Our Car Population Is Shrinking!

TW: This chart only goes back to 1990 but I would suspect the lines had not crossed for quite awhile prior either. The number of vehicles being scrapped is exceeding those new vehicles registered meaning our population of vehicles is shrinking for the first time probably since vehicles were invented. I believe something like 1.2 vehicles are registered per American meaning there are a heck of alot of vehicles populating our roadways, garages and driveways. Excessive consumption is rightly derided within the U.S. this is change for the better even if it is highly painful for the industry.

Bi-Partisan Stupidity

TW: Really not much to say about this bi-partisan pile of dung. One of the reasons the American auto industry is dying are massive legacy costs such as these. Republican Grassley IA is sponsoring the Senate bill, such stupidity. This is how nations decline, entrenched interests which stopped adding value years ago refuse to go away. Perhaps the Dems would pass this garbage by themselves but the Republicans being huge buddies with the dealers are right there at the trough with them on this one.

From the Detroit News:
A majority of House members have signed onto a bill to reverse the closing of 789 Chrysler dealerships and block General Motors Corp. from closing more than 1,300.
The Automobile Dealer Economic Rights Restoration Act of 2009, sponsored by Rep Daniel Maffei, D-N.Y., now has 221 cosponsors — a majority of the 435-member House.
Idiots.

This comes via Jim Manzi who explains pithily: "The practical effect would be to reverse or prevent the vast majority of dealer closings that were a key component of the auto restructuring plans. This seems only fair, as the dealers paid good money for these politicians."

This is a wholly nonideological porkfest, with 133 Democratic cosponsors and 88 Republican cosponsors. (So far.) Which just goes to show: under the right circumstances, bipartisanship isn't dead after all. David Broder should be thrilled.

Democrat Pandering: Not Cutting Car Dealers

From NBC:
"...In a conference call last week with the White House task force on the auto industry, Hoyer asked the experts, "What does it save the manufacturer to shut down dealerships?"

The answer he received from the Obama team was "practically nothing," Hoyer said.
For this reason Hoyer reiterated his support for "The Automobile Dealer Economic Rights Restoration Act of 2009" which would restore auto franchise agreements to GM and Chrysler dealers who have had to close due the companies' recent declaration of bankruptcy saying: "By closing [dealerships] there is no economic benefit to the manufacturers. If that is the case I think it is irrational to close down dealerships that average 53 workers and quite possibly increase unemployment by one hundred thousand people."

TW: Either the Obama team answer was flawed or Hoyer misunderstood the answer but Hoyer's support for keeping car dealers open is not founded on rational analysis. While GM etc. may not be directly funding their dealer overheads they are inherently indirectly funding the dealers. Car dealers are merely distributors for the manufacturers. If you have more of them then you likely have more costs. Hoyer's point about employing 100K workers makes the point, someone is paying for those workers and showrooms etc.

The number of car dealers theoretically should be set by the market but decades' old and stringent franchise laws have resulted in thousands of economically marginal domestic car dealers remaining open even as the domestic car sales shrank. The imported car manufacturers get by with a fraction of the dealers the domestics use. The import car dealers have higher profit margins hence nicer showrooms hence more sales hence less price competition amongst their brands hence the death spiral for the domestic manufacturers goes unabated.

Hoyer no doubt has the still powerful domestic car dealer association up his backside but making spurious economic arguments makes him (and any other politicians preaching the same tune) a pandering fool on this issue. If the domestic auto industry is to revive they will need far fewer car dealers, period.

Detroit's Problems: Not Just Unions Or Incompetence

TW: Unions, incompetent managements and brilliant foreigners get blamed for Detroit's woes but there is another contributor, the dealers. American car dealers are a legacy structure going back decades which have created a huge cost infrastructure contributing immensely to Detroit's woes.

The dealers are frequently pillars of their communities, the epitome of "small-businessmen" that rightly or wrongly are considered the backbone of American life. Partially as a result of these attributes, the dealers have been a potent lobbying force for decades leading stringent franchise laws which forced the Big Three to retain thousands of un-needed dealerships even as their market shares declined.

