Giving the Devil His Due
Over at Takimag, Chronicles contributing editor Tom Piatak has a thought-provoking piece on the proposal to extend $25 to $50 billion in government-backed loans to the Big Three automakers. Among other points completely ignored by those who reflexively shout "Let them die!" whenever the American auto industry is mentioned are, as Tom notes, that as many as three million U.S. jobs may be lost; that the "tax loss from such a catastrophe would be over $150 billion over three years"; and that over 850,000 retirees receive pensions and health benefits from the Big Three--and taxpayers are on the hook for at least some of that cost through the Pension Benefit Guaranty Corporation.
In other words, the extension of $25 to $50 billion in loans may be the cheapest way out of this mess. Predictably, though, the same people who declared that we had to bail out Wall Street have drawn the line at Midwestern Main Streets.
Tom's thoughtful, reasoned, and fact-filled post drew a response from Richard Spencer, modestly titled "A Modest Proposal." Alas, there's nothing Swiftian about Richard's post. His modest proposal comes down to this: "Give every Big Three worker a direct cash handout of $100,000, and then cease all bailouts." He offers this alternative to loans to the Big Three because, as he writes, "arguments for saving the Big Three are arguments for saving jobs and helping out the good people who work for these massively unionized and horribly mismanaged companies." So why not just give the money to the workers and be done with it? (And save as much as $25 billion to boot!)
Since Richard doesn't really support this idea, it's perhaps a bit unfair to point out what his proposal reveals about his knowledge of the economic impact of the American automobile industry and of manufacturing generally, but I'll do it anyway. Like a good individualist, Richard instinctively assumes that all jobs and companies and industries are interchangeable. Individual wages and profits tell the entire economic story.
But they don't. This passage in Tom's post should have alerted Richard to that point: "The November 3 issue of Crain’s Cleveland Business reports that in greater Cleveland, where I live, 26,800 people work in the transportation equipment sector, and 100,000 jobs depend on that sector, directly or indirectly." Here in Rockford, as recently as three years ago, 23 percent of jobs were still in manufacturing, but another 23 percent of all jobs in the area depended on the manufacturing jobs.
That's why, even though Richard finds in Wikipedia that "there are around 240,000 people working in the American auto industry," Tom notes that "The Center for Automotive Research has estimated that a collapse of GM, Ford, and Chrysler would cost nearly three million jobs." Different types of occupations have different effects on the economy. Industrial manufacturing has a relatively high multiplier effect; internet punditry (to pick an example out of the air) does not.
None of this, of course, necessarily means that the proposed loans are a good idea. I, for one, would like to see a serious debate in Congress before such loans are approved--far more serious than the one held before the Wall Street bailout. (Financial services, by the way, also have a rather low multiplier effect on the economy.) And I'm heartened by the fact that some commenters at Takimag--especially Evan McLaren, "Eagle," John Médaille, Derek Leaberry, Sean Scallon, and Red Phillips (among others)--clearly understand the issues at hand. (Others, unfortunately, cannot avoid bleating out "one size fits all" libertarian talking points.)
Some of the commenters, including McLaren and Leaberry, note the irony that paleoconservatives now find themselves in the position of trying to save America from deindustrialization, even though industrialization had many very anticonservative effects. This was a subject of one of my Rockford Files columns over five years ago. In light of this debate, that column seems relevant again, and so I present it below.
* * *
Giving the Devil His Due
Early in the morning factory whistle blows,
Man rises from bed and puts on his clothes,
Man takes his lunch, walks out in the morning light,
It’s the working, the working, just the working life . . .
One of the oddest ironies of our postindustrial age is that conservatives—true conservatives, not the various utopian progressivists who call themselves by that name—find themselves defending the remnants of the industrial system, the onset of which their intellectual and spiritual forebears viewed with dread. It is not that the crazy mystic William Blake was wrong when he wrote of the destruction of the English countryside by “these dark satanic mills”; still less Robert Burns, in his “Impromptu on Carron Iron Works”:
We cam na here to view your warks,
In hopes to be mair wise,
But only, lest we gang to hell,
It may be nae surprise . . .
Rather, conservatives, knowing that Jacobin optimism is more dangerous politically (and, possibly, even more destructive spiritually) than despair (you can, after all, repent of despair), see all too clearly that, whatever the damage wrought by industrialism, the emerging postindustrial “service” or “technology” economy bodes far worse for society.
Through the mansions of fear, through the mansions of pain,
I see my daddy walking through those factory gates in the rain,
Factory takes his hearing, factory gives him life,
The working, the working, just the working life . . .
“Factory gives him life”: Can the same be said of the job at Wal-Mart or McDonald’s or even the relatively high-paying technology positions at WorldCom or Enron? Libertarians and neoconservatives may long for the day when subsistence farming and manual labor disappear completely from the American scene, but what kind of a life can you build for your family if your continued employment—let alone the continued existence of your employer—is always in doubt?
These questions have an added urgency here in Rockford, now that Ingersoll Milling Machine has closed its doors after 112 years and filed for bankruptcy, and one of the largest private employers, Hamilton Sundstrand, is sending signals (perhaps unintentionally) that the days of its factory in southeast Rockford are numbered. (After months of negotiations, Sundstrand’s management gave the union less than a day to examine a six-inch-thick contract proposal; when the union asked for more time to examine the details, Sundstrand locked the employees out.)
Shortly after Ingersoll gave its 300 employees two hours to clear out and locked its doors forever, the local Gannett paper’s token Republican columnist opined that “Some doomsayers will predict that Ingersoll’s failure signals the end of manufacturing in the Rock River Valley.” I’ll take the bait: Yes, manufacturing is leaving Rockford—20 percent of local manufacturing jobs have been lost over the past three years. And, unlike in my hometown in Michigan—which, in the recession of the early 1980’s, successfully exploited its access to Lake Michigan to move to a tourist economy—nothing is replacing it: Unemployment in Rockford is back in double digits—its highest rate since that earlier recession. Rockford is more like Flint, post-GM, struggling to avoid bankruptcy. The major difference is that the political, media, and civic leaders in Flint acknowledge the problem.
