Respectful Insolence

Hypocrisy and the Big Three bailout

Detroit’s my hometown. I was born in the city, spent the first ten years of my life within the city limits, at least until my parents moved to the suburbs. Given that, I’ve been watching events unfold with regard to the impending bankruptcy of GM and Chrysler (and, less likely but still possible, Ford) with increasing dismay. The economic devastation that would be visited upon Detroit were even one, much less all three, of the Big Three to fall would be beyond imagining. On the one hand, my disgust at the mismanagement at the top that wants to see the heads of the Big Three executives on a platter (metaphorically speaking, of course) leads me to say: Just let them go under. Ditto my general support for free market capitalism. On the other hand, the “creative destruction” of capitalism is still destruction, and in this case the destruction would be horrific to Detroit and devastating to the nation as a whole. Consequently, political philosophy clashes with practicality. This clash is made harder to take given that apparently the U.S. has already decided that giving hundreds of billions of dollars to the financial industry is fine and dandy, but lawmakers balk and go all pious and pontificating on us when the automakers ask for a fraction of that amount.

Don’t get me wrong, the performance of the Big Three executives last week was embarrassing. They didn’t seem remotely capable of explaining in a coherent fashion what they would do with the money if Congress loaned it to them, and they couldn’t even give lawmakers a good estimate of how much money they’re spending a month or why they think they need the amount they’re asking for. Worse, they are about as tone deaf as can be. After all, they should have been savvy enough to know that appearances matter. They weren’t. They gave Representative Brad Sherman a huge opening to take his grandstanding just one step too far to the point of burning stupidity when he asked the executives if they’d sell their jets and fly coach back home. (If he had stopped before that point, his performance would have been a tour de force of political grandstanding; caught up with admiring himself for just how awesome he thinks he is, he just took it one step too far and descended into demagoguery.) I can understand the anger, although it’s rather amazing that only a fraction of such anger was directed at the banking executives, who were given far more cash to save their asses with at the cost of far less flak.

Mitch Albom actually sums up the situation very well. Key gems:

Which makes me wonder why you’re so against our kind of business? The kind we do in Detroit. The kind that gets your fingernails dirty. The kind where people use hammers and drills, not keystrokes. The kind where you get paid for making something, not moving money around a board and skimming a percentage.

You’ve already given hundreds of billions to banking and finance companies — and hardly demanded anything. Yet you balk at the very idea of giving $25 billion to the Detroit Three. Heck, you shoveled that exact amount to Citigroup — $25 billion — just weeks ago, and that place is about to crumble anyhow.

Does the word “hypocrisy” ring a bell?

Indeed it does, especially from some of the most unctuously sanctimonious of our legislators:

Sen. Shelby. Yes. You. From Alabama. You’ve been awfully vocal. You called the Detroit Three’s leaders “failures.” You said loans to them would be “wasted money.” You said they should go bankrupt and “let the market work.”

Why weren’t you equally vocal when your state handed out hundreds of millions in tax breaks to Mercedes-Benz, Hyundai, Honda and others to open plants there? Why not “let the market work”? Or is it better for Alabama if the Detroit Three fold so that the foreign companies — in your state — can produce more?

Way to think of the nation first, senator.

I suspect there is more than a little of that at work in Congress among the opponents of the bailout package, as well as more than a little hatred of the UAW. No doubt opponents of the bailout are hoping that big auto unions would be destroyed once and for all if GM were forced to declare bankruptcy. But, as badly as the Big Three executives performed last week, what bugged me more was the dripping, smug, self-righteous, self-satisfied sanctimony coming from legislators:

Besides, let’s be honest. When it comes to blowing budgets, being grossly inefficient and wallowing in debt, who’s better than Congress?

So who are you to lecture anyone on how to run a business?

Ask fair questions. Demand accountability. But knock it off with the holier than thou crap, OK? You got us into this mess with greed, a bad Fed policy and too little regulation. Don’t kick our tires to make yourselves look better.

Which is exactly what a lot of legislators are doing.

I still haven’t decided on the bailout. The thought of the government supporting a failing company still rubs me the wrong way, but in this fiscal climate staring into the abyss I wonder if helping the Big Three out is not the lesser of two evils. I can also sympathize with the argument that states that it would be bad for our national security to allow so much of our industrial manufacturing infrastructure to fall apart. Certainly, if one or more of the Big Three fail, we’ll be looking at a new Depression in Detroit and a much worse recession nationwide. But, more than anything, it still galls me that these same legislators who handed over dumptrucks full of money to save the hides of the the greedy bankers and investors who are responsible for the financial mess we find ourselves in, all the while having facilitated it over the last couple of decades with policies that made such a catastrophe more likely, are now pious and oh-so-superior as they hold the feet of the auto industry to the fire and make the Big Three executives abase themselves before Congress before considering giving them even a tiny fraction of the largesse bestowed upon the financial industry.

As always, hypocrisy, thy name is Congress.

Comments

  1. #1 Ruth
    November 25, 2008

    I have mixed feelings, too. My husband left Ford in 2004, not liking the way it was mismanaged. I still have family tied to the auto industry. And the Big Pharma company I worked for in Ann Arbor is gone. Orac, will you turn out the lights when the last employer leaves Detroit?

  2. #2 K.
    November 25, 2008

    A few weeks ago I read a post from another blogger that I think is important to consider as far as the automakers’ situation is concerned: http://www.idrewthis.org/2008/11/why-i-think-gm-is-worth-bailing-out.html

  3. #3 DonZilla
    November 25, 2008

    On the other hand, the Big Three have had almost 40 years now (since the last “gas crisis” in the 70′s) to work on improving their products over those of foreign imports (lots of those now being made here), and woo American car buyers back into the fold. Wasn’t that enough time to play “catch up”? Why haven’t any of them been able to come up with a car as popular with American consumers as the Nissan Altima, the Toyota Corolla, or some of Hyundai’s models? Why did they kill the electric car?

    I agree with Orac’s view about government bailouts and also think the Big Three are being made an unfair example of, simply because almost ALL Americans understand automotive products, and far less understand financial products. But 40 years was plenty of time.

  4. #4 trrll
    November 25, 2008

    The financial bailout was justified on the grounds that it was necessary to let everybody else in the country do business: meet payroll, extend loans, etc.

    The automakers, on the other hand, are a regional business. I don’t need a Detroit car to buy a house. Businesses do not need Detroit cars to finance new buildings or balance cash flow. So the question becomes, what makes Detroit management and workers so special that they should receive a windfall bailout when all sorts of companies are going out of business and workers all across the country are losing their jobs? Many of the companies in trouble are far more public-spirited that the big automakers who have continued to promote gas guzzlers at a time when increasing energy efficiency and reducing fossil fuel consumption was a national priority. When the automakers chose to put their interests ahead of the nation’s, why should the nation come to their aid when those very same decisions have gotten them into trouble? Certainly there are many, many businesses across the country that are less guilty of mismanagement, and more likely to succeed if given a little support. And a lot of their employees get dirt under their nails, too, if that is to be the criteria of who is the most deserving. I’d rather see the government extending aid to unemployed workers directly than propping up failing companies

    I can understand that the failure of major businesses in the Detroit area will be a strain on the local economy, but it is a local issue, just as it was when the oil wells began to run dry in Texas and New Mexico. It isn’t even really part of the financial crisis, as these companies were on the verge even before the crisis hit. So if these particular businesses are so valuable to the state that there needs to be a bailout, it seems like it should be financed primarily from increases in state taxes and from bond issues, just like a big highway project. Perhaps the federal government might have a role in extending loans to the state, but it is the state and residents that should accept the responsibility of paying back those loans if they blow it and the automakers go under anyway.