Culling them has been neither popular nor legally feasible but they are a massive overhead nonetheless. The culling process will cost thousands of jobs directly and indirectly (e.g. not as many ads in the local papers and billboards) and create empty lots across America. The economics realities rule, however, and Detroit and those effected communities would have benefited if this process had been allowed to take its natural course over the past years rather than blow up all at once.

Franchise laws exist for legitimate legal and economic reasons but frequently those laws have been co-opted by the franchisees to their benefit (most are state level). The auto industry is by no means the only industry impacted. So if you don't feel sorry for the union folks, you should not feel so sorry for these folks either.

From Economist:
"...Fitzgerald was among the 789 Chrysler dealers, a quarter of the total, that the carmaker “extinguished”, as he puts it, as part of its move through the Chapter 11 bankruptcy process. The decision had been expected: the firm had been saying it needed to cull its dealers for years.

The same is true of General Motors, which still had nearly 6,000 dealers in America last year, hardly fewer than in the 1960s when it controlled roughly half the domestic market (these days it is struggling to keep its share close to 20%). Just a day after Chrysler’s announcement, GM sent letters to 1,100 of its own retailers letting them know their franchise agreements would not be renewed. At least 500 more dealers will be dropped in the months to come as it closes or sells off its Hummer, Saturn, Saab and Pontiac brands. It eventually hopes to get the number down to 3,600.

Why are the companies desperate to reduce their dealer count when they are haemorrhaging sales and market share? Foreign firms such as Toyota have found that they can do a better job with fewer stores. Toyota now outsells Chrysler with barely a third as many showrooms. Its dealers do not have to compete with one another on price. That means they earn better margins which, according to Mark Templin of Lexus (Toyota’s luxury brand), they put back into their stores “to deliver a more attractive experience for their customers”.

...It is only thanks to bankruptcy (actual for Chrysler, imminent for GM) that the two carmakers can now overcome onerous state franchise laws that have long frustrated their efforts to modernise the system. Individually and through umbrella organisations, such as the National Automobile Dealers Association, car retailers are some of the country’s most effective lobbyists—which is not surprising as they are among the largest state and local taxpayers. In some states, such as Texas, taking away a franchise is virtually impossible, even when a retailer is convicted of fraud. A few years ago GM spent more than a billion dollars to buy out the retailers affected by its decision to eliminate its Oldsmobile brand..."
http://www.economist.com/business/displaystory.cfm?story_id=13703900

Does Obama's Aggressiveness With GM Reconcile To His Financial Bailouts?

TW: Many have asked why is Obama being a hardass with GM while pandering to the banks. They are different situations requiring differing responses. A simple concept lost to many. The banks have a balance sheet problem, a very huge balance sheet problem whereby their assets are worth far less than book value but their underlying businesses do produce profits. In time the banks will be restored to "normalcy". In addition, it is a dead certainty without a viable banking system one does not have a viable economy.

The automakers as an earlier post showed are in a long-term sectoral decline. As currently structured their legacy costs not only related to retirees but also just old installed capital bases are not profitable now and will never realistically be profitable. Obama has a choice between the lesser of two evils, bite the bullet now or kick the can down the road. Those legacy costs have to be addressed through a combination of retiree concessions, bond holder haircuts and taxpayer subsidies. We can do it now or later. Now is not a good time to do it given the overall economy but there does not appear to be a viable alternative.

From Jim Suroweicki at New Yorker:
"In the wake of the Obama Administration’s decision to take a hard line on bailout funding for G.M. and Chrysler, there’s been a lot of talk about why there seems to be a double standard at work in the way the Administration is dealing with the automakers and the way it’s dealing with the banks. This may well be a premature conclusion: it’s not obvious that the Administration won’t adopt a tough line with at least some banks after the stress tests are completed next month. But to the extent that there does seem to be a difference between the Administration’s strategy for dealing with the two industries, there is an obvious explanation: it’s relatively easy to see how the banks can return to profitability, while it’s much harder to see how the automakers can become profitable again, at least in the absence of the kind of radical restructuring you’d get through bankruptcy or some kind of deal with the bondholders.