When Bruce Springsteen wrote the final verse of “Factory,” he was describing the pain and anger of men who would return to their jobs the next morning, when the factory whistle blew once again:
End of the day, factory whistle cries,
Men walk through these gates with death in their eyes,
And you just better believe boy,
somebody’s gonna get hurt tonight
It’s the working, the working, just the working life.
That pain and anger, however, is nothing compared to the social disruption caused by the loss of those jobs. Over the past year, I’ve watched marriages end—good marriages, loving marriages, with young children—as the financial strain of unemployment, compounded by the loss of healthcare just when it is needed most, pulls families apart. Homes are lost, and the financial effects of factory closings cascade through the local economy as small businesses—from sandwich shops to metal-working and packaging plants—find themselves without customers. What does a father do when he can’t find a new job within six months, or nine months, or a year? He can “retrain” in one of the “hot new fields,” the democratic capitalist replies—but that assumes that companies in those fields are opening up in Rockford. (They aren’t.) Then he can uproot his family and move where the action is, the libertarian smugly answers. (The market has spoken.) But at what cost to his family and to Rockford? And where? And when his family arrives in the Promised Land, what guarantee will the father have that his new job won’t head south, or to China, or to India?
Yes, life involves certain risks, and most of us are here in the United States because our ancestors suffered similar economic “dislocations,” but there is a difference in kind, not simply in degree, between the farmer in 1832 who left one subsistence existence in Alsace for another in the fertile fields of Southern Indiana and the engineer in Rockford in 2003 who may eventually—and, in all likelihood, far from his hometown—find work that will pay him wages that the subsistence farmer would never see. After all, that engineer will always know the uncertainty that comes from earning your livelihood at the mercy of another man.
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Why have some of us singled out the unions? Try reading the Manufacturing 2.0 blog entry linked from #22. Quote:
When times were good, the automakers did not take on the UAW, which the companies say drove up their labor costs to $30 per hour more than Japanese companies paid their workers. The figure includes pension and health care costs for hundreds of thousands of retirees.
When GM pushed for changes in 1998, the union went on strike at two key Flint, Mich., parts plants, shutting down the company and costing it about $2 billion in profits.
“They were making money and the union had a monopoly,” Cole said. “They’d shut them down. That’s why they had some very lengthy strikes that were very painful.”
End quote.
So, the union would only agree to changes when the manure hit the fan. Now we have a new agreement that will be phased in from now until 2010 and later. But the auto companies needed a better cost structure yesterday, not in 2010.
This is typical union behavior. Only when jobs are leaving or companies are being destroyed and they might lose ALL their jobs do they get reasonable. For that matter, jobs related to auto manufacturing have been leaving the country for decades. What was the UAW response to that?
With a labor union, the situation can always be summarized as follows: Those who still have jobs are doing very well with their above market wages and benefits, but those who don't have their jobs any more are invisible and do not control the union.
While it is true that giving the Big 3 money may not forestall their imminent collapse, neither has pumping hundreds of billions to Wall Street necessarily meant that the government has successfully forestalled the demise of the banking sector.
And, the bottom line remains: Bush justifying the bailout off his friends on Wall Street while arguing that American auto manufacturers should face the wolves of the free market, when his friends didn't, won't play well in Peioria. If the government doesn't intervene and the industry collapses, I can hear the democrats now: "Bush and the GOP had plenty of money to save their fatcat friends, but to the Joe the Plumbers of the country all they could say was 'Let them eat cake!' "
If the GOP wants to help solidify Obama's hold on the country, let the automakers collapse, and if GOP senators and congressmen want to blame someone for their hands being forced, then they need look no further than The Oval Office.
TomL@ 43 wrote: "The American people will never adopt the Japanese protectionist model where it costs $4 a pound for carrots in Japan instead of 40 cents a pound in the rest of the world because of the Japanese insistence to guarantee Japanese farms will not fail."
Prove.
Scott @8
OK, more accurately, I work for an independent parts supplier who has several GM contracts. If we were to lose our GM work, there would be a good chance I would get laid off.
Now, to your second point. I am remembering the last round of UAW-GM contract negotiations back in 05 (? I think). The contract was full of unneeded goodies (IIRC free internet service, among others). Even more appalling, UAW tried to get 'free abortions' in the contract. Fortunately, that part failed. But when you look at what they did get, it is not hard to see why the unions are big contributors to why these companies are failing.
To those of you who are doing the libertarian-bashing (including one who basically calls us neocons), it is easy to find grounds to oppose this without any sort of ideology. If the Big Three know they can again hoodwink the feds into a bailout when they start to fail, why bother trying too hard? But why stop there - if you're going to support a bailout next time they fail, why not just nationalize all three of them?
Daniel Maxwell (@54):
That's a good point, and it underscores the need to take this slowly, have a serious debate, and, if loan guarantees are to be approved, to make sure that they come with some pretty big strings attached--strings that won't allow the Big Three to slack off.
If you think that the way to avoid nationalization is to dismiss the idea of loan guarantees, I think you're likely mistaken. As a number of commenters have pointed out above, the Big Three (and heavy manufacturing in general) are an important component in national security. Do you think that, if GM and Ford both look likely to go under, the Defense Department will sit idly by?
Of course not. They'll be lobbying for nationalization of one or both companies for national-security reasons.
That's something else to consider in this debate. Loan guarantees may be the lesser of evils, preventing outright national socialist ownership of industry.