  5. #5 Drake33
    November 25, 2008

    FWIW, some talking heads yesterday on “the politics of money”, (MSNBC I think) were saying that the financial AIG type people came in with a comprehensive plan on how to use the bailout money, which it sounds like Big 3 did not. I’m not a big money guy, but it sounded like the bailout was a loan program and the financial companies were taking the majority of the risk, and were putting the maximum benefit towards the stockholders and not management.

    The general thought was; once the Big 3 put together a similar proposal, they’ll get their money.

  6. #6 Orac
    November 25, 2008

    I can understand that the failure of major businesses in the Detroit area
    will be a strain on the local economy, but it is a local issue, just as it
    was when the oil wells began to run dry in Texas and New Mexico.

    Whatever drugs you’re on, I want some.

    The economic tendrils of the Big Three are not just a national business, but an international business. Of all the arguments for letting GM go under I’ve heard (and I’ve heard a few good ones), arguing that it’s just a “regional” business is by far the worst. If trll thinks that letting the Big Three go under would merely be a “strain on the local economy,” he is even more clueless than I thought. Detroit would be the epicenter and suffer the worst, but it would be a national catastrophe which would guarantee that this recession would be deeper and longer than anything we’ve seen in a very long time.

    Whether that’s reason enough to do it, again I’m conflicted about, but don’t pretend that the Big Three are just “regional” businesses.

  7. #7 Orac
    November 25, 2008

    FWIW, some talking heads yesterday on “the politics of money”, (MSNBC I think) were saying that the financial AIG type people came in with a comprehensive plan on how to use the bailout money, which it sounds like Big 3 did not.

    What about Citigroup? What about all the other financial companies that have been bailed out?

  8. #8 Warren
    November 25, 2008

    I wonder if it’s not hypocrisy so much as, “Oh no, not you guys too?” And, to be fair, the automakers were already promised $25bln (which, I understand, is mired in red tape) to do a retooling which they actually should have undertaken more than twenty years ago.

    The problem with the short term job loss is that the US economic safety net for unemployed workers is terrible, but if the Detroit automakers imploded, suppliers would still do business. There are other automakers, and BO is pontificating about a WPA-style domestic initiative that could effect a turnaround in a longer view.

    That doesn’t help the immediate issue, of course; but in light of the additional $800bln offered to banks today (taking the promissory debt up to $1.5 trillion), one has to wonder where the capital is actually going to be coming from.

    To me a significant consideration is that GM supplies the US military with equipment. Losing them seems implausible just because of that; but potentially quite devastating if it actually were to happen.

  9. #9 PalMD
    November 25, 2008

    my disgust at the mismanagement at the top that wants to see the heads of the Big Three executives on a platter (metaphorically speaking, of course)

    I’m not sure if it’s only a metaphor for many folks around here. People who aren’t from the rust belt have no way of clearly understanding what the failure of any of these companies means. My patients are suffering terrible physical and psychiatric problems already with this economic instability. Most of us in SE michigan know more than one person who has lost a home and several jobs. It’s hitting from the top to the bottom.

    If michigan goes down, many other communities in the country will begin to feel some of we have for a long time, and it won’t be pretty. Just try finding a moving truck or U-Haul out of here…none are coming back…

  10. #10 I am so wise
    November 25, 2008

    The Big Three got caught by the oil price spike and credit crunch like everyone. For all the flak about failing to produce hybrids while focusing on gas guzzlers, let us not forget that Ford’s 150 series were the most popular trucks for 3 decades and the best selling vehicle in America for almost as long. (http://www.trucktrend.com/features/news/2007/163_news070524_2008_ford_trucks_features/index.html)

    The truth is Ford produced the vehicles that Americans craved big time until a few months ago.

  11. #11 cm
    November 25, 2008

    Two other issues re: this.

    1) Talk about not being proactive. GM et al. have been losing money for a long time, and there has been little reported discussion of any plans to address this to prevent a collapse. Could we have begun to take national cooperative action–conditional loans or improvement programs–5-8 years ago? Of course, that was in the heart of the Bush admin.

    2) As with Orac, part of me wants to see these car companies put on the ash heap of history. I remember in 1982 or so VW Rabbits getting 35-40 mph. It’s freaking 2008 (!) and avg car mileage is well under that, with SUVs routinely doing far far worse. That’s just sad. Plus, yes, what happened to the electric car or other innovations. But, yes, we’ve built things such that so many low income people would be just crushed under the weight of the collapse, that should not be allowed to happen. If anything, maybe there could be some sort of long-term (10 years) restructuring plan that would shift the Big Three into more sustainable development of cars and other vehicles while retaining a good American workforce? Just thinking out loud.

    Not looking good for this situation generally.

  12. #12 ZacharySmith
    November 25, 2008

    trrll,

    Since when does any company put the nation’s interest ahead of its own? If that were true, perhaps so many jobs would not have been lost to China, India & Mexico.

  13. #13 Mu
    November 25, 2008

    The one number that still gets me in regards to the big three is how badly disadvantaged they are by their legacy union contracts. The average cost per hour for a GM worker in $78, for a US Toyota worker is $48. The question is – will bankruptcy solve that issue, or are many of those long term obligations those you cannot discharge in Chapter 11? Chapter 7 obviously would make them go away, but it’s hard to sell a working business that way. But then, for the UAW it’s bust either way, so they have no real incentive to try to work with management.

  14. #14 Brian Seiler
    November 25, 2008

    It strikes me that much of this post and the subsequent commentary largely miss the point with respect to the proposed automotive company bailout. The issue isn’t whether we should let the companies fail to punish the leaders of those companies. The issue is whether it would be worth taxpayer money to prop up those companies when the past twenty years of history suggest that they are incapable of operating profitably, whether they receive a bailout or not.

    One thing that we definitely ought NOT do is equate this action with the recapitalization of banks and financial institutions, which are a completely different creature from an economic standpoint. If you think of the economy like a computer (I am a programmer, so I think of everything like a computer), financial services institutions would be low-level operating processes – the gears that make the machine go – while any automotive company, no matter how large it may be, would be a program running on top of that infrastructure. The financial services companies that have received federal money weren’t bailed out because they were too big to fail – they were bailed out because their failure would have had grave and definite economic implications at a fundamental level.