The money the government has been giving the automakers has been going not to shore up their capital base, but literally to pay their bills. In the absence of government aid, the automakers would have had to shut down their factories because of their inability to pay suppliers and workers. That’s not true of even the most troubled big banks, which are having no problem meeting their debt payments or paying their bills: the government’s aid has gone instead to replenish their capital and allow them to stay in regulatory compliance. That doesn’t mean the government’s aid was not essential, but it was different: the money the government gave G.M. has already gone out the door, while in the case of the banks it’s still, for the most part, sitting on their balance sheets (which is where it’s supposed to be)..."

All You Need To Know About GM

TW: Nate Silver nails GM. Any company or industry (I would think Ford/Chrysler have similar charts), with a similar chart would be doomed. Anyone who invested in a U.S. automaker over the past 40 years (other than a trader playing the movement around the general decline) was on a fool's errand. Why does the chart look this way? Two things, massive competition from the internationals and retirement benefit deals made decades ago which larded the present day company with unsustainable burdens.

If this concept was merely limited to the U.S. automakers it would be bad enough. Unfortunately the automakers in many respects are metaphorical for the overall U.S. fiscal system. Workers have been promised retirement benefits which are also unsustainable. Folks have taken out mortgages for which they will be unable to support. Banks have made unsustainable loans etc., etc. The common thread short-term gain for long-term pain.

Our states are creating pension time bombs that will make the automakers seem tame. The housing bubble at least is bursting in rapid if too spectacular a form. Benefits (health care/pensions etc.) must come down!!

From Silver at 538.com:
"...The auto business is highly cyclical because consumers are buying expensive assets that last for years at a time. Nobody ever really has to buy a new car (they can buy a used one if their car breaks down), and therefore consumers are willing to hold on to their existing vehicles and wait out economic slumps. You can't do that with, say, a loaf of bread, or even something like a cellphone, which has a much shorter lifespan.

...If I were an alien beaming down from Rigel-3 looking at this pattern -- an alien with an MBA degree -- my first guess is that it would reflect some sort of systemic problem, some chronic imbalance that magnified over time. Something, in other words, like the costs of GM's retiree pension and health care programs. It's difficult to get a precise figure on these so-called legacy costs, but they averaged about $7 billion per year between 1993 and 2007 and are probably at least $10 billion per year now. Considering that GM has never made as much as $10 billion in profit in a year and that its entire operating lossses in 2008 were $13.8 billion, you can see why this is a significant problem.

...Of course, GM benefited by promising its employees access to lucrative retirement programs -- it benefited by being able to pay less to those employees in the form of salary. But whereas the benefits to GM came long ago, the costs come now...GM was willing to cut its employees some very attractive deals in the 1950s through the 1980s -- provided that they took them in the form of retirement benefits rather than salary

...This issue is wrongly portrayed by both the liberal and the conservative media as one of management versus labor, when really it is a battle between General Motors past and General Motors present. In the 50s, 60s and 70s, everyone benefited: GM and its shareholders got the benefit of higher profit margins, and meanwhile, its employees benefited from GM's willingness to cut a bad deal -- for every dollar they were giving up in salary, those employees were getting a dollar and change back in retirement benefits. But now, everyone is hurting.

...most of the excess costs it requires to produce a Buick versus a Toyota come in the form of legacy costs, not what those employees are receiving in salary and benefits today. And the taxpayer is bound to to get screwed either way, either picking up the tab to bail out GM, or bearing the costs of the pension programs, which are guaranteed by the government (although the legacy health benefits aren't guaranteed)..."

High Stakes Poker With the Automakers

TW: I suspect this week's drama with the automakers is merely another inning in the on-going fandango with the automaker bondholders (the bondholders hold tens of billions of notes on the automakers, they must take significant haircuts if the automakers are to have viable recovery plans, the stocks are toast except for casino playing traders). Below Smith outlines the downside of the hardball Obama is playing this week. While at a certain level the bigwigs being held to the fire is enjoyable, the risks are considerable. Ultimately I strongly doubt Obama wants any of the Big Three in Chapter 11, naturally the bondholders know this hence the need for the game of chicken. The southern Republicans may relish the world auto industry losing American based manufacturers, I am not convinced the rest of the American public is ready for that step.