Why shouldn't the auto guys be treated like us small manufacturers when it comes time to borrow money from a bank or SBA?
When I started my company 7 years ago, the bank required Personal Guarantees, which means my house was the collateral for the loan. If I were to borrow again in today's environment, I would again be required to personally guarantee the loan even with a good track record.
Now what strings would the Government place on the executives that affects their personal bank accounts? Why should they get big salaries and bonuses and stock options and all the rest? What happens if they don't make it happen?
Give me a break!!
Mr. Maxwell,
I am happy to hear practical arguments from any, libertarians included. And I agree that a skeptical voice is necessary to a good debate.
You're correct that there is a danger of getting intransigence and unimaginative thinking from an industry that thinks its protected. However, critics of the UAW and Big Three need to get up to date. Back in the 90s Detroit was printing money selling SUVs and they and their workers probably acted like grasshoppers . . . just like everyone else in that bubble economy. But, it ain't the 90s anymore. The industry and economy have changed drastically. I don't think there's misconceptions about the severity of circumstances from anyone in Detroit.
Now that doesn't mean they are nonetheless possessed of the ideas and leadership ability to transform this companies into profitable enterprises. I think that's part of the practical debate Mr. Richert referred to as being necessary. I agree.
Alas, that's a problem with the whole idea of treating a corporation as a person, a legal entity separate from those who run it. Arguably, this legal fiction is one of the most anticonservative features of the American economic system.
Maybe they could have a negative performance clause; if you miss targets, no bonus, less pay.
Or make the incentives a longer term program, like 5 years. If you are successful the first year, you "bank" the payment for the 6th year, if you miss on year 2, then subtract from the first year bank.
You could also withhold base pay on the same principal.
Is it practical? Maybe not, since the boards are in it together and the search firms are as well.
But, in the case of Government money, these strings should be art of the bailout.
Otherwise, get some Turnaround Specialists in there, give them 90 days to come up with a Restructuring Plan and then execute it.
Make it a"lif or death" scenario....
I think we need to get Bob Trojan down in D.C., lobbying Congress for a plan that might actually work.
Here are the statements by Sen. Shelby (who lives off the teat of the finance, real estate and investment industries.)
"“The financial straits that the Big Three find themselves in is not the product of our current economic downturn, but instead is the legacy of the uncompetitive structure of its manufacturing and labor force,” Mr. Shelby said in a statement. “The financial situation facing the Big Three is not a national problem, but their problem.”
And AIG and Co. differ how?
And Representative John A. Boehner of Ohio, the Republican leader, also came out strongly against the idea. “Spending billions of additional federal tax dollars with no promises to reform the root causes crippling automakers’ competitiveness around the world is neither fair to taxpayers nor sound fiscal policy,” Mr. Boehner said in a statement.
Who said there were "no promises." Why not discuss that with the auto companies? Maybe afraid you'll come to agreement when you're posturing for backbenchers who've read too much Rand and Friedman? BTW, what promises of "reform" did Boehner and Co. demand from Wall Street?
Yech. Hand me the elephant gun.
Well, unfortunately, we have the wrong bunch there to understand all this. They're politicians, not doers. Plus the new guy is going to save Michigan. That would be a life killer, but thanks for the vote of confidence.
"To those of you who are doing the libertarian-bashing (including one who basically calls us neocons), it is easy to find grounds to oppose this without any sort of ideology"
Mr. Maxwell,
I admit my comment was likely pointless to this discussion, though I did compliment the insightfulness of many libertarians. I'm not crazy about bailouts but I'm very nervous as our nation continues headlong into a purely technological, information, and service based economy. I'm not sure there is a good resolution for this particular dilemma. Any solution is likely to be a bad one. My complaint was that generally libertarians don't consider the issues of social stability and cultural continuity when they approach a problem. Some of the thoughtful comments in this discussion from libertarian perspectives have disproved much of my created stereotype. And if that doesn't satisfy you, some of my best friends are libertarians.
Mr. Trojan's remarks, with which I agree, has prompted me to apply his principles to another sphere of endeavor, the abuse of which confirms his points and shows what rubes all of us are. I am speaking of the professional sports industry. Here we have young athletes in football, baseball, hockey, and basketball being paid millions of dollars a year to perform based on hype of past performance and promises of future performance. With the money these young lads are making, one would expect that there would be hundreds of Major League Baseball golden glovers, or batters hitting at least .900 a year, or pitchers throwing E.R.A. averages of .001/annum; or National Football League quarterbacks never throwing an interception, wide receivers never missing a pass, corner backs always breaking up a pass play, line backers never missing a tackle, running backs always scoring a touchdown each time they got the ball; and so on. But, that isn't the case. The same goes for the automotive industry. They've been around many years and all they have given us is a car with poor gas mileage; mostly made of plastic and ready to be traded-in within three years; dripping with high maintenance costs; a plethora of new models to distract us from what a car is: a means of transportation and not a sex symbol with which we are supposed to have a love affair; and prices that are extortionate. One would think that by this time with all the innovative technological developments we would have a vehicle that could carry us to work on a 20 gallon gas tank, 80 miles a day (round trip), for example, and we would only have to fill up about once a month. The disk brake was in use in the 1920s, that's nearly a hundred years ago. I've heard that carburetion was developed by independents that could give fifty to sixty miles per gallon back in the forties and fifties. I realize that many jobs depend upon the automotive industry, but frankly, I am tired of being taken for a rube by these white collared Fagins, and unless they really start to perform, then the hell with them and their business. I mean think about it folks, we put a man on the moon, we can't have an efficient, inexpensive means of personal transporation in this day and age? Oh, by the way, if the Ford ownership of the Detroit Lions, winless in nine games this year, is an indication of managerial skills, then I say to hell with a bailout for these incompetents. I can always walk.