    Hypocrisy is utterly irrelevant to this subject – accusations of it are a commission of the ad hominem fallacy and I’m distressed to see a skeptical blogger like Orac engaging in the practice. What congressman got what money when and how he’s grandstanding now aren’t relevant at all to what we ought to do to best address the current debacle that is the (native – note that factories owned by foreign companies don’t have many of these problems) American automotive industry. At best, this is a pointless side show, and at worst this just adds more noise to an already impossibly complicated problem.

    The facts of the matter are that the so-called big three cannot function as they are currently structured. It is impossible. Between union contracts (a tremendous problem which can only be fixed by automotive workers taking a pay cut – a fact which is doomed to result in much squealing and shrieking) and bad business decisions, the current structure of these businesses is unworkable, they are tied up in horrible, destructive business arrangements, and these businesses frankly need bankruptcy and the reorganization that comes with it. The problem is not whether these businesses should be allowed to fail – there’s no question that they should, and we ought to hurry them along down the road to Chapter 11 to get it over with as quickly as possible. The problem is that everything ELSE in the economy is a touch upset right now, and allowing something as superficially disruptive as Chapter 11 for as large a company as Ford or GM (note the “superficial” here – the actual economic implications aren’t as severe as they’re perceived to be, as the company won’t be evaporating into the mist, most of the employees will continue to be employees, albeit at perhaps a lower rate of pay, and the business will continue to function throughout the process) could create a more significant economic effect through its arguably unwarranted influence on markets, business confidence, and public perception.

    My take, for what it’s worth, is that the companies should receive federal funds to cover debts that they will be unable to pay, but that this bailout should be contingent upon those companies going through something very similar to Chapter 11 restructuring. The government should not let these companies default on loans (something that would have REAL economic impact), but we cannot throw good money after bad keeping these horrible monoliths on life support when there are so many better ways to use our money in these trying times. That’s just my conclusion, though – others will review the facts and reach their own. One thing we can be certain of, however, is that what jet the company heads flew in on (as an aside, they kind of had to fly in on private jets as a matter of company policy – it’s a business continuity issue on their end, and actually results from a risk management plan) or what bad, questionable, or contrary acts policy makers have engaged in in the past.

  15. #15 Mike LaPenna
    November 25, 2008

    The Big Three are sadly unprepared for shifting markets and politics and ecomonomic woes all at the same time. As customers, we cannot get a loan to buy a Toyota or a Honda or a Ford. When the government fixes (bails out) a financial institution, it frees up cash for the rest of us to use to buy cars. Wait a minute, I still cannot get a loan for a car!?

    My feeling is that the car companies are facing continued disadvantages with the so-called legacy costs (big union pensions and health care). Toyota (an American company that has five plants in the U.S. and which is listed on the NYSE) is simply hiring a younger work force because it is newer. Average age of the workforce will give you an indicator of health care costs and the fact that one company has a 401K and the other a fixed benefit program, will let you know which is more competitive (other things being equal).

    Ford built trucks and Toyota builds trucks (even bigger trucks than Ford) but Toyota also builds the most fuel efficient car in America – the Prius. Some companies win and some lose in a marketplace and the Big Three won for over sixty years. Now they are losing.

    Let them be restructured. Chrysler went from its own Iococca-led bailout to privatization and now the stockholders who bet on Ford and GM and the equity firm that bought Chrysler have to take their losses. Unfortunate, but that is the system we live under. There will be assets that others (Honda? Toyota?) will pick up and some executives will keep their jobs and others won’t. Sadly, some autoworkers will be affected but they have to undestand that this economic problem is affecting all of us.

    I think the auto execs did not understand that the Congress was reeling from packages that did not work the way that they wanted and the car companies appeared to be coming in for more. Why did they not understand that we think they already got a $25B ‘bail out’ for retooling just a month ago? We, and the Congress, do deserve better leadership and more savvy behavior from the execs.

    AML

  16. #16 Joseph C.
    November 25, 2008

    What about Citigroup? What about all the other financial companies that have been bailed out?

    I’m no economist, but I don’t think it’s unreasonable to assume that the failure of Citigroup, with over $2 trillion in assets, would be far, far more devastating to the economy than if one of the big three melted down.

  17. #17 dean
    November 25, 2008

    ” can understand that the failure of major businesses in the Detroit area will be a strain on the local economy, but it is a local issue”

    So, all of the automobile dealerships, suppliers and manufacturers of parts, and other auto-related industries are in and around detroit? There are no big-3 manufacturing plants in other states? I would have sworn otherwise.

    There may be reasons for thinking long and hard about giving Detroit anything (it should have been about giving any of these fools anything, but that horse is out of the barn), but saying it is only a “local issue” if the Big 3 go down is one that is less than well thought out.

  18. #18 trrll
    November 25, 2008

    Since when does any company put the nation’s interest ahead of its own? If that were true, perhaps so many jobs would not have been lost to China, India & Mexico.

    I have no objection to a company putting its own interests first, as long as they are good enough at it that they don’t have to come to me asking for tax money to bail them out of a hole they’ve dug themselves into. When they come to me for a handout, I think that I’m justified in asking, “What have these guys done for me?”

    And I don’t buy the argument that by building and selling gas guzzlers, these companies were only giving America what America demanded. I’ve seen the auto ads that pitch these CO2-spewing monsters as necessary to one’s manhood. This is a demand that has been built by US automakers, in the full knowledge that it is destructive to both the environment and our national interests.

    Now I don’t dispute their right to do that; I’m just not willing to help save them when their gas-guzzler strategy drives them into bankruptcy.

    Yes, a lot of guys who simply worked for the automakers are going to be out of a job. But those aren’t the only companies going out of business and laying off workers (and any workable deal for saving the automakers is going to involve massive layouts and production cuts, in any case). So I ask again: What makes automakers and their employees more deserving of a Federal bailout that all of the other companies across the nation that are going out of business and laying off workers?

  19. #19 Chris H.
    November 25, 2008

    Some humorous commentary from a local radio talk show:
    http://mynorthwest.com/?nid=75&sid=109286

    It is “audience fill in the blank” on companies “too big to fail”.

  20. #20 daedalus2u
    November 25, 2008

    My take on the financial crisis is somewhat different.

    Some financial institutions are in trouble because they gambled and lost using other people’s money. The derivatives market was pure gambling. It was zero sum gambling, for every winner there had to be a loser. Unfortunately the “winners” took all of their “winnings” as cash and profit and didn’t save any to pay when they became “losers”. With such high “profits”, the financiers paid themselves handsomely and with big bonuses too.

    The fundamental problem with the banking industry is that it is too large. With computers doing the accounting now, there isn’t the need for so many accountants keeping track of everything; unless those keeping track of things make everything so complicated that no one can keep track of it.

    200 years ago, the most common profession was farming. It took that many farmers to grow enough food for everyone else to have enough to eat. With modern technology, it takes far fewer farmers to grow enough food to feed themselves and everyone else.

    The banking industry needs to shrink in manpower and in the fraction it makes of the GNP. Those in the banking industry will fight that shrinkage and if there are few enough players to maintain a monopoly position, they just may be able to do so.