From Yves Smith at Naked Capitalism:
"It would be better if we were wrong, but we are of the school that putting the big automakers into bankruptcy, despite its attractions (being able to restructure debt and dealer networks; the UAW contracts are far less significant economically than the media makes them out to be) misses out on one crucial element: you don't have a business if you don't have customers. And a GM bankruptcy would be a protracted affair. Even if consumers believe the company will make it, what about their local dealer? If they worry they might have to schlepp to get their car serviced, is it worth it?

In typical backwards American deal and contract focused thinking, the officialdom has not spent enough time assessing the single most important issue: how would customers react? If GM and Chrysler were to lose as many as 20% of sales they'd otherwise get as a result of a bankruptcy filing, that it is a very big change in outcomes. And the drop could be considerably higher than that.

I worry that this punitive move will wind up being Lehman redux. Recall that bailout disgust was running high post Bear and Fannie and Freddie, and Someone Had to Suffer to show the Administration was made of real men. Now since no one even dares bitch slap a bank (the bonus stuff is mere Punch and Judy), all the hostility is channeled at Big Auto. And the danger is going into overkill literally, not just figuratively, to make up for being too easy on the financiers. And if GM or Chrysler were to be liquidated, the knock-on effects would be grim. They are important to quite a few parts suppliers. If those suppliers fail, it threatens the viability of the foreign transplants."
http://www.nakedcapitalism.com/2009/03/auto-company-plans-rejected-by-task.html

Nut Cuttin' Time For the Automakers

TW: Tuesday is meant to be an inflection point for GM and Chrysler, they are to submit plans justifying more subsidies from us or cut bait. Not surprisingly the leaks are flying this weekend in particular with GM "pondering" bankruptcy. Also the UAW negotiations had one of their periodic breakdowns last night.

At this point, given the depth of the hole they are in (regardless of the reasons and the reasons are vast and not related purely to incompetence) and the state of our economy; I am now in the bankruptcy as best course camp. The job losses are going to be massive whether they go Chapter 11 or not. Worldwide overcapacity in autos is extremely high and will have to be reduced.

Chapter 11 re-organization probably provides the best mechanism by which to force bondholders (equity holders are done and anyone owning US auto stock other than as a trade is deserving of being wiped out), the unions including retirees (although I suspect we the taxpayers will end up "owning" those pension funds sooner rather than later), and others to make the painful choices and reductions necessary if GM and Chrysler have any future. I do not buy the notion that folks will stop buying GM cars if they go into Chapter 11, anyone who is not concerned about GM is living in lala land so they are already taking risk if they buy GM. A solid re-org plan might actually do wonders for their reputation.

I say this given what I know from superficially following the matter and trying to be cold-blooded about it. There is of course the possibility that GM could be a Lehman (i.e. a firm that if it goes down will bring the rest of the country along with it). Understand actual companies and individuals own the $100 billion of GM/Chrysler debt, if they start taking bigger haircuts there will be repercussions. If GM/Chrysler force even deeper supplier cuts, there will be repercussions etc.

Pending Train Wreck Alert

TW: Feb 16 is the day (i.e. the date the can was kicked down the road last month) the automakers are meant to come back with justification for their continued existence/subsidization by the federal government. Sales released today for January showed declines of roughly 45% on average. I assume folks will start focusing on this pending kerfuffle by next week. It will be a game of chicken between the bondholders and the government. The bondholders seeking to avoid getting wiped out and the government seeking to avoid the collapse of our domestically owned auto industry.

The Fall Of GM On One Page

Click on image for larger view

TW: This one page encapsulates the plethora of arguments and factors impacting the decline of GM and really all of the domestic automakers. The fact that there are so many factors provides everyone with a reason to dislike the automakers. It also provides cover for anyone with an ideological bent to claim moral highground when attacking the automakers. The reality is the demise of the domestics is a complex result of many variables.

