Bailing out Detroit

Larry Kudlow:

…Stocks were off big today — before, during, and after Paulson — closing down over 400. Tough to pin it on the Treasury man, however, since the plunge started in the early-morning well before he spoke.
Some folks think the stock market is stalking Obama, whose defining moment may be a GM bailout. Plus, investors are waiting for a new Treasury appointee who will shed light on Obama’s tax and trade threats for 2009 as well as his UAW rescue mission that is so strongly favored by Speaker Pelosi and Senate Majority Leader Harry Reid. Policies protecting ailing industries would certainly set a France-like tone for the new administration.
Here’s a stat from my friend, blogger Mark Perry: Total compensation per hour for the big-three carmakers is $73.20. That’s a 52 percent differential from Toyota’s (Detroit South) $48 compensation (wages + health and retirement benefits). In fact, the oversized UAW-driven pay package for Detroit is 132 percent higher than that of the entire manufacturing sector of the U.S., which comes in at $31.59.
I don’t care how much money Congress throws at GM. With that kind of oversized comp-package they are not gonna be competitive. It’s throwin’ bad money after a bad cause. What a way to start the new Obama era.
I would still argue that rescuing banks and consumer credit companies removes systemic risk from our lending system. But the only thing systemic about the GM bailout is the hegemony of the UAW. Or maybe I should be more cynical: Republican socialism followed by more Democratic socialism.

Megan McArdle:

One of the things you hear over and over again from critics of Detroit, especially ones from the left, is that their current woes are all management’s fault because they kept making big cars.
Management has made a lot of mistakes. But making big cars wasn’t one of them. That’s because they couldn’t profitably make small cars in the United States. And the reason they couldn’t is that their labor costs were too high. All in, Detroit was paying about $30 more an hour than other companies to make cars. At that kind of differential, you have to concentrate on large cars with big profit margins, not economy cars where consumers fight to save $15 on the headlight bezels.
That has changed, as Freddie rather vigorously points out in the comments. But corporate culture is a powerful thing. One of the fascinating things about mergers is just how resistant corporate culture is to change; you can fire nearly everyone, and as long as there is still a core of old workers, they will fight to the death to keep doing things the old way. 30 years of complacence followed by 30 years of worrying how to meet the UAW’s bill left a corporate culture that was not geared towards innovation, nor towards making small, efficient cars.
Moreover, there was no good way to recruit new talent who might have changed things…Working for the Big Three magically combines vast corporate bureaucracy and job insecurity in one completely unattractive package…
Into this mix you have to throw the dealer network, which has as much of a stranglehold on Detroit as the UAW. As I understand it, until gas hit $4 a gallon and the bottom absolutely dropped out of the market, the dealer network continued to pressure GM and the others to concentrate on high margin SUVs with lots of extras. Libertarians who get all huffy about the UAW should be even more revolted by the dealers, which have browbeaten state legislatures into giving them ridiculous powers over the auto makers.
The entire thing is a toxic mess, left over from the days when interlocking oligopolies contentedly conspired to suck every last dollar out of captive consumers to whom Detroit would happily have given Flintstones cars if they could have figured out how to do them in two-tone vinyl. But things that look like lunatic mistakes on the part of management were often quite rational responses to intolerable pressures…
Having driven the companies right up to the verge of bankruptcy, they conceded literally only when it became clear that the union members were about to get their contracts unilaterally rewritten by a judge, lose their health benefits, and possibly get their pensions crammed down by the PBGC, which maxes out somewhere slightly north of $40K per annum. Then the unions ever so generously agreed to cut health care costs by 30% in exchange for job security guarantees. And now that their game of collective bargaining chicken has resulted in the obvious disaster, they want us to pay to save their jobs, at a cost of over $300,000 per.
It seems to me at least as plausible to believe that the unions were behaving like morons in the belief that the government would bail them out, as that the big bankers were. What is the prudential reason for the rest of us to encourage this sally into the land of moral hazard? If GM goes bankrupt, my Mini will not suddenly stop working.
Bailing out the auto industry offers no net gain to society. It is a straight transfer of resources from one sector to another: we tax money, or borrow it from a finite pool of capital available to the nation, and spend it on auto workers. The people who pay the taxes, or the people who would have borrowed that investment capital, now have less to spend. Whatever they would have bought goes unbought; whoever would have made it goes unemployed. To coin a phrase, what is made on the swings is lost on the roundabouts We have the illusion of a gain only because that other group of people is invisible. Even if we don’t bail out GM, they will not be visible–we will never know who didn’t lose a job or a business because we declined to spend one squillion dollars saving the Chevy Cobalt.
But let’s say it was all management’s fault. What’s the argument for bailing them out then? Does someone have tens of thousands of auto engineers, marketers, and senior management buried under a rock somewhere, waiting to replace the incompetent managers? Because it seems to me that we’re just pouring money into the same deep hole that will periodically reward our efforts by coughing up the Pontiac G6.