    Bailing out Citigroup because they are “too big to fail” is precisely the wrong thing to do. If we are going to have free markets but with a government back-stop, then companies that are “too big to fail” and which get a government bailout need to be broken up until each of the pieces is small enough that it can be allowed to fail.

    Backing the biggest players in an industry that has to shrink is a recipe for failure. Bailing out farmers until there were gigantic surpluses of food would have been a recipe for failure too. The biggest farmers could have survived, and if they were able to get and maintain a monopoly position on food, then food might still be the largest sector of the economy.

    The financial industry hit on the idea of the derivatives because there wasn’t enough “real” work for them to do, so they made up these fantasy deals out of smoke and mirrors. The derivatives markets were make-work for financial industry that was paid for by people with too much money. If that capital had been invested or used productively the whole economy would have grown. But the financial industry isn’t interested in making the whole economy grow, they are only interested in making money for themselves.

  21. #21 JoshS
    November 25, 2008

    I have nothing but contempt for the poor products and lack of responsiveness American automakers have displayed for the past 40 years. But it’s odd that many of us are forgetting it takes two to tango – consumers have let them get away with this. Many of you are commenting (and I totally agree) on the industry’s aggressive marketing of dangerous, inefficient SUVs. But the consumer has to take the blame, too. We don’t *have* to give in to the ridiculous sales push. We choose to buy these vehicles; we’re just as short-sighted and self-interested when we make these purchases as the companies are when they put short term SUV/truck profits over long-term stability, safety, and full efficiency. Consumers aren’t forced to buy these cars, so we do give the public a free pass? They deserve just as much criticism as the sales hucksters.

    Nothing irritates me more than when people actually have the audacity to bitch about how much they’re paying to fill up their GM Yukon (substitute whatever behemoth you like). People who are overwhelmingly:

    a. Suburbanites who have no need of a V-8 truck they actually have to *climb* into.

    b. Families with two kids who claim (with deadpan seriousness) that they literally cannot do without the space inside an SUV for all their activities. These same people cannot explain how they and their parents managed to survive when the biggest car you could get was a station wagon.

    Folks, this is your fault. Not GM’s. Not a marketing campaign’s. Your fault. You made the choice. A friend of mine actually complained yesterday about having to pay a $10 surcharge at a funeral home parking lot in Manhattan (picture how little parking space there is in the city) because he had an SUV. With a tone of righteous indignation. I wanted to slug him (not least for thinking the best way to get from Long Island to Manhattan was, no, not the train, but a full-sized SUV).

    People can make any choices they want, and I don’t believe in haranguing them to their faces when they make foolish ones. But as a society we have to find a way to make consumers understand they too are accountable for their pettiness and avarice. It’s not just the big bad companies.

    /rant:)

  22. #22 JoshS
    November 25, 2008

    Addendum for clarity, and to pre-empt any misunderstandings: I do not – let me repeat that – I do not let the car companies off the hook for stoking consumer demand and taking advantage of fuel effiency loopholes in creating the SUV problem. I think they need to be criticized and reined right in. I’m only arguing that the consumers who bought these need to take just as much blame and responsibility for falling for it. As someone who’s worked for years for a consumer advocacy organization that vociferously criticizes industry marketing practices, I’ve seen just as much willing victimhood on the part of consumers. No, Joe and Jane Public, you aren’t helpless zombies. Commercials don’t force you to make bad decisions. Yes, marketing can be hard to resist, but as grown-ups, you have the responsibility and the ability to think for yourself.

  23. #23 Alex Besogonov
    November 25, 2008

    Actually, GM is currently building Chevrolet Volt – a plug-in hybrid. It has 40 miles electric-only range, then gasoline-powered generator kicks in and Volt gets 50 mpg on gasoline power. And it can be recharged from a common power outlet.

    It should be ready (for mass production!) in less than two years.

  24. #24 Courtney
    November 25, 2008

    The average cost per hour for a GM worker in $78

    I’d like to point out that while you can work the math to make this be true, it’s really deceptive. The short explanation of the problem is that the $78/hour (or whatever, I’ve also heard $73/hour) is that it includes the healthcare and pensions of all the retired workers.

    There’s a longer explanation of why using this number is really stupid here.

    Relevant quote from an article reference in that link:

    As of 2007, the UAW represented 180,681 members at Chrysler, Ford and General Motors; it also represented 419,621 retired members and 120,723 surviving spouses. If you take the costs associated with 721,025 individuals and then divide those costs by the hours worked by 180,681 individuals, you’re going to end up with a very large hourly rate. But it won’t mean anything, unless you’re trying to be deceptive.

  25. #25 Schwartz
    November 25, 2008

    There is a lot of burning here…

    Let’s list the major differences between the Citi example and the big 3:

    1) The government is responsible for deposits and investments if Citi fails. (FDIC)
    2) Citi already fired the people responsible for trading them into this mess in 2007. How many executives have the big 3 fired?
    3) The government is getting preferred shares in exchange for guaranteeing loans donating capital
    4) The government money isn’t going to fund operations, but will be used as capital to maintain regulatory levels
    5) We don’t even know what the big three will do with the money, but I can guarantee it will be to fund some sort of money losing operation

    Now lets examine the decisions of the wise Georgia Senator:
    You have two sets of car companies: One set is competitive, gaining market share and makes cars that are environmentally friendly. The other set makes gas guzzlers, are consistently losing market share, and only exist in their current state due to protectionist North American Agreements. Which ones would you choose to invest your government money into?

    One final question: Orac, do you own/lease a car from the big three?

    If not, I’d say your accusations of hypocracy ring pretty hollow…

  26. #26 trrll
    November 25, 2008

    I’d like to point out that while you can work the math to make this be true, it’s really deceptive. The short explanation of the problem is that the $78/hour (or whatever, I’ve also heard $73/hour) is that it includes the healthcare and pensions of all the retired workers.

    Well, yes, but. Retirement pay is a form of deferred compensation. So the money being spent for retired workers is a decent surrogate for the amount of additional money owed (but deferred) to current workers. It is, however, important to keep in mind that this means that the company will not reap immediate savings of $73/hour four each worker laid off today, because a substantial proportion of the savings from those layoffs will not be realized until sometime after the time at which the current workers would have reached retirement age.

  27. #27 Bert Chadick
    November 25, 2008

    I don’t think the big 3 should all be lumped into the same crusher. The Ford Focus seems to compete competently with the Civic and Corolla, even if the two Japanese tagged cars will last about twice as long on average. No Accord or Camry competitor yet. The Flex seems to be a nice design. Chrysler is a joke. Sure they have style, but the guts are rubbish. Let ‘em die. GM is the real problem child. They have built up so much bad will over the last forty years with outdated crappy technology that they deserve the same fate as Chrysler, but they are the only company with enough heft to engineer a new generation of alternately fueled passenger cars. I say break Ford and GM up into their constituent brands and put genuine motorheads in charge. I mean the sort of guys that created the companies. People who love cars and know their customers. Current management is clueless.