With sales decreasing for all automakers including the transplants at 30%+, clearly one or more will be gone by the end of the year. The question is only how to facilitate the consolidation.

Kicking the Can Down the Road...

From Robert Reich:
"George Bush's Final Christmas Present
The President's lifeline to the auto industry includes the provision Senate Republicans were insisting on last week, which scuttled the deal -- cuts in UAW wages and benefits to make them comparable with wages and benefits in non-union automakers' plants (all owned by foreign automakers, all mostly in the South). Last week, Bush lobbied against this provision. Now he's adopted it, without any legislation at all.

What's really going on? Bush doesn't want messy bankruptcies of GM and Chrysler, potentially threatening more than a million jobs, to tarnish his last weeks in office. So he's giving the automakers what they need to tide them over, and kicking the can to the Obama administration. But nor does he want to leave office slapping down Senate Republicans, so he's giving them what they demanded, too.How to square the circle?

Read the fine print: The automakers don't really have to bring wages and benefits down in order to get the money. That requirement can be "modified" in negotiations with the UAW. So everyone gets a Christmas present, and W. leaves town before the bill arrives."

Reconciling Detroit to "Japan"

TW: Have posted many times on the inaccuracy of the claim that "Detroit" wages are vastly higher than "foreign car" wages in the US. The graph depicts the issue clearly. Strip out the retirees and "Detroit" workers make $4/hr more than "foreign" workers.

Another key argument against "Detroit" is that they do not make the right cars. One of the primary (although certainly not sole) reasons they do not is underinvestment in new cars. The perniciousness of the retiree overhang for "Detroit" is that the fixed costs associated with the retirees (but not the younger "foreign" operations) suck up billions of dollars that could otherwise fund R&D or other corporate uses. This creates a vicious circle whereby Detroit makes a car and takes much of the profit to pay its past workers, while the "foreign" automakers take the profits and fund the next generation of those vehicles
"Americans want". It is not this simple of course, but you get the idea (and this ignores all those subsidies the "foreign" folks get to set up shop in the first place).

http://www.nytimes.com/2008/12/17/business/economy/17leonhardt.html

Those Southern Socialists (aka Republicans)

TW: Hypocrisy is such a delicious political trait. Southern states have provided over $2.3 billion in state subsidies attracting foreign car firms to their states. The foreign automaker model is not complicated, use young workers (without legacy retiree costs) and state subsidies to compete effectively with U.S. automakers. Have management decisions contributed? Presumably. Are they solely or even majority responsible for the foreign company success? Not likely.

From Washington Independent:
"To hear Southern Republicans tell the story, the financial burdens facing Detroit’s automakers are self-made troubles to be settled by the laws of Adam-Smith capitalism.

“We don’t think it is the role of government to intervene,” Sen. Jim DeMint (R-S.C.) told the Fox Business Network last week. “We need to let the market and the laws work the way they are already in place.”

Yet this argument — that the government has no business interfering in free markets — ignores an increasingly frequent tradition among Southern states, which have fronted billions in local taxpayer dollars in the past two decades to attract foreign auto plants

Supporters of these deals contend that the economic activity spurred by the arrival of the automakers is worth the up-front costs. Yet some experts say that, considering the ever-growing size of the incentive packages, there’s little evidence to support that claim.
“It’s exceedingly difficult to determine whether the returns warrant the original incentives,” said Matthew N. Murray, executive director of the University of Tennessee’s Center for Business and Economic Research. “It’s just hard to show that it’s going to produce enough tax revenue.”
http://washingtonindependent.com/22236/cars

Bob Corker Where Are You?

TW: Sen. Corker is trying to make a big name for himself by opposing the UAW during the negotiations with the automakers. He is all for setting blue collar autoworker wages. I now challenge him to oppose the Bush Administration and set financial worker wages. Here is your chance- Rock on Bob!

ps I am repeating my call for any pay restrictions on "Wall Street executives" to be extended throughout the financial organizations in order to broaden the pain in simpatico with the form of the automaker bailout.

