Detroit Broke City

Automaker Bailout, Bailout, Big Three, Economic Stimulus, Economy, Politics

Robert

Recently US Senator Carl Levin from Michigan stated that in regards to Honda locating in Alabama:

[Alabama] has cheaper labor, younger labor, no legacy costs (for retiree health care) — younger work force means lower medical costs. They have certain competitive advantages that are not the result of brilliance or greater skill.

Holy sh*t. Has Levin been smoking too much green or what?

I hate to keep throwing around the phrase “basic economic principles”, but I learned about competitive advantages on my first day of Econ 101. “If Country A can produce a widget for $1 and it costs Country B $2 to produce the same widget, Country A has a competitive advantage.” If Honda can produce cars in Alabama more cheaply than it can in Michigan, then why wouldn’t they build a factory in Alabama? It is really difficult for me to sympathize with the state of Michigan on this. 

For far too long the owners of the Big Three have been getting rich while at the same time producing inferior products. When a few companies have total control of the market, the average consumer can do little. I mean seriously, I am going to start riding a bike instead? Do you know how sweaty I get? I’ll just pull a quick hobo shower in office bathroom and be good. Via an open economy, foreign cars started to make an appearance on American roads. And you know what?  They were nice and, more importantly, they were cheap. They were cheaper because they were produced overseas where employee wages are substantially lower. They were nicer because without all of the overhead, the foreign car companies could put more money into the vehicle and still charge a lower price. An additional $2,000 is added to each car just to cover retirement benefits for employees. 2 Gs!!! Unfortunately, unions have a strangle hold on the auto industry. They have had far too much power for far too long; they have paralyzed the auto industry. They are just one more gigantic rock around the neck of the albatross that is the American auto industry.

Enter bankruptcy. Bankruptcy is the only chance that these companies actually have of recovering. Filing Chapter XI would give them a chance to break the shackles of many of their past poor decisions. They could renegotiate their union contracts, so that the autoworkers begin to earn wages that are more competitive. The new leaders would have to work in harmony with federal bankruptcy regulations that would prevent them from making bad decisions that would slow down the recovery process. As horrible as it is to see so many people lose their jobs because of greedy decisions made by those in charge, I see a basic purge as the most logical way to solve this problem. Break down the Big Three so that they can be built back up through the free market. Make them compete and they will either flourish or perish, but their success will hinge on the quality of their products and their company overall, not the artificial infusion of government funds.

 

 

Adam    

 

Robert…its bad news. This whole situation has been difficult to gauge my feelings. I have had somewhat unflattering things to say about the American auto industry for years. The market manipulation they have been able use to their extreme benefit is unbelievable. I don’t want to get into a history of how this industry (along with a couple of other cooperative industries) has brought our society to the slow and mind-numbing pace we found ourselves at now.

That being said, I should point out that the American consumer has a great deal of power and control in shaping the auto industry. Unfortunately price along with product choice can easily fool consumers.

Glad to get that bit out of the way. What about the proposed bailout of the Big Three? Well it sure is tough to advocate for some of the largest corporations on earth who have ignored the need to help themselves. The way I have thought about this issue is not in terms of “The Big Three”, but in terms of the Big Three Million plus who will lose their jobs if these companies fail.

In the economic stimulus package I wrote about in a past post, I advocated for investment in infrastructure to, partly, create millions of jobs. So, although it is beyond frustrating for me to advocate helping these slow and inefficient companies with a bailout, I have to. 

This $25 billion bailout is necessary to save jobs. In regards to the Big Three failing, Jonathan Cohn points out that three million people would lose their jobs in the first year after such a Big Three meltdown, swelling the ranks of the unemployed by nearly one-third nationally and leading to hundreds of billions of dollars in lost income.

A bailout of the Big Three could provide our country with a unique opportunity. One point to be made is the billions that would be spent in unemployment by the government if these jobs were lost. A bailout would mean billions of dollars saved in this context (I know…it’s a stretch). The other point is that the Federal government is in a unique position to put standards in place to force the Big Three to modernize and help the United States become less dependent on foreign oil.

It may be argued that the free market would force these companies to adhere to new standards without government intervention. This type of restructuring would take place in the Chapter 11 process described above. As pointed out at The 7-10 “Who wants to buy a car from a bankrupt company?” This is where the Chapter 11 scenario becomes a problem.