  28. #28 Fi
    November 25, 2008

    Apparently if the right folks had seen “Roger & Me” by Michael Moore, where he talked about his beloved Detroit and how it was being destroyed by greed and insensitive people back then, this may have been avoided. Then again, Detroit is not proving itself too bright.
    As for the Volt, if GM does not get their shit together, Lordstown Ohio will be devastated.
    http://www.npr.org/templates/story/story.php?storyId=97481357&ft=1&f=1001

  29. #29 Dr. T
    November 25, 2008

    “I still haven’t decided on the bailout. The thought of the government supporting a failing company still rubs me the wrong way, but in this fiscal climate staring into the abyss…”

    Right now, commercial banks are flush with cash because few businesses want to borrow money. The government forced the biggest banks to borrow federal money so they can lend it (and decrease the so-called credit crunch). Question: Why don’t we just tell Chrysler, Ford, and GM to go to some big banks and borrow what they need? Answer: We won’t tell them that because they won’t do it. They would not be able to repay the loans. The CEOs know their companies are failing. The CEOs just want to hang on long enough to grab tens of millions in salary and bonuses before retiring or jumping ship. Giving money to the Michigan auto makers is equivalent to throwing money on a fire to put it out. The problem will get bigger soon after.

  30. #30 Paul Murray
    November 26, 2008

    There’s also the possibility that the automakers *cannot* be be bailed out. Maybe it’s not simply a matter of money. Maybe the fact that they make badly built impractical cars that no-one wants cannot be overcome with cash, unless the govt is outright giving charity. Yes, it impacts low income people terribly … but those low income people are the people building those impractical cars that no-one wants.

    If the govt is going to pay money for blue-collar workers to have some sort of emplyment, than that money would be beter spent on massive public works – bridges and railroads come to mind.

  31. #31 natural cynic
    November 26, 2008

    I remember in 1982 or so VW Rabbits getting 35-40 mph. It’s freaking 2008 (!) and avg car mileage is well under that, with SUVs routinely doing far far worse.

    1984 Honda Accord ~1950 lbs.
    1992 Honda Accord ~2800 lbs.
    2008 Honda Accord ~3450 lbs.

    Yet the MPG is about the same. All the increases in efficiency [and they have been significant!] have gone into overcoming the weight increases. A significant part of the weight increases have been for safety in maintaining structural integrity in a crash – mandated by the government. The engines are bigger, the pollution control methods are better [and heavier]. Look under the hood of a ’70s & ’80s model and look under the hood of a current car. It’s a different world.

    And I heartily second the idea that both producers and consumers are at fault. I feel like puking every time I see a machoer than thou pickup ad. But that’s the way the free-market works – always looking for the short-term profit as opposed to the long-term needs of both consumers and the companies themselves.

    One thing that should certainly improve things – the ouster of Dingell from the Chairmanship of the House Energy & Environment committee. He should get a lot of the blame for the mess Detroit is in. Orac could make another [verbose] rant on Dingell alone.

  32. #32 Miko
    November 26, 2008

    Consider that the comment “Or is it better for Alabama if the Detroit Three fold so that the foreign companies — in your state — can produce more?” implicitly acknowledges that if the Three fold (of course, bankruptcy and retooling is more likely, but ignore that), the effect is going to be nothing more than allowing better companies (which are “foreign” despite operating in the US, as if that mattered anyway) to fill the demand created by their absence. This isn’t so much about protecting the economy, or even about protecting these particular companies: it’s about protecting the entrenched position of union campaign contributors.

    And yes, it would be hypocritical to bailout the financial sector and not these companies. We can hope that Congress will see that the financial bailouts are doing more harm than good and that they’ll cut off whatever funding remains.

  33. #33 Drake33
    November 26, 2008

    What about Citigroup? What about all the other financial companies that have been bailed out?

    Sorry, I had it on in the background. I don’t remember which specific financial company they were talking about (it was probably Citi and not AIG), but the message was that the Big 3 didn’t come in prepared and Congress jumped all over them. AIG came in with a working proposal and Congress gave them $25B without hassle. So, according to the expert, the Big 3 will likely get their bailout, but they have to submit a real proposal first.

    Personally I’m torn as well. I’m liberal and the goofy anti-union sentiment coming out of the woodwork on this issue bugs the crap out of me. At the same time, I’m not sure if I want them bailed out either. The companies have dragged their heels and fought the environment every step of their existance. They’ve stifled innovation. IMO, they are a bunch of rat bastards who don’t deserve the money.

    But the question I have is; is it better or worse to let them fail? That is where I end up at.

  34. #34 Samantha Vimes
    November 26, 2008

    GM has created the kind of mess that makes me think maybe it’s time to see how well a worker’s collective would work; if the bailout went not to the executives, but to the engineers, the lower ranks of management, and the production line– could they put together a plan to keep everything together and be able to pay back the loan when things get better?

    I have more willingness to believe that Ford, as it is, can turn themselves in the right direction with less radical changes.

    Don’t know much about the third of the Big 3.

  35. #35 Orac
    November 26, 2008

    There’s also the possibility that the automakers *cannot* be be bailed out. Maybe it’s not simply a matter of money. Maybe the fact that they make badly built impractical cars that no-one wants cannot be overcome with cash, unless the govt is outright giving charity. Yes, it impacts low income people terribly … but those low income people are the people building those impractical cars that no-one wants.

    Once again, it is a pernicious myth that American cars are badly built lemons. True, they were pretty bad in the 1970s and 1980s, but throughout the 1990s there was a serious push to improve quality. Now, American cars are frequently right up there at the top of various quality surveys with Toyota and Honda. For example, this year J.D. Powers ranked the Chevy Malibu as the best midsize car and the Pontiac Grand Prix as the best full size car, as far as having the fewest initial manufacturing defects. I’ve seen it quoted somewhere that Toyota has started to emulate Ford in terms of some of its quality control (I can’t find the citation right now; so take that for what it’s worth). The Ford F-150 remains the most popular pickup truck, and it’s one reason why Ford is the most likely of the Big Three to survive. (Don’t dis pickup trucks; while it’s true that suburban poseurs bought them for no good reason over the last decade, there is always a sizable market for pickup trucks among people who do real work and hauling.)

    The persistence of the myth that American cars are crappy lemons does demonstrate one thing, though, namely that once a company has gotten a reputation for shoddy quality it can take decades to lose it. The Big Three have been trying to live down the 1970s and 1980s for nearly 20 years now.

  36. #36 Orac
    November 26, 2008

    Don’t know much about the third of the Big 3.

    Chrysler is a privately held company, and thus information about it is harder to get, but while its short term prospects are better than GM, its long term prospects suck because it has the fewest fuel-efficient cars and the most gas guzzlers.

  37. #37 Tim Eisele
    November 26, 2008

    “Once again, it is a pernicious myth that American cars are badly built lemons.”