From WaPo:
"Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules.

But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said...

Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives. "The flimsy executive-compensation restrictions in the original bill are now all but gone," said Sen. Charles E. Grassley (Iowa), ranking Republican on of the Senate Finance Committee..."
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/14/AR2008121402670.html

Automaker Bailout BS: Now the Republicans Want the Government To Set Wages

TW: Oh the irony...the Republicans abandoning Adam Smith to set wage rates. Now if the Republicans propose capping financial worker wages (and not just the top level folks) then we will know the Republicans are really serious and not merely grandstanding.

From Surowiecki at New Yorker:
"...[the UAW refusal to cut wages again in 2009] has almost nothing to do with the core problems faced by G.M., Chrysler, and Ford. The wage gap between U.A.W. workers and workers at other car companies is no longer that big, and labor costs at this point account for only ten per cent of the cost of producing a vehicle. So rolling back wages was not going to suddenly make G.M. and Ford significantly healthier than they are today, and not getting those rollbacks did not materially change the economic value of the bridge loan. In other words, if you could support the loan with the givebacks, you should have been willing to support the loan without them.

More important, having the government dictate the wages of employees—which is literally what the G.O.P. was insisting on doing—is precisely the kind of government meddling in the marketplace that Republicans normally abhor. There is no reason to think that G.O.P. senators have a greater insight into labor dynamics, the appropriate wage for Ford workers,and how labor-management relations affect productivity than the Big Three’s executives do. Yet the senators were insisting that their judgment on these matters should trump all other considerations.

I recognize the logic of saying that if we’re going to offer the automakers a loan, we should have conditions attached. But those conditions should be similar to the ones any lender would attach. They shouldn’t be an attempt to have the government dictate wage levels. What’s next? Price controls?"
http://www.newyorker.com/online/blogs/jamessurowiecki/2008/12/government-medd.html

That Elusive Fairness

TW: The bloviation emanating from DC relative to the auto "bailout" has been as usual truly inspirational. And it is all about "fairness"...right...not so much.

From Gail Collins at NYT:
"...let’s turn our attention to the U.S. Senate where a plan to bail out the auto industry went down the drain Thursday night. It was a stopgap measure, not necessarily the best bill in the world — although it did pass my own personal quality-control test, which is to find out what Senator Richard Shelby of Alabama thinks and go the other way[TW: EX-F'ing-ACTLY].

“We’re going to have riots. There are already people rioting because they’re losing their jobs when everybody else is being bailed out,” said Senator Jim DeMint of South Carolina.

Some Democrats denounced the bill because they said that it was unfair that the union workers were getting dumped on while a lot of the Wall Street fat cats got to keep their golden parachutes. Republicans complained that it was unfair that General Motors paid its workers more than Toyota or Honda does. Many senators took the DeMint line and wanted to know what made the autoworkers’ jobs more important than the home builders or waitresses who were getting laid off, too...Senator Claire McCaskill of Missouri threatened to vote against the bill because somebody had stuck in a provision giving federal judges a cost-of-living raise while other Americans were going without Christmas presents...

If you took the long view of the pay raise for judges, you’d have to say that: 1) they deserve it; 2) now isn’t the best time; and 3) making a statement on the timing is not quite as important as saving several hundred thousand auto-related jobs...

It’s just too easy for lawmakers to dodge the tough vote by reminding their constituents that somebody else is getting more breaks than they are.
Which somebody always is. If Senator DeMint’s constituents are going to riot over a bailout for the auto industry, they’ll wind up being met by tool-and-die makers waving torches and yelling about soybean subsidies. If the lawmakers from Alabama say their constituents do not want their tax money going to bail out Michigan, the people in Michigan are going to say that they never really enjoyed paying more taxes to the federal government than their state received in aid, while Alabama got a return of $1.61 on the dollar. And anytime a representative from the Great Plains opens his mouth, the people from New York are going to point out that while every state gets the same number of senators, there are more people waiting for a subway in Brooklyn in rush hour than inhabit all of Wyoming.