Douglas Baird, via Jennifer Rubin:

Professor Douglas Baird of the University of Chicago Law School has some sober words of advice for GM. The entire interview is worth listening to, but the bottom line is simple: GM can’t pay its bills, and it is making a product no one wants. So, a bailout just puts off the inevitable. Oh, and there’s no guarantee that bankruptcy will help, either. As Baird puts it, if a restaurant makes bad food, bankruptcy won’t help it recover.
At least with bankruptcy, however, taxpayers dollars aren’t at stake. Moreover, unlike the vision portrayed by allies of the car companies, bankruptcy won’t mean that GM stops operating–only that its shareholders get wiped out, its creditors “get a haircut,” and that new management likely will be brought in. (Remember United Airlines?)
There is little doubt that neither management (which doesn’t want to get booted) nor the UAW (which wants to keep its rich benefit and wage structure) likes the bankruptcy option. And both groups have a lot of political muscle. On the other side are the taxpayers, businesses who have just as much claim to public dollars (and a better track record), and people warning against the never-ending parade of petitioners an open-ended bailout policy will invite.
It will be an interesting test for the President-Elect. Can he stand up to Big Labor? Does he see through the emotional cant (“The auto industry is the backbone of our economy!”)? Can he perceive the systemic danger of perpetual government rescues? Stay tuned…

Jim Manzi:

What would it mean to have GM go bankrupt? A change in ownership and a renegotiation of contracts.
The factories, computers, office space, intellectual property and so forth that are now owned by GM would not disappear; they would basically become the property of GM’s creditors. These creditors would sell the assets to the highest bidder. Assuming there is economic value to be created by continuing to operate the company as a business, private equity or strategic investors would buy the assets, shut down some plants, fire some union and exempt workers, and probably use the leverage of bankruptcy court to get a better deal from the unions. The current employees and creditors would be better off if you and I were forced by the federal government to prevent this by paying money to the corporate entity named General Motors, to then be paid to these employees and creditors. Of course, you and I would be worse off in this situation. On balance, if you believe that markets are more efficient allocators of capital than Congress is, the population of the United States would, on the whole, be worse off.
Is this fair to the people who work at GM and will now have a deal changed after the fact? Well, when people sold parts to GM on credit, or employees (individually or via union negotiations) entered into labor contracts with GM, they undertook counterparty risk. That is, they were taking, in part, a bet about whether GM would actually be able to pay them what they are owed. This is also true for pension payments, which are simply deferred compensation, as much as it is for deferred payments on credit terms for parts. To act now as if they should be protected from this risk is to treat them as children.
Is this fair, given that you and I are being forced to cough up an immense amount of money to bailout bankers in New York who are far less sympathetic characters than assembly line workers or Assistant Market Research Managers in Warren, Michigan? We are bailing out bankers, not because we want to avoid employees losing jobs at AIG or shareholders losing money at Merrill Lynch — in fact, as I have argued form the beginning, it is essential that employees and investors not be protected as part of these bailouts — but because the economy as whole is at risk of devastation if we allow systemic collapse of the banking system. We are bailing out parts of the finance industry because it is good for us, not because it is good for the finance industry. This ultimate public backstop is why it is appropriate and prudent to regulate parts of the finance industry to avoid collapses that threaten the whole economy.
Isn’t it important that we maintain an industrial base as a matter of national security? Yes, but that is not the same thing as saying that the current management of GM needs to continue to have operational control of these assets, or that current employment levels are appropriate, or that current union contracts need to be maintained. There is a potential argument to be made on these grounds for some kinds of restrictions on foreign ownership.
A bailout of GM would be a pure exercise of political power to deliver taxpayer funds to one organized group of citizens at the expense of the country as a whole. It should be avoided.

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adam hartung
15 years ago

If America bails out GM and/or Ford we should demand a change in the leadership and management teams. Until someone Disrupts these companies and changes their management approach these companies will not be viable competitors. Read more at

Mike Cappelli
Mike Cappelli
15 years ago

Who is kidding who?! This is a UAW bailout. I say F#@& THEM! They overreached, and now, they pay the price.
You want rubber rooms??? How about rubber checks – for your pensions!

15 years ago

If we bail them out will they stop making shitty cars?

Ragin' Rhode Islander
Ragin' Rhode Islander
15 years ago

Airlines. Steel. Automakers.
Unions eventually strangle companies, just like they’re strangling the taxpayers in Rhode Island.
Let the automakers sink – we shouldn’t be forced to bailout the UAW.
Let them serve as a lesson to AFSCME and NEA and the other greedy unions here in RI.

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