    I agree that it is a myth. I own two Ford vehicles which work just as well as anybody else’s vehicles. One of them is pushing 15 years old, and has always been highly reliable in spite of much abuse heaped on it over the years. The second is not as old (about 8 years old), but so far has been just as reliable. I fully expect that it will last at least as long if I want it to.

    Also, a few years back I was reading one of the Consumers Reports automotive review issues. They stated right up front that they find all of the major auto brands to be pretty comparable as far as quality and reliability these days.

  38. #38 Mindy
    November 26, 2008

    Orac you didn’t answer the question about what kind of car you drive, but if you’d like to buy a GM I can help you get a discount because I work there. A small gesture of gratitude for providing me with the phrase “pernicious myth” which I am going to use all day long because I like the sound of it, kind of like “vermicious knid.”

    The executives at GM are encouraging all of us employees to tell our friends and family to contact their congressperson and say “that a healthy U.S. auto industry is vital to our nation’s economic stability and long-term security.” So there. Although personally I’d really like to try Samantha Vimes suggestion.

  39. #39 dean
    November 26, 2008

    There is one bit about the production of cars that I contend is contributing to these problems: American companies build the same car under several different labels, with only minor changes. Honda builds essentially one Accord (slight modifications for its Acura line): how many different versions of a typical Chevy, Chrysler, etc., are sold under other names? With the slight tweeks needed make them look different, it’s not surprising (to me) that a coherent focus hasn’t developed.
    Orac, I have to disagree with the “quality just as good” comment, at least for Chrysler and Cadillac. I’ve looked at some: poor interior fit, cheap parts inside (even in the caddies), and an emphasis on “show” rather than reliability, still make their products suck, at least if you plan on keeping them more than 3 years. A vehicle that looks stylish is worthless if it has to spend most of the time in the shop.

  40. #40 Orac
    November 26, 2008

    Orac, I have to disagree with the “quality just as good” comment, at least for Chrysler and Cadillac. I’ve looked at some: poor interior fit, cheap parts inside (even in the caddies), and an emphasis on “show” rather than reliability, still make their products suck, at least if you plan on keeping them more than 3 years. A vehicle that looks stylish is worthless if it has to spend most of the time in the shop.

    Objective evidence from various independent sources does not support your contention. I suspect confirmation bias on your part.

  41. #41 Andrew Dodds
    November 26, 2008

    Bert -

    Strange thing is, here in the UK, the Focus (and Astra, by GM) compete perfectly happily with the Japanese cars; reliability is only slightly worse. The next model up for Ford is the Mondeo (Honda Accord size), which is better than anything else in the class. Don’t know if it is even sold in the US.. the diesel version will give you 50-odd mpg, and beat a Prius in real world mpg if not driven hard.

    GM does the Vectra in the same class, not as good but still a perfectly decent car.. especially compared to some frankly awful GM cars I’ve driven in the US. (Guys, the steering wheel is meant to change the direction of the car. OK?)

    Still don’t understand why GM didn’t continue the EV1 project.. or try it in the European market where our vastly higher fuel prices and shorter commutes make EVs far easier to market, in theory.

  42. #42 Mu
    November 26, 2008

    You mention an important point here – the complete abandonment of fuel efficient diesel engines by the US automakers (the only diesels sold are VW). Despite the fact that they make some of the nicest diesel engines with their European branches. Neither Ford nor GM would have any issue bringing a series of 30+ mpg diesels to the market; even the stupid SUVs would profit from them.

  43. #43 Jud
    November 26, 2008

    It is, however, important to keep in mind that this means that the company will not reap immediate savings of $73/hour four each worker laid off today, because a substantial proportion of the savings from those layoffs will not be realized until….

    Folks are laboring under two misconceptions, both I believe stemming from an inability to think outside the box of the historic union/management battle.

    First, only about 28% of GM employees (74k of 266k) are the hourly unionized workers over whom all the fuss is being made. This means that most of GM’s workforce cost problem has nothing to do with union employees. And so far as retirees are concerned – are you in favor of dropping the pensions and healthcare for these 60-, 70-, and 80-year-olds that they were promised while they spent their lives working on assembly lines?

    Second, unless you’re building yachts, where are virtually all your buyers going to come from? The middle class, yes? But when people are considered “costs” and businesses are urged to cut them, what happens to the size of the middle class and thus the market for your product? This is the classic “free rider” problem as applied to American business. If you cut costs before your competitors, you benefit, and there are enough of your competitors’ employees making good wages to maintain your market. You’re a “free rider” on the wages your competitors pay their employees. But when your competitors (and other companies in other lines of business) follow suit, there’s no more cost advantage for you, and also a big hit to the market, since no one’s making middle class wages. (Think about it – one breadwinner could buy a middle class lifestyle in the 50s and 60s, now two breadwinners struggle in the “modern service economy,” while we, parroting what we hear from the media, save our fiercest criticism for those who are managing to maintain that middle class existence.)

  44. #44 Flex
    November 26, 2008

    I suppose my position as an automotive engineer for a tier-1 supplier should provide some insight into several of the perceptions listed in this comment threads.

    There are a few factual errors though. The Big-3 have not been losing money for 20+ years. All through the 1990′s, mainly because of consumer demand for large vehicles, Ford and GM were making tremendous profits. Chrysler, (and Daimler-Chrysler) somewhat less so.

    After the internet bubble burst in 2001, demand dried up. Probably mainly due to the number of people who had recently purchased vehicles right before the bust deciding not to replace them. Demand dropped for not only the Big-3 but for all the imports as well. The gult of used cars entering the market at this time probably also helped drive down demand. Ford truck sales for fleets were still strong, then Ford maintained a good profit for several more years. I don’t know as much about GM as I mainly worked on Ford designs.

    So the idea that the Big-3 have been failing for decades is in error.

    Also in error is the idea that the quality of the Big-3 vehicles is poor. I think Orac deals with that sufficiently. The quality level for most manufacturers is roughly the same, domestic or import.

    As a tier-1 supplier, I can tell you that this is not a regional problem. We have plants in Minnesota, Illinois, Texas, and California. We supply parts to plants in Kansas, Kentucky, Georgia, and Virginia. Similarly I am aware of suppliers from every state in the union. The supplier network for automotive parts for the Big-3 is worldwide.

    I’m a big fan of unions, but I apprechiate the legacy cost GM is under for retired union members. But you know what would lower GM’s legacy costs? National health care.

    Even if GM payed taxes into a fund to pay for nationalized health care, it would be less money than they are paying for the health care for their employees, active or retired. The only reason I see for companies not backing national health care is because they see the possibility of eliminating paying for health care for workers altogether, i.e. not paying into a fund.

    The root of the problem, as I see it, is that the market is actually oversaturated with automotive companies. The demand in the American market for automobiles is fairly steady (when we are not in a recession). The entry of a number of additional automakers has reduced the share of the market available for each automaker. The Big-3 has been complacent about the loss of market share in some segments, like low-cost vehicles. However, when the recession hit, and demand shifted to low-cost vehicles and high-milage vehicles, they found they had already lost a significant amount of market share.