We can really get tiresome on the subject. You don’t want to go there.

Any mammal can obsess about fairness. (Did I mention how ticked off monkeys get if they find out they’re getting cucumbers while somebody in the next cage has a grape?) The real human trick is to get past the quid pro quo and try to focus on the common good..."
http://www.nytimes.com/2008/12/13/opinion/13collins.html?_r=1

Automaker Bailout BS!!

TW: Have been remiss on posting re the automaker bailout for no other reason than there is so much flying around relative to the bailout that I have not been able to pin myself down to fairly absorb it enough to have a perspective. But thanks to the inimitable Larry Kudlow, I have finally found a nugget to highlight.

I am increasingly agnostic on whether bankruptcy or some sort of government intervention is the better route. There are many arguments on both sides, most of them bad and one ends up picking the least bad one. But I will leave that small issue until later (if I get around to it).

There is now a cabal of mainly Southern Republican Senators blocking the current iteration of the intervention. These Senators clearly have an agenda beyond this particular intervention. Some have big foreign car interests in their states (i.e. Shelby AL, Corker TN etc.), some have visions of leading a Republican small government revival (i.e. Coburn OK etc.). Most of them have an axe to grind with unions generally. All Senators have their own parochial interests so I begrudge the first group no more than I would those Dem and Repub MI, OH, WI Senators pushing for the intervention. The latter group of small government patriots concern me as they are ideologues and ideologues can get you into some deep holes, but again that is for a diffferent post.

This post is about intellectual dishonesty. The Republicans are pinning the blame for the failure of the latest intervention on the UAW.

"...In truth, the UAW is to blame...Average compensation for the Detroit little three is $72.31. Toyota's average wage is $47.60, Honda's is $42.05, and Nissan's is $41.97, for an average of $44.20. So Corker's idea was to bring that $72 a lot closer to that $44."

--Kudlow via the conservative Real Clear Politics site

We posted on this last month(http://treylaura.blogspot.com/2008/11/gm-et-al-what-to-do-part-6.html). The $70+/hr figure is an average reflecting the salary and benefits of not only current GM/Ford workers but the retiree costs at those firms as well. There is a gap between current compensation of the domestic autoworkers but the gap is small and rapidly decreasing (despite the fact that most of the foreign owned auto companies are located in lower cost areas, but again a separate topic).

A guy like Kudlow knows this but attempts to perpetuate a stereotype to further his right-wing agenda. That is intellectual dishonesty. I hate intellectual dishonesty. More posts to come.
http://www.realclearpolitics.com/articles/2008/12/whos_losing_the_us_car_busines.html

Financial Capital v. Human Capital

TW: The automakers continue to be pilloried in the media. The automakers have basically been reduced to overt begging at this point. I suspect the automakers are suffering from being an easy outlet for many people to express their collective frustration with our current economic predicament. The automakers worst mistake was likely not figuring out how to get "bailout" money approved quickly before the backlash could build. The financial firms have been able to do so by basically blowing up over the course of several days (remember Bear Stearns on Wednesday was business as usual, publicly at least, by Saturday night it was burnt toast) as opposed to the relative prolonged agony experienced by the automakers.

Reich brings up another issue requiring reconciliation. One of the first public services to contract during a recession is education as local funding is derived partially from property taxes which are declining rapidly. Reich asks the simple question does it make sense to let public education spending, a good almost all regard as a crucial investment for our future, fall precipitously while billions are spent "bailing out" financial firms or even automakers.

From Robert Reich:
"Education is largely funded by state and local governments whose revenues are plummeting. As consumers cut back, state sales and income taxes are shrinking; three quarters of the states are already facing budget crises. On average, state revenues account for half of public school budgets, and most of the funding of public colleges and universities. On top of this, home values are dropping, which means local property taxes are also taking a hit. Local property taxes account for 40 percent of local school budgets.The result: Schools are being closed, teachers laid off, after-school programs cut, so-called “noncritical” subjects like history eliminated, and tuitions hiked at state colleges.It's absurd. We’re bailing out every major bank to get financial capital flowing again. But we’re squeezing the main sources of our nation's human capital. Yet America's future competitiveness and the standard of living of our people depend largely our peoples’ skills, and our capacities to communicate and solve problems and innovate – not on our ability to borrow money...