One interesting effect of the Wall Street Bailout is that many conservatives now have seemingly accepted that from at least a pragmatic point of view a govt. bailout is a legitimate option. The question now seems to be which industry is more deserving than another. And it seems a cinch to be able to rate almost any industry as more deserving than wealthy Wall Street.
And so government taking many billions from one group and giving to another group continues to grow with the approval of many, even many within our conservative ranks. Their thinking seems to be that our society may unravel unless we empower government even more. And that is exactly the way my liberal democrat friends have always looked at it. The nanny state.
I've been out of work many times and so have many people I know and we have survived even though we didn't know where our next money was going to come from. We need to be more self-reliant in our attititudes and do what it takes: move, sell the house, consider a new line of work, work for less money, etc. This is better than looking at our communities as some kind of potential disaster zone unless the helping hand of govt. bails out a major employer and its dependent industries. This is not hard hearted libertarian logic but determined American spirit of being a survivor and looking after ourselves regardless what happens to companies, govt, etc.
There is a growing group of new entrepreneurs in America and that is what we need more of: getting out of the corporate world and starting our own businesses, even on a shoestring budget.
T66TomLwrote: "This is not hard hearted libertarian logic but determined American spirit of being a survivor and looking after ourselves regardless what happens to companies, govt, etc."
Unfortunately this is precisely what Wall Street did when they decided they were going to get their pal Hank Paulson to bail them out. They were being self-reliant and did what they needed to do to save themselves and their companies.
Tom L (@66):
I haven't seen anyone here suggest that government-backed loans to the Big Three are ideal, only that they may be best of a bunch of bad options. Everyone who is willing to entertain the idea on this site has expressed his support for making sure that these loans are indeed repaid, and that significant strings are attached that can bring about some necessary changes.
And I agree with you that individual workers need to be more self-reliant. I know autoworkers who have seen the writing on the wall and have figured a way out of the industry, even though it has meant sacrifices for their families.
But if every autoworker were to leave all at once, that would amount to a massive economic and social disruption. And to force them all to leave without having any place to go lined up--which is what would happen if the industry were destroyed--would increase the disruption exponentially.
In other words, the question of personal responsibility is different from the question of what to do about the industry as a whole.
#65 I tip my hat to you sir a fine post. Those damn Yankees who I have rooted for all these years for what they are paid should win every game. I agree they should go bankrupt every new car I purchased over the last 15 years have all began to fall apart as soon as the warranty runs out
The auto industry will get bailed out one way or another. However the imported cars will continue to undersell the domestic cars so the industry will continue existing on the verge of bankrupcy. The solution in the end will be akin to what happens in agriculture where farmers get paid not to produce. Following the auto industry, many other industries will end up subsidized in a similar fashion as they will be deemed too bog to fail. God knows where the money will come form. However I can't wait to see what will happen when the government gets called to start bailing out all these universities that produce degrees and mentality which render their recepients unemployable. what will happen for the professariat that is ultimately responsible for the current economic and cultural crisis in the first place? Will they get subsudized not to produce as well?
sorry for the typos
Those who keep saying, "Why [insert financial firm/insuance giant] and not GM?" never seem to address the arguments for why one could reasonably favor a bailout for, say, AIG and not GM. It is reasonable to conclude, yet hardly irrefutable, that if AIG were allowed to go bankrupt, we would plunge into a depression. If AIG were to default on its various obligations tied to financial derivatives, the whole financial system would be taken down taking along with it GM, Chrysler, Ford and GE, Caterpillar, and any other major manufacturer you can think of. The point is, however damaging and horrible it would be, the collapse of the auto industry would be self-contained, whereas, the collapse of the financial industry would destroy everything. I don't necessarily agree with it, but that's the argument, and it's never addressed here.
Other arguments for no bailout I posted on Taki's site:
1. Bankruptcy does not mean the end of the American auto industry. It means the end of the industry as it is currently structured. The assets are still there; the labor is still there; the expertise is still there. What would no longer be there are unions and the unsustainable liabilities that they’ve extracted from the Big 3. I'm talking about bankruptcy in which you liquidate, not reorganize, so that takes the "no one will buy without a warranty they can trust to be there" argument.
2. The loans given will not be repaid and they’ll be back for more in 6 months to a year. The economy is still deteriorating. People are not going to buy cars at the rate they were for years to come. As early as 1 to 2 years ago, GM had $20 billion in cash reserves and we’re told they will run out by the end of the year. $25 billion to GM alone would not save it. I'm quite sure the Big 3 were on the road to recovery when the debt-infused consumer driven economy that Chronicles rightly deplored was humming along but there's been a paradigm shift and it ain't coming back.
Sorry, R. Oliver your argument is unconvincing. There is no reason to believe AIG was the Atlas of the financial world. There is no reason to believe that AIG could not have gone bankrupt and had its assets sold to other companies and its bones picked clean just like WaMu or Lehmans, without a "depression" (LoL)
The Fed and Paulson simply decided the pain and dislocation wasn't worth it and decided to bail AIG out. Now, they are propping AIG up as a going concern for political reasons.
Using the same logic, there is no reason to let GM go bankrupt and cause massive dislocation and panic when a bailout can solve the problem. Bankruptcy may in fact cost the taxpayers more money then a bailout - unlike AIG.
I am surprised no one has mentioned the Chrysler bailout more than 25 years ago. There were a lot of predictions of how badly it would turn out, along with ideological discussion, but the company rebounded and the government made money on the deal as a result.
The credit markets are essentially frozen. They have been propped up by a massive injection of government capital and easy money. Without this bailout, all of these firms would have failed by now in addition to Lehman Brothers: Morgan Stanley, Goldman Sachs, AIG, Freddie Mac, Fannie Mae, Citigroup. and I doubt you'd have found buyers for Washington Mutual, Wachovia, and Merrill Lynch. (Who am I forgetting?) Without these firms, there would be no credit. Every industry, including the auto industry, is dependent at the very least on short-term lending. Without it, everything goes to hell, including the auto industry.