    Because of the amount of capital necessary to build a car, not just the price of the materials and labor in the vehicle to be sold, but all the associated costs from all the suppliers in the supply chain as well as overhead, profitability only is possible through economics of scale. That is, to make money, you have to sell a lot of vehicles. When the volume of vehicles shipped drops, an automaker rapidly goes into the red. During the peak of the SUV demand, some imports had dropping volumes because they didn’t have an SUV offering (that changed rapidly).

    I have mixed feelings about the bailout. Stablization of the jobs associated with the automotive industry is important. Our economy is currently driven by consumer spending and eliminating a large number of jobs will impact far more than the automotive industry.

    However, a bailout without a plan is not going to work.

    In the long-term there is going to have to be some consolidation of the automotive industry. It is too capital intensive to support as many players in the American automotive market as there are today.

    What I would like to see would be a Toyota-Chrysler merger and a Ford-Mazda merger. I think that two fewer makers in the market would allow every automaker to be profitable. (Making GM bigger will not help.)

    Of course, I’m a simple automotive engineer who just finished his MBA in international business at U of M, so you can discount my opinions as much as you wish.

  45. #45 johannes
    November 26, 2008

    > and a Ford-Mazda merger

    Ford already owns Mazda (or at least a sizeable part of it).

  46. #46 Flex
    November 26, 2008

    Yes,

    Ford owns a 30% share of Mazda. That’s one of the reasons I brought it up.

  47. #47 rrt
    November 26, 2008

    I agree that it’s a horribly complicated and political mess. I also agree that reliability is much more comprable these days, though I do nitpick over “quality,” as in penny-pinching choices on material selection, part design, etc., bit that’s more personal opinion.

    But regarding bailouts, I do wonder if at least some of the legislators aren’t thinking that it’s just not going to work. Sure they can port over a few of their European models, but even that will take a year or two. Current low prices aside, I still think they need to cut gas consumption drastically, and basically remodel themselves after the European markets. That will take at least a few years, and will be even harder since they’ll be making a late start, and will be dealing with consumers that will at least try to cling to trucks and Suvs (even if many fewer) for some time.

    I don’t know enough to say what will work, but I’m sure $25bn and promises alone aren’t going to carry Detroit for the several years they need to produce a viable, profitable lineup.

  48. #48 Tom
    November 26, 2008

    > Ford owns a 30% share of Mazda.

    Not anymore.

    Ford, Trying to Raise Cash, Sells Stake in Mazda

    http://www.nytimes.com/2008/11/19/business/worldbusiness/19mazda.html?ref=worldbusiness

    It will still keep some, but this was the only part of their business they could get any cash for. Even though it was still very profitable, they don’t have anywhere else to get financing, which is why – even though it is really distasteful – the bailout may be the least of two evils.

    And not to be a Detroit apologist, but things look somewhat bright if they can get through this rough patch (I know, heard that one before, right?) They gone part of the way in restructuring their union contracts, they just have to get more people to buy their cars now. With GM’s widely anticipated Volt coming and with decent prospects overseas for Ford and GM(especially in China, with a still booming economy and where everyone will be buying a car soon) things may be looking up.

    Ford and GM may get through this. Now Crystler … they’re screwed.

  49. #49 Flex
    November 26, 2008

    Thanks Tom, I missed that news.

  50. #50 Schwartz
    November 26, 2008

    Orac,

    You still haven’t told us if you drive a car from the big 3! I’ll take your silence to mean “NO”.

    “You mention an important point here – the complete abandonment of fuel efficient diesel engines by the US automakers (the only diesels sold are VW). Despite the fact that they make some of the nicest diesel engines with their European branches. Neither Ford nor GM would have any issue bringing a series of 30+ mpg diesels to the market; even the stupid SUVs would profit from them.”

    As I understand it, the EU diesel’s won’t meet the US air quality standards without significant changes. I’ve read in the past numerous complaints that the CA air standards (which set the bar for the whole continent) are skewed in favour of gasoline engines, and last I looked there was much debate over that. So we should be careful before blaming the car companies on the NA diesel front.

  51. #51 Schwartz
    November 26, 2008

    “Now, American cars are frequently right up there at the top of various quality surveys with Toyota and Honda. ”

    Broad brush statements are very dangerous. Throughout the 90′s and early 2000′s Ford had notorious quality issues. I believe they hauled all of their parts manufacturers into a meeting to demand changes, although it was their own mismanagement of the process that was more to blame. However, your statements about certain GM models is certainly true. I agree to assume that big 3 is lower quality is also wrong. There are plenty of European made cars with loads of quality issues.

    As for the F150, there are two main buyers of pickup trucks:

    1) Core Buyers: Those that work in construction, contractors etc, who need trucks and will always buy them
    2) Regular consumers: Buy them when gas is cheap because they want a truck

    The second group is what made huge profits for all of the big 3 in the last decade (while gas prices were extremely low). The Big 3 make enormous profit margins on their trucks and they milked that train without preparing for the next change. They all know exactly what the size of the core market is, and they will staff their factories down to service market #1 because #2 vanished in the last year or so.

  52. #52 Jim
    November 26, 2008

    read someplace that GM burned throu $8 bill third quarter ’08. Give them all of the $25 B; think they can turn around to profit in less than a year? Split the 25 three ways and it might last a bit longer. They will be back for more when the 25 runs out. If we throw bucks at them now it seems like we will have to do it again in a year or so.

  53. #53 Troublesome Frog
    November 26, 2008

    People who compare bailing out the auto makers to bailing out the financial system are missing the point. The financial system wasn’t bailed out on its merits. It was bailed out because not doing so has the potential to catastrophically affect every market. All it takes is a quick look at the run on the money market that happened after Lehman went down. A banking system simply can’t survive a large scale version of that type of failure. Bankruptcy for those institutions is impractical because it seizes up too much money on the global credit market.

    The bottom line is that the laws that allow you to go into bankruptcy and reorganize were written exactly for situations like the Big Three. I’m OK with the government backing some guaranteed financing for them if they declare bankruptcy (special case–they’re important to the nation and the credit markets are frozen), but there’s no reason to give them a gift. Let them do what everybody else does when they mismanage their company into the ground.

  54. #54 Jud
    November 26, 2008

    The bottom line is that the laws that allow you to go into bankruptcy and reorganize were written exactly for situations like the Big Three.

    There are at least two huge problems with this approach:

    (1) One group of creditors who cannot afford to receive pennies on the dollar are the Big 3′s suppliers. This would make a Big 3 bankruptcy likely to cascade throughout the nation, causing damage to what’s often referred to as the “real” economy analogous to the run on the banking system that the bailout was created to forestall.

    (2) A second group of creditors who cannot afford to receive pennies on the dollar are employees and particularly retirees (and the employees and retirees of suppliers as well). Let 10-20% of the nation’s grandparents stop receiving their healthcare and pensions, and we’ll see just how many milliseconds it takes for the rest of us to begin shouting for something to be done. See also my point above, that once you lower wages and take away benefits and pensions for this many people (plus all the small businesspeople who in turn depend on them economically), you’ll put a serious squeeze on the market for the Big 3′s products. Decimating your market is hardly a good business strategy to recover from bankruptcy.