I’m not saying funding is everything when it comes to education. Obviously, accountability is important. But without adequate funding we can’t attract talented people into teaching, or keep class sizes small enough to give kids a real chance to learn, or provide them with a well-rounded curriculum, and ensure that every qualified young person can go to college.So why are we bailing out Wall Street and not our nation’s public schools and colleges? Partly because the crisis in financial capital is immediate while our human capital crisis is unfolding gradually. But maybe it's also because we don’t have a central banker for America’s human capital – someone who warns us as loudly as Ben Bernanke did a few months ago when he was talking about Wall Street's meltdown, of the dire consequences that will follow if we don’t come up with the dough."
http://robertreich.blogspot.com/2008/12/of-financial-capital-and-human-capital.html

GM et al: What To Do Part 6

TW: Certainly the automaker bailout continues to garner major coverage. I would say at this point rightly or not, the anti-bailout folks have the upper hand. The stats below summarize pretty clearly why our US Big Three are screwed regardless of whether current management is competent or not. GM is trying to support over 600,000 retirees and spouses on the back of less than 200,000 current workers (and under all scenarios that number will decline). This is patently unsustainable. It is also loosely emblematic of what is going to happen to our country (and many other countries) as we try to sustain growing numbers of retirees with fewer current workers.

Regardless of whether there is a "bailout" or not, the million plus retired autoworkers will have to be dealt with sooner or later. It is easy for Southern Congressmen with foreign automakers using non-union but more importantly young workforces without significant retiree claimants to claim moral and economic superiority but it is more complicated than their arguments.

From Felix Salmon at Portfolio:
"...all of them are perpetuating the meme that the average GM worker costs more than $70 an hour, once you include health and pension costs. It's not true.

The average GM assembly-line worker makes about $28 per hour in wages, and I can assure you that GM is not paying $42 an hour in health insurance and pension plan contributions. Rather, the $70 per hour figure (or $73 an hour, or whatever) is a ridiculous number obtained by adding up GM's total labor, health, and pension costs, and then dividing by the total number of hours worked. In other words, it includes all the healthcare and retirement costs of retired workers.

Now that GM's healthcare obligations are being moved to a UAW-run trust, even that fictitious number is going to fall sharply. But anybody who uses it as a rhetorical device suggesting that US car companies are run inefficiently is being disingenuous. 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."
http://www.portfolio.com/views/blogs/market-movers/2008/11/18/the-return-of-the-70-per-hour-meme?tid=true

GM Part 5: Reader Comment And Response

A blog reader comment (from a traditional Republican btw):
"GD 2.0 would be a fact if action isn't taken. Consider, for every job on an auto assembly line, there are 7.5 jobs in auto-related industries. I agree with Reich that there's going to have to be tough love here and the CDS market will go haywire I'm sure. "

TW: Someone needs to get this message to Sen. Kyl, Sen. Shelby etc., who got on the Sunday talk show circuit to piss on the bailout concept. I am absolutely not claiming the Dems have all the answers or that they are not contributors to this epic mess. BUT, the Republicans must face up to the reality that the "Reagan" ideology if it was ever effective is certainly not effective or particularly relevant now.

This GM thing is not a binary choice between two extremes- e.g. throw $25 Billion no strings attached to the automakers or do nothing. There can be and should be all kinds of strings attached but to do nothing is to invite economic disaster. The automakers will go down with government intervention, there is no private market solution short of liquidation of at least 1 or 2 of the Big Three.

Few, even the so-called experts, realize that this economic crisis is no longer so much about the financial crisis from this summer and early fall, it is about a precipitous collapse in world-wide demand. The auto industry while much smaller than it used to be is still a very significant component of employment in the US. Without auto related employment and the associated consumer and investment demand, our economy will spin into a depression. Solving the auto sub-crisis does not solve the overall crisis but without solving the former you will not solve the latter.