I picked AIG as an example. Pick any major financial firm that has swapped billions of dollars in derivatives with all the other financial firms and one's downfall leads to all the rest. We saw that with Lehman and the rest only survived because the government bailed them out.
With that said, I was against the financial bailout--believing a relatively short horrible depression is better than a long slow decline ending with the destruction of the dollar.
Mr. Coleman,
You are exactly right about Chrysler. I mentioned the success of the loan to Chrysler in my original article.
Mr. Oliver,
The liquidation of the Big Three would almost certainly result in an additional three million unemployed Americans the Center for Automotive Research projects, along with near total economic devastation in a number of communities. To avoid that calamity, it makes sense to me to offer a loan to the Big Three, particularly if the loan can be used to further some necessary restructuring.
Mr. Piatak,
I suppose where you and I differ, then, is on whether the Big Three would in fact pay the loan back and not ask for more. I'm deeply skeptical because I see a worsening in consumer demand for cars and GM has burned through $20B in cash reserves in just 1 to 2 years.
Nor do I doubt the devastation of a bankrupt Big 3 would be horrible. I just was trying to point out that reasonable people who don't necessarily loathe Middle America can justifiably draw the line at the financial industry because arguably the effects of the collapse of the financial industry would be far greater than the auto industry or any other industry.
There is no doubt the potential fall out from a bankrupted auto industry should be debated and thanks to Scott's Richert's article and the response to it for providing a basis for this interesting debate.
Writing from Canada, I want to mention that the ripple of a Big Three bankruptcy would flow heavily across the border. The Auto Pack, and of late, NAFTA has meant that southern Ontario has depended heavily on the American auto industry's prescense in Canada as an economic underpinning. The Ontario economy is in a down slide (although Toyota is expanding) as it suffers the same fate as the US's midwestern industrial belt. With good size oil and gas reserves off Newfoundland and rich reserves in Western Canada, Canada is precariously on the verge of reducing its economic status to an "oil producer". The demise of the auto industry would no doubt push this further.
Speaking of NAFTA, my guess is that if there is an attempt at restructuring the "North American Auto Industry" the globalists (and Washingtion is now globalist) will try to bring Mexico into the formula. So one agrument against the bail out may be, "careful for what you wish for". If you turn to Washington, remember you are not dealing with the same mentality or money interests that existed back when Chrysler was bailed out. Isn't that what Pat Buchanan has been trying to tell us?
To pretend there is a free market economy in the US is as much of a manufactured reality as any claims being made on the left.
If a bailout is a "tool" at the hands of the Feds, it is no different than many other monetary or fiscal tools the central planners have used on a daily basis since the New Deal or even before. Except that this time the stakes are higher, the globalists are at play and the politics are more corrupted.
There really is no argument for the question where does it all end when it comes to the bailouts. The airline industry could be next, and after that the states of California and Mass. (since they can't print paper like the Feds) are lining up (remember NYC's pleas to Reagan). The fact that the chickens of the debt based economy are coming home to roost and are many in number is a reality but is not really an argument against doing what you can to try to shore up one or some of the cards in the American Empire's house of cards. You do what you can do with the caveat in place that you never trust the Feds to do it right.
Finally, given the degenerate nature of the American elite and the culture it has produced, a realistic assessment of the long term chances for a recovery are slim. In all American institutions (including to some extent the chruch), the bats have gotten into the belfry and these bats are not from heaven. No nation's economy can survive and service its citizens when its institutions have been taken over by cultural Marxists.
Auto industry related or not, if I was an American in the midWest or anywhere for that matter, I would be hoping for a bailout to buy some time and for the long term I'd start with a reading of Belloc or Father Mcnabb and begin to look for five acres and a good mule. A few good Canadian gold dollars in your pocket may also be a good idea.
G.L.A. (@79):
Thanks, Gary, for a very thoughtful comment. Much of my own ambivalence about the loan guarantees is that I think that things are very different now from 1979-80. While the Big Three are making better products, are more efficient, etc., and while the UAW has made concessions that no one would have dreamed of a quarter-century ago, the climate in Washington is much worse.
That's why your warning to be careful what you wish for is perhaps the most persuasive pragmatic argument against federal loan guarantees.
Even those who don't look for five acres and a mule should start reducing their own consumption, producing something (even if only a few vegetables in a backyard garden), and start thinking seriously about whether the neighborhood and city in which they live is viable in a postindustrial society.
The Financial Times yesterday had an analyst present his opinion that the massive bail-out of Wall Street is having unintentional consequences (from memory) because of the mis-use of the funds by the bailee:
1) increase dividend pay-out
2) continue bonuses for the kleptomaniacs at the helm
3) hold as reserve to cover "gambling" exposures
4) deposit these funds with the FED which will now pay interest on these deposits!
5) nary a dime for Main Street where it is needed and for which these funds were intended.
In an earlier post I tried to make a case that these funds would have had a better and quicker effect on the economy if they had been used to fund a minimum income plan administered through the income tax administration.
In my opinion this plan would have been no worse, and in timing and effect much better, than the present plan.
H.F. Wolff
Dr. Charles Krauthammer, David Brooks and dozens of the children over at Free Republic are against the auto bailout so it must be a good thing. Perhaps Governors Grandholm and Strickland can persuade President Obama to muscle an auto relief measure through next year. Trite as the saying is, political circumstances can make strange bedfellows.
Even if the initial bailout of AIG at $85 billion in Sept was needed, the additional $60 billion is not. Wall Street has friends in the Bush Administration which accounts for the way the bail out has proceeded, how who got what. Many responsible economists and politicians were against the bailout in the form presented.