    So let’s not go there (bankruptcy) in the first place.

  55. #55 Troublesome Frog
    November 26, 2008

    One group of creditors who cannot afford to receive pennies on the dollar are the Big 3′s suppliers. This would make a Big 3 bankruptcy likely to cascade throughout the nation, causing damage to what’s often referred to as the “real” economy analogous to the run on the banking system that the bailout was created to forestall.

    I haven’t seen any numbers that convince me that such a default is anything near the scale of the default of a large financial institution. The damage may be “analogous” but the scales aren’t nearly comparable. Yes, auto companies these days are essentially glorified banks that also happen to make cars, but there’s no reason that a properly structured bankruptcy can’t take that into account.

    A second group of creditors who cannot afford to receive pennies on the dollar are employees and particularly retirees (and the employees and retirees of suppliers as well). Let 10-20% of the nation’s grandparents stop receiving their healthcare and pensions, and we’ll see just how many milliseconds it takes for the rest of us to begin shouting for something to be done.

    Whether GM goes bankrupt or not, GM will not be paying retirees what it owes them. That’s pretty much a mathematical fact. They’re either going to take severe benefit cuts or the government will have to step in to take over payments. I don’t think that yanking pensions from 1M+ retirees is an option, so the government will definitely be taking over those liabilities. I can’t conceive of any scenario in which Big Three retirees simply lose their pensions. If we’re going to put money into those pensions, I’d rather not do it through an intermediary that’s hemorrhaging money.

    I find it interesting that GM’s web site can claim in the same breath that:

    1) losing the GM workforce would be devastating to society as a whole
    and
    2) they’ve made great gains in efficiency by cutting their workforce by 45.8 percent in the last 8 years.

    If they can explain how we’re not just buying them a backhoe to dig their own graves faster, and describe a plan that involves hurting out the shareholders and management enough to make this an undesirable outcome, then I’m willing to buy into it. Until then, I’d rather see the government take over important liabilities directly and let the inefficient operations restructure.

  56. #56 trrll
    November 27, 2008

    And so far as retirees are concerned – are you in favor of dropping the pensions and healthcare for these 60-, 70-, and 80-year-olds that they were promised while they spent their lives working on assembly lines?

    Those promises were made by the auto manufacturers, not by the federal government. So no, I am not in favor of the auto companies being managed so badly that they end up defaulting on the promises that they made to their workers, but that is clearly what is happening whether I am in favor of it or not.

    That is not to say that I am unsympathetic to the plight of workers who lose their pensions because their employer goes bust, or mismanages their pension funds, or to those who can no longer afford to retire due to the financial crisis sucking the value out of their retirement accounts. But that is a problem that hardly unique to the auto industry, so it is unclear to me why the auto industry should be special-cased. It seems more reasonable to develop a program to provide relief and health care to retirees who are in this kind of fix, regardless of what industry they were formerly employed in.

    So it seems like the plight of the retired autoworkers really is not particularly relevant here, unless a case can be made that it will be cheaper to provide for them by shoring up their employers than it will be to aid them directly as part of a general program to aid retirees in difficult financial straits due to the economic crisis. But that of course depends upon the assumption that the bailout will indeed enable the companies to survive at least long enough to meet their obligations to their retirees, which seems highly doubtful.

  57. #57 Tracy W
    November 27, 2008

    Orac: . Certainly, if one or more of the Big Three fail, we’ll be looking at a new Depression in Detroit and a much worse recession nationwide.

    How does the recession get worse nationwide?

    The $25 billion extra has to be raised by at least one, or a combination, of the following ways:
    – borrowing
    – taxes
    – less government spending on something else.
    Obviously, if taxes or less government spending on something else is used, then whoever were the people receiving that money before is going to be worse off to the tune of $25 billion. Plus, there are all the multipler effects of that spending lost (eg I have less money so I don’t spend as much, so the owners of the places where I wouuld have spent that money have less money, etc). As for borrowing – this means less money available for other borrowings.

    At best, you’re shifting money from one location to another. At worse, you waste money in the shift (deadweight cost of taxes, cutting government spending on a much better investment, etc).

    What is your economic theory that implies that a receission would be worse nationwide if we bail out? Why would the Big Three spending the money be more likely to avoid recession nationwide than whatever the money is being spent on in the counterfactual?

    The money spent on the bailout makes it even more important not to waste money otherwise, even if the bailout was a blazingly bad idea. Indeed, the worse the bailout was as an idea, the smarter and more careful the US government needs to be with the rest of its money. When you are in a hole, the first thing to do is to stop digging.

    Jud – you need to think about where the money goes. Okay, you cut costs by cutting your labour costs. So you have more money, which you either send to your shareholders, or keep for senior management/directors (I am ignoring taxes here). This means that your shareholders/managers/directors are better off by whatever you saved by cutting labour costs. Therefore they have more money to spend or invest. It may be that these shareholders/managers/directors already have as many cars as they want, in which case some other firm manufacturing luxury goods they want will earn more money and thus its shareholders/managers/directors will be able to buy more of your cars. Or it may be that your shareholders/managers/directors will invest the money, thus increasing the savings supply and lowering interest rates, leaving more free money for whoever wants to invest.

    If the change from wages to profits means that more taxes are paid (because of a progressive tax system) then the government has more money to spend on providing good and services, which means a higher income for whatever group provides those goods or services. Which means that group is able to spend more.

    Basically money doesn’t go away just because it’s moved around.

    Think about it – one breadwinner could buy a middle class lifestyle in the 50s and 60s, now two breadwinners struggle in the “modern service economy,”

    As far as I can tell this is because we are spending far more money on healthcare and the elderly, and until recently on housing. In the USA healthcare rose from 5.1 % of GDP to 13.4% of GDP in 1993. Similar scale rises, albeit at lower percentages of GDP to start with, have been seen in other western countries, this sort of growth isn’t particular to the USA’s healthcare system. At a broadbrush level, breadwinners are supporting more elderly people, and paying for more healthcare for said elderly, their children, and themselves.

  58. #58 Nic
    November 28, 2008

    If we want to think ahead, I’m not sure we want to continue down this path of unsustainable transportation. Electric cars are not the answer — unless of course we have an energy source that doesn’t come with national security issues.

    I did see a mention of encouraging these companies to start looking into making trains (idealistically great! realistically, not sure) and jobs could be saved.

    If we’re having this revolution, we might as well make some changes instead of persisting on a path that cannot last.

  59. #59 Phoenix Woman
    November 28, 2008

    By the way, you know the $70 an hour figure the right-wingers love to toss around to bash UAW workers?

    They’re including insurance and pension numbers (and highly inflated ones) in their figuring to achieve that number. The true figure is more like $23 an hour — and much less for new hires:

    http://mediamatters.org/columns/200811250012