.g. railroads, tractor producers, aircraft manufacturers, etc.)."...

Hmmm, according to whom?

BTW it seems you are missing the point of Krauthammer's commentary: "Dems want you to subsidize an industry made unprofitable by Dem policies"

Personally I think Krauthammer should've included the R.I.N.O.s in his commentary also...

How much more profitable would the American auto industry be if it were able to shed the onerous CAFE and EPA standards?

The seemingly endless and costly to the taxpayer/consumer games goes on: Lobbyists see a tradeoff -- ANWR for CAFE standards

"And Charles Krauthammer? He is still crowing about our great success in IRaq, duh"...

Is save the rustbelt still doing his/her level best to hide from reality?

At 11/16/2008 6:37 AM, Anonymous Anonymous said...

Hello again juandos aka 1.

TARP is a slush fund. Every industry and local government is considering an application for a piece of the slushie.

To wit: GE Capital, American Express, 4 insurers, the City of San Jose.

There will be an endless parade to the 7-11 and an endless lineup for the slushie. Hurry up. Slushies are selling out real fast.

At 11/16/2008 8:36 AM, Blogger Mark J. Perry said...

Save_the_Rustbelt: Data sources have been added.

At 11/16/2008 9:23 AM, Blogger K T Cat said...

Here's my take on it. It's going to be even worse than Krauthammer suggests.

At 11/16/2008 11:17 AM, Anonymous Anonymous said...

Maybe the UAW should have the option of buying GM rather than facing bankrupcty with its likely renegotiation of union wages & benefits.

Just a thought.

At 11/16/2008 11:35 AM, Blogger save_the_rustbelt said...


Those numbers are still craopla.

For example, should UM Flint prepare a calculation for Mark Perry including an hourly average for retired professors' retirement benefits?

On another note, as I remember the transplants do not offer defined benefit or retirement health care benefits, so why are their reported numbers so high?

The great thing about cost accounting (as opposed to financial accounting) is that everybody can customize their own numbers. Sorta like economics.

And when will UM Flint start to lay off professors? Share the sacrifice!

At 11/16/2008 12:20 PM, Anonymous Anonymous said...

save_the_rustbelt said:

"On another note, as I remember the transplants do not offer defined benefit or retirement health care benefits, so why are their reported numbers so high?"

Those are total labor costs and not just compensation costs. Employers' workman's compensation and their part of Social Security are included; don't forget that employers pay half that cost.

In addition, the cost of cleaning the factory (the employees' percentage) and providing toilet paper, tampaxes, and kotexes in the hourly bathrooms are included, too. There's a reason these are typically called "all-in-employee costs" [pun intended :-)]

The employee costs even include the kitchen sink if the location has to subsidize the employees' cafeteria. Most cafeterias are subsidized by GM (we lost ours because they quit the subsidy to save cash). Even though these costs do not make it into employees’ pockets, even indirectly, employers pay them, and they still have to be expensed. Since robots and machinery do not require these expenses, they are deemed labor costs.

As far as your remark about professor pay/compensation, UM-Flint is a public institution and that information is available to you if you care to do some research.

I'm not so sure laying off professors is a good idea in a world where education is the difference between a well-paying job and just surviving. Perhaps we will be tested on that thought very soon. If you haven't got some, you might want to get some:-)

At 11/20/2008 10:10 AM, Blogger Buck Snyder said...

Just a note on ideaology that the U.S. auto makers have held on to for so long.

It is well represented by H. Ford's famous, "You can have a Model-T in any color you want, so long as it's black." For what it's worth, this is the attitude Ford (and the others) have had over the past decades. They have become complacent from the idea that they are the industry standard and can set the tone for how automobiles should be, look, and work.

In essence, the Big 3 have said to the market, "Here are your options, pick one that fits you." The first thing that can be said about this strategy is that it's not going to do much for a company's top line. Second, it's only a matter of time before more nimble competitors arrive and take the market. Once competition like that is established, it is only a matter of time before competitive advantage is diminished.

I won't describe the statistics of the auto industry over the past several decades any futher than this: on a nation by nation basis, the only country that's losing ground in the share of the U.S. auto market is the U.S.

Of course there are myriad other factors that have come into pulling these giants off of their throne, but their market orientation was what I wanted to touch on.

In response to the bailout: don't start to rebuild a log cabin if it's still on fire. Let them crumble. Maybe all the bureaucracy will split open and give way to a more ruthless and innovative strategice approach.

At 11/21/2008 9:54 AM, Blogger Chris said...

Do you know how many hourly jobs GM has laid off from 2006 to July 2008? Take a guess. How about 34,000? And now, they're talking about another 5,500 layoffs. How many hourly jobs has Toyota’s American production system laid off in the same time frame? Zero. That’s right. ZERO. So, what does Toyota know that GM doesn't?



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