As Derek states, its funny how the usual East Coast neo-con suspects are now railing against the possible Auto bailout. Of course, the same gang of course approved the $700 billion bailout of Wall Street.
Those who believe bankruptcy (or outright failure of any of the Big Three) forget the substantial pension liabilities that would then be placed on the federal gov't through the Pension Benefit Guaranty Association. Those liabilities would be astronomical as they would apply to all current retirees and all future retirees (both blue and white collar.)
Self-sufficiency is, of course, a good instruction. But it's a bit late to encourage that after more than a century of corporate capitalism (which not only discourages it, but prevents it.)
The Unions are also a convenient whipping post, but inaccurate. Wages in Japan are akin to those in Detroit. The comparison to Japanese plants in the US is that those workers are nonunion and their localities lured in the Japanese through a combination of tax giveaways and lower wages and benefits.
Finally, the notion "innovation" is the issue is similarly inaccurate. Japanese cars are not hallmarks of design innovation. The Japanese "innovation" was quality, not design or performance. And the consumer (far from being deprived of innovation by Detroit) resisted Detroit innovation--Saturn, anyone?
And if a criticism of my viewpoint is that it is based on a sober appraisal of actual circumstances and likely outcomes--rather than what one would desire--I plead guilty.
As I’ve said, this is tough debate because sides have good points to make. Aside from personal attachment to the auto industry, the bottom line is you’re dealing with a business that ties into a lot of the U.S.’ manufacturing, technological and financial infrastructure. This is real wealth instead of the phony paper wealth created by the financial industry we’re currently bailing out because cars and the components that go into them are real things. To lose that capacity would be staggering loss to our economy far more than the loss of AIG, who was rescued because it owed $25 billion to Goldmann Sachs. Lets be clear about this.
At the same time, we must acknowledge that the Big Three find themselves in this position because of badly misreading the market and being caught flat footed as the price of oil rose. They also ditched the electric car and tried to turn puck-up trucks into gas guzzling passenger vehicles. No profits coming in meant no money to pay the generous union contracts. To give them a bailout without any kind of restructuring of their senior management and engineering staffs and restructuring UAW contracts is like pouring money down a rat hole. They have to change and re-tool and accept new standards even if they are kept out of bankruptcy or else they’ll be like AIG, continually asking for bailout money after blowing through much of it and becoming a welfare case.
Do some paleos have attachment to the auto industry? So what if we do? Paleoism at its essence is about place and many of us grew up in stable, middle class communities because of the auto industry or know people who worked for it. Is that a crime? I’m sorry we didn’t grow up in Galt’s Gulch. And we’ve seen what happens to those communities when such an industry goes away either overseas or dies completely: devastation both economically and culturally. We don’t wish to see this continue to happen in the places we live in. And before anyone cries that’s it not the Government’s job to bail out the Rust Belt, I would remind you it’s also wasn’t the government job to build all the Levittowns, all dams in the TVA, and all the irrigation projects out West so people could live in the desert and all the military bases across the South and Southwest. My tax money and the tax money of my parents and my family was sucked right out our pockets in Wisconsin so people could live in Florida, Arizona and Nevada when they retire. Don’t talk to me about wealth redistribution.
However, I must also say that not everything that was good for GM was good for the U.S. It was GM that lobbied cities to get rid of their trollies in favor of smog-belching GM-made buses. It was GM that lobbied hard for the interstate highway system that hurt a lot of small towns and tore urban areas apart which created that taxpayer parasite-land known as Suburbia. Unfortunately GM put itself in a position to benefit from a government that clearly went out of its Constitutional bounds by being too cozy with the powers that be. Obviously GM, like any American business, was looking to make money for itself and its shareholders to stay in business. And to be fair, in the immediate postwar period, the terms “car culture” and “urban sprawl” hadn’t been invented yet. Planners back them were looking to alleviate population density, taking people out of crowded urban slums and putting them in areas of space on underdeveloped and unused land (and if you really want to see the joys of population density go visit Mexico City, Karachi, the Gaza Strip and Calcutta). They viewed the automobile as the best way to do this and tried to accommodate it. They could not forsee paying $4 per gallon for gas nor the fact the U.S. would be a net oil importer rather than exporter.
As with everything in the U.S., we always overdo it. We can never find the right balance because of shortsighted greed and lack of responsibility. And looking for that balance between saving our manufacturing base, but also not rewarding bad behavior and stupid decision making must be the balance we have to find as well, otherwise we all lose in the end, both our communities and the free market.
There would not be a complete liquidation of the big three. There would simply be a declaration of bankruptcy, a restructuring, and a down-sizing. Some jobs would be lost, but not even close to all. Cars would continue to be produced, and management would proceed more prudently knowing that a bailout would not be there to protect them against bad decisions.
Lucius (@86):
You might want to read the remarks by Tom Piatak and Bill Wilder above on why bankruptcy is not an option.
Scott's correct, a great deal of discussion and debate is required. However, if the management of the Big Three isn't changed and UAW wages and benefits brought in line with reality the bail out is destined to fail.
Man, this is a tricky issue.
I think Mr. Scallon finished up nicely in the final paragraph, after sort of losing his footing in the previous sentence. No one anticipated $4/gallon gasoline, but that is not an issue either. It is a weak excuse (if it is being offered), and it weakens the argument for a government loan.
Some parts of this debate are not confusing. It is clear to me why so many elites were for the financial bailout but are against the Detroit one. For 30 years now, we have been brainwashed into believing that the financial "industry" is actually leading our economy, and that manufacturing stuff is not a necessary component. Peter Schiff has outlined some of these things very clearly. In the late 70's, the U.S. was the world's largest creditor nation. Now we find ourselves as the world's largest debtor nation.