This situation is not similar to letting the airlines go into Chapter 11 in the 1980’s. A warranty is not necessary for me to fly from one part of the country to the other. It is, however, necessary for me to want to buy a new car. If any of the Big Three were to begin the Chapter 11 process their ability to continue to do business would be dramatically diminished.

So…where do we go from here?  I feel Robert Reich provides the best way to proceed in this brief summary:

In exchange for government aid, the Big Three’s creditors, shareholders, and executives should be required to accept losses as large as they’d endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions.

Remember: The underlying goal is to help Americans through this crisis and come out of it with a stronger economy.

We need the Big Three to continue to exist. We need the three million jobs to continue to exist. We need a better American automobile fleet. The bailout of these companies, if done properly, can help us achieve all three of these needs.

 

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7 Comments

  1. Jesse  •  Nov 26, 2008 @7:57 pm


    Competition is the key here. Rather than subsidies, bailouts, and bellyaching, perhaps it is time that the dinosaurs be left to die so that something better may evolve. Sure, people may lose their jobs, but the innovation that would arise could lead to better cars and better ideas. Bailing out the Big 3 does not spur innovation; it rewards mediocrity and decades of poor business practices and greed. It has finally caught up with us. I would rather lose jobs and face harsh realities than bankroll further debt on a future generation that drives Toyotas and Hondas because they don’t break down as you drive them out of the dealership.
  2. Barry (Who am I?)  •  Nov 26, 2008 @9:33 pm


    Adam, being as that I have a similar educational background as you, it should be no surprise that I would agree with your Nov. 14th post that mentions investing in infrastructure as a “necessity” for reasons more numerous than I will go in to here. However, investing in infrastructure on a massive scale to create jobs (your Nov. 26 post) at this time makes little sense to me since it did not work when F.D.R. did it.

    While programs such as the Works Progress Administration and the Civilian Conservation Corps created millions of jobs during F.D.R.’s time in office, the increase in public spending resulted in large tax increases in later years, thus largely offsetting the supposed “good” that these programs strived to achieve. The value of a dollar plummeted and the cost of living skyrocketed. Later, Banks folded and the dominos began to fall (does this sound familiar . . . oh right . . . crap)

    What really turned the economy around? WWII – the greatest economic stimulus package the United States has ever known. A comprehensive timeline of the “Great Depression” can be found at http://www.huppi.com/kangaroo/Timeline.htm. Just to be clear, I am not advocating or supporting war here.

    I don’t think creating jobs in infrastructure is going to save us. The way Detroit does business is going to have to change from the top down. As for foreign cars – Robert’s post about basic economics is absolutely correct. Why am I going to pay all of those overages for a Detroit built auto when I can buy a Honda? Superior product, better quality, better engineering, same or lower cost because of less overhead . . . this shouldn’t take a genius. I mean seriously, a Chevy or Buick loses over 50% of its original purchase price value in two years or less!

    Not that this is a revolutionary thought, but shouldn’t the big three have maybe taken a commercial flight (or driven one of their products) to Washington and approached congress with one of those things . . . umm . . . oh, yeah – a “plan” or some kind of “proposal” for what they would do with the money!?

    On another note, I agree with the statements regarding Unions. I work in a City for the past two years where Unions have permitted residents to be overcompensated underachievers . . . until one day the big factories closed down. That was eight years ago and there are still unemployed people collecting checks from the government and the company for no reason. These people have little incentive to further their education, find another job, or gain any new skills.

    I suppose our unemployment benefits and how it is a self-perpetuating problem that encourages people to remain unemployed and remain a burden on people who are employed is for another post.

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  3. Adam.BTA  •  Dec 1, 2008 @11:39 am


    Barry, great to see you checking in here and commenting. Of course, its always nice to see you agree with me….and then instantly disagree with me. But this is good stuff, just like we’re back in class mixing it up. So I’ll try and bring back those reminiscent feelings and we can have a bit of a debate on the points you presented.

    One point I think you should see in my post on economic stimulus is that the case for that kind of government spending is “necessary” based on the state of our existing infrastructure ( http://beyondtheargument.com/?p=16 ).