How the swing? Because we have been following the model that only profits matter. So called capitalists have been trading expensive labor for cheap labor, dropping prices only enough to destroy the stubbornly righteous and pocketing the rest, providing a financially virtuous cycle in their eyes.
So it is no mystery at least to me why now that broken, repeating record is still playing the same tune.
I would like to know where all the capitalists are though. I am not a libertarian, but I do believe in the power of free markets. Am I losing my mind? Are markets at these levels so sticky? Where is Warren Buffet and his billions? Why not buy one of the three, turn it around, tenfold his money and become a national hero in the process? Because he's lazy, and he hasn't risked a dime of his money in his life. But there must be others...
"American" auto makers have been making crappy cars for a long time, way before gas got expensive, and have been relying upon market inertia to stay around. Some people buy Buicks their whole lives no matter what. I worked for Enterprise Rent-A-Car over 10 years ago, and at that time the most American-MADE car, barring the Cadillac, was the Honda Accord. When I asked my friends, mostly from small towns, why they insisted on buying crappy American cars just to support American CEOs, they had no good reason -- they were ill-informed suckers and denied reality for 3 decades, as did the American corporate and union CEOs. If GM, Chrysler, and Ford claim to be about ready to turn the corner, I do not believe them for a second, regardless of the 3 million honest people out there who are about ready to get screwed. I apologize for not opening the JD Power link, but I can only assume it's like it's been recently, winning impotent categories like "Best in Initial Quality" or best in "Customer Satisfaction."
I apologize if my frustration shows through.
And to the great and decent people who run this place (as well as commenters), please steer clear of any philosophical arguments behind this (you have mostly). This is all about practical arguments because the philosophy fails here and does nothing but create hypocrites.
How I wish the pen were mightier than the clank of steel.
Mr. Scallon,
I have no idea if AIG in fact owed Goldman $25B but as you say, let's be clear about this. If it did owe Goldman $25B and defaulted on that obligation, it would've taken Goldman with it, who in turn would've taken JPMorgan, Citigroup, Morgan Stanley, etc. and maybe even Bank of America, the only one with a decent balance sheet. The hedge funds and mutual funds would have imploded next. Where would that have left us? Who then would've purchased GM debt? Ford debt or Chrysler debt? The only companies left would've been those with strong cash flows and sources of liquidity (e.g., mining companies and oil companies).
My point is that it's not a persuasive argument to simply say or imply that Wall Street is in bed with Washington. If you're concern is the survival of the auto industry and you have only contempt for the financial bailout, then you must successfully argue how the the auto industry would've survived without bailing out the financial industry.
(By the way, I don't like that our economy is as dependent on the financial industry as it is, but it's simply a fact. By letting everything go under, we would've had the opportunity to go in a different direction, but, alas, we've just kicked the can down the road.)
Much of what problems we face in both the financial and auto manufacturing areas are the result of too much consolidation. In the financial realm, once the federal reserve system was foisted off onto a hapless public, the result was concentration of financial power in New York City. During the last Depression, this concentration of financial power tried very hard to destroy or bring to heel the rest of the country's banks and finance operations. They almost succeeded. Now, with the help of Paulson's seemingly endless bailouts of his old cronies, they are trying to finish the job. The same thing happened in the auto industry. At one point, there were hundreds of auto manufacturers spread all over the country. Many of these were quite innovative, but had limited resources. Once General Motors started annual models, only a few could match the necessary expenditures, and all but a small number fell by the wayside. At that point, the control of auto manufacturing was centered in Detroit. During this same period, political power was concentrated in Washington D.C. although it can be argued that this, too flowed from NYC. What is common in all of these scenarios is the consolidation of power, and a consequent loss of innovation and a commitment to customer or citizen service. Now, we are faced with tottering institutions, all of which are deemed to big to fail, and are also too big to bail out. It seems to me that what needs to be done is to break up these giants, perhaps through bankruptcy, or via anti-trust actions, and politically (Professor Wilson will like this) secession. What really needs to be done now is to find the best way to buy the time to get this accomplished. I suspect that decentralization will be fought fang and claw, but it will probably happen regardless. What is needed is to salvage as much as possible through this process. This is why I favor loans with suitable conditions for all of these faltering firms, along with transparency, to help maintain the necessary order during some very trying upcoming times.
@24 Grumpy
Returned from where in "upstate NY?" I find that most people have no idea about New York State, including many who live there. If one talks with folks from NYC, they consider "upstate" to be Westchester County; others think "upstate" is Albany. To us real New Yorkers upstate is the mountains, central New York begins at Utica, and the real New York is from Syracuse west. The richness of this big state is in the Finger Lakes, and in the Great Lakes that most people mistakenly equate with the upper midwest, where I live now. "Upstate" means nothing unless you are a New Yorker.
Scott (@ 87),
The arguments of Mr. Piatak and Mr. Wilder against bankruptcy are:
1. A reduction in consumer confidence which would make survival impossible;
2. Impossibility of raising financing to survive bankruptcy.
Well, if those points are true, GM is clearly not viable in the reality of today's market. Wouldn't dumping money into it just delay the inevitable? Wouldn't the inevitable be made worse as we would be effectively reducing the funds available for more profitable investments?
I must say, though, that I find it hard to believe that all those manufacturing assets could not be put to some profitable use in the current market reality. If there is wealth-building potential there, it will be picked up by private enterprise. If there is no wealth-building potential there, then it's nothing more than an elaborate welfare scheme.
It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. It should be equally clear that, as a consequence, other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry. And customers, because they are taxed to support the X industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.
But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as the X industry has expanded. The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.
-- Economics in One Lesson, by Henry Hazlitt
Correct. The auto industry cannot be saved within its present business model. However such an analysis is not complete without the analysis of the social costs involved. It may very well be that these costs would be lower if the industry was allowed to go completely bankrupt but the argument is being made here that the social costs incurred too high.
I mentioned @31 an article in the Oct. 25th WSJ. It's too long for this blog, but here are his concluding "what now" comments. Written by Paul Ingrassia, former Detroit bureau chief for The Wall Street Journal. He is writing a book about America's car culture.
"What now? Cerberus is trying to sell Chrysler. The most logical buyer would be Nissan, India's Tata or some other profitable foreign car company seeking to expand in the U.S. But desperation doesn't breed logic, which is why General Motors might become the buyer. It's difficult to see how this deal would make any sense for GM, which already has too many brands (eight) and must cut billions from its cost base. Adding more brands (Chrysler has three) and more costs would be charging headlong in the wrong direction, and distract GM's management from putting its own house in order.
GM is bleeding cash so quickly that it likely will run out next summer without a sizeable transfusion. Selling assets, selling stock or adding debt will be enormously difficult for the company. But unless one of those things happens it's either a government bailout or bankruptcy for General Motors.
Ford's cash position is somewhat better than GM's, and the company seems to have more options. Its Volvo subsidiary and its 33% stake in Mazda are valuable assets that could be sold. But Mr. Kerkorian's apparent about-face on Ford is unsettling. It's possible that the blue-blooded Ford family is just as happy to see the Las Vegas billionaire cash in his chips, but his move could shut off a potential source of additional investment that Ford might need in its quest to survive.
But to thrive, instead of just survive, Detroit will have to use the brains of its workers instead of just their bodies, and the UAW will have to allow it. Two weeks ago some automation equipment broke down at the Honda factory in Marysville, Ohio, but employees rushed to the scene and devised a temporary solution. There were no negotiations with shop stewards, no parsing of job descriptions. Instead of losing an entire shift of production, Honda lost just 150 cars. The person overseeing Marysville's assembly operations is Brad Alty, still with Honda after nearly 30 years. These days, instead of a Gremlin, he's driving a Honda Pilot -- made at a Honda factory in Alabama."
Here is the part referencing his earlier comments about Brad Alty...
"On Aug. 20, 1979, 18-year-old Brad Alty, fresh out of high school in Mechanicsburg, Ohio, was driving his Gremlin to work when the car broke down. He was two-and-a-half hours late to his first day on the job at a new motorcycle factory that Honda Motor was opening in central Ohio.
For the next few weeks, Mr. Alty and his 63 co-workers did little but sweep floors and paint them with yellow lines. Then they started building three to five motorcycles a day. And at the end of each day they would disassemble each bike, piece by piece, to evaluate the workmanship. Mr. Alty hated it, and he kept getting grief from his older brother for working for a Japanese company. "I thought I had made a mistake by going to work there," he recalled recently. "It was like, 'What the heck am I doing here?' "
But Mr. Alty stuck with it, and Honda stuck with him. Honda's real goal was to build cars in America, but the motorcycle plant allowed it to test the mettle of American workers for a modest investment. The workers passed the test. Honda started building Accords in Ohio in November 1982. Ironically, some U.S. Honda dealers actually protested that they wanted to sell only Accords made in Japan. But the quality of the Ohio-made cars was soon confirmed."
Last time I looked, AIG was an insurance company not a bank. The idea that AIG's bankruptcy would have caused a financial collapse is interesting but unlikely and unprovable. AIG has assets and these assets could have been sold or exchanged for any defaulted debt.
But its impossible to convince fantasists of their unreasonable assertions.
Presently there was no reason to keep AIG as a going concern. We've now loaned them $150B with no end in sight. They should be sold off and the taxpayers reimbursed.
In other news, AmEx and 4 other insurers have declared themselves "banks" and have requested bailouts. Looks like GM and Ford should just follow suit. Buy a small thrift and demand a piece of the pie.
Derek Leaberry wrote: "Dr. Charles Krauthammer, David Brooks and dozens of the children over at Free Republic are against the auto bailout so it must be a good thing."
Beyond being cannon fodder for their wars of conquest, whyever should a good neo-con care the least about anyone who can't tell a chardonnay from a chablis? A cabernet from a merlot?
Let them drinking Rolling Rock.
Pablo,
Insurance companies are not banks, but they are financial institutions. They take your premiums and invest them in things like toxic financial derivatives. The effect of a collapse of AIG would not be unlike the collapse of Lehman Brothers because AIG is as inter-connected with the rest of the financial industry through financial derivatives as any other major financial firm.
The ability of AMEX and insurers to convert to bank holding companies only proves my point: i.e., they are financial institutions. To convert, they had to have some significant interest in a bank (i.e., an institution that takes deposits). And bank holding companies cannot engage in any activities that are non-financial in nature, or, if they do, they must divest such interests within 2 years of becoming a bank holding company.
GM is a de facto bank. Their GMAC financial division had been their only money-making holding for years. However, since they were heavily involved in selling bad mortgages in recent years (GMAC owns Ditech - seen any of their TV commercials lately?). So GMAC is a wash now too. GM even wants to be reclassified as a bank (the joke a few years ago, when they were giving away thousands of cars through dealer-sponsored contests and their profits were all coming from GMAC was "they're a bank that gives away free cars" instead of toasters). But as the poster @#99 notes, they would have to sell off their automotive division to qualify for that status, and any subsequent Treasury Dept. bailout they received. Face it, either way GM is doomed.
One stray thought: I have supped with dozens of neoconservatives and only two of them--the exception that proves the rule--who liked good wine are not real neocons at all. People who only eat power breakfasts, power lunches, and power dinners cannot actually appreciate good food or wine any more than they can appreciate a good novel or honest work of history. What matter is getting a good price on what impresses other people as expensive. Where everything--wine, poetry, love, neighbors, citizens--is a commodity, as it is with neocons and libertarians, nothing has any real value.