    FDR, The Depression, and The War. Ok, FDR and the New Deal did create jobs and help bring the economy back on track. The point I believe you are describing as far as jobs and the economy is in 1937. This is when FDR fell into pressure to cut back government spending and raise taxes because of legislators worried about deficit spending. The chart provided by Krugman http://krugman.blogs.nytimes.com/2008/11/08/new-deal-economics/ shows the progress the New Deal was making and what happened when FDR went off course from it. The economy was growing until 1937 changes were made and continued to go back to growing after this period. Then of course the war really filled the gap left by the Depression.

    Another point to note, the economic stimulus provided by the New Deal was really around 3% of GDP. Considering the “limited” effect it had on the economy and the massive effect the war had should only bolster the argument of large amounts of government spending during a recession.

    You state that “Later, Banks folded and the dominos began to fall (does this sound familiar . . . oh right . . . crap)”. The banks fell before FDR. FDR brought the FDIC which I believe had a positive impact on the chance of banks failing.

    I am glad you are not advocating war. War really creates temporary jobs (temporary demand which can be filled after the war as it did), but does not produce usable “things” for the country. If 50 tanks are built or a few miles of transit lines are built, which one advances the economy in the long term? All of those bombs, bullets, tanks, and planes dont enhance the economy in the long term (also, there is the massive loss of human life that does not exactly advance the economy).

    Once again Krugman has the idea on the stimulus and war in this post http://krugman.blogs.nytimes.com/2008/11/10/fiscal-fdr/

    “What you see is that the fiscal stimulus provided by the WPA and all that was relatively small — and pulled back in 1937, with disastrous results. But when Dr. New Deal turned into Dr. Win the War, the economy got some serious stimulus.”

    I think if you’re going to try and stimulate the economy, you do it all the way and not half way.

    That out of the way, the auto bailout is a bad situation. I really don’t think we can handle losing 3 million jobs. The companies have been doing a bad job for years. The Big Three cars do lose value, as do all (buying a vehicle and expecting a ROI is not smart). I do not see any real proposals from anyone on how to replace those jobs. Maybe some are picked up by the foreign autos, but we are talking about a massive increase in unemployed Americans. I just don’t think now is the time to let them go..

  4. Adam.BTA  •  Dec 1, 2008 @11:45 am
  5. Adam.BTA  •  Dec 1, 2008 @5:43 pm


    Wow…too many quotes from him…but I just think he’s spot on when it comes to the idea of stimulating the economy.
    Krugman in regards to an opinion about tax breaks for job creation:
    http://krugman.blogs.nytimes.com/2008/11/30/the-greatness-of-keynes/

    “if the private sector wouldn’t have created a job on its own, that job shouldn’t have been created — whereas the real choice is between having workers doing something and being uselessly, destructively unemployed.”

    Ok, so this takes me to our inefficient Big Three. Isn’t it better to keep 3 million people working and adding to the economic output of our country than have them be unemployed?

    Oh, and by the way, we can load that loan up with everything we want the big three to be. If they want to live…they’ll change.

  6. AdamBTA  •  Dec 3, 2008 @5:06 pm


    For totally unrelated purposes…but a light note to end the thread with fun instead of gloom

    http://www.hellogreenman.com

  7. Shane P. (Who am I?)  •  Dec 8, 2008 @1:21 pm


    Hello All.

    I only have a couple of brief comments to make and they will be short and simple.

    1.) A bailout is needed for the major 3. The likely trickle down of job loss and other negative situations that would come from a collapse would be far worse than most people can imagine. With the possible loss ration of every dollar lost by the Auto Makers there could potentially be seven dollars lost from suppliers and other automotive dependent industries. I don’t like the whole bailout scenario but in this case it may be the only out.

    2.) Coming from a background of Advertising and Public Relations I beleive that another situation must be looked at when talking about the bailout of the Major 3. The situation I speak of is the cutting of almost all Public Relations positions and Marketing positions within the 3. It is understandable that most businesses feel that the PR position is the least needed position when it comes to cutting back. In some cases this could be correct but in the case of the Major 3 I beleive that they made a big mistake when making thses cuts. One of the problems that the 3 are having is realying their message(s). Over the last couple years most americans have not heard about current and future endeavors of the american auto makers. Even during the hearings there have been questions asked about current and future products that could have easily been communicated with good to sub par public relations. The fact is I blieve strongly in communication efforts and when you cut most to all of your key communication experts you end up becoming silent in a world that demands you to speak up.

    That was a bit longer than intended…but hopefully clear enough to get my point.

    Shane P.

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