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The wisdom of Bruce Bartlett
I think it would be a terrible mistake to simply write a check to the auto industry without demanding major, major restructuring of its labor contracts. Without that the money will simply go down a rat hole and the automakers will just be back again in a year or two asking for more money. Obama has a strong hand to play here and I hope he uses his leverage. With bankruptcy as the only alternative to federal aid, he can drive a very hard bargain with the auto workers. If he caves and just writes a blank check, everyone will know he can be rolled and he will pay a heavy political price for it. If Obama shows toughness on this issue, I think it will pay enormous dividends for him down the road.
Via Brad DeLong, Bruce is now blogging. And if you want some provocation, here is Kevin Drum on the idea of a GM bailout. And Felix Salmon has some interesting ideas.
Posted by Tyler Cowen on November 16, 2008 at 09:07 PM in Current Affairs | Permalink
Comments
So, the wisdom of Bruce Bartlett is that contracts with labor should simply be broken? I guess I just take legal contracts more seriously than you guys.
Of course, if the alternative is bankruptcy, perhaps it is necessary, but at that point shareholders and bondholders should be zeroed out and management on the unemployment line somewhere because then the negotiation is with the workers.
Posted by: ross at Nov 16, 2008 9:19:57 PM
I'd love to see some new and innovative companies buy up the useful pieces of GM et al during bankruptcy proceedings.
Failing that, I look forward to some old and profitable companies buying up the useful pieces in bankruptcy.
It should be clear to many that even a bailout with labor restructuring won't save these companies. They make junk cars. The Volt is a joke - $40k+ MSRP for a car that weighs less than a Honda Civic? Toyota and Honda are light years ahead in quality and profitability. Hyundai, Scion, and others will knock Detroit's legs out from under them - undercutting price whilst delivering superior reliability.
Posted by: Mercutio.Mont at Nov 16, 2008 9:42:27 PM
I think it would be a terrible mistake to simply write a check to the auto industry without demanding major, major restructuring of its labor contracts.
Of course, we do know that the President-Elect ran ads in Michigan proclaiming that he favored an industry bailout unlike Sen. McCain. And we also know that the flight attendants union endorsed Obama for a variety of reasons, prominent among them being support of the Fly America Act and voting to ban restructuring of union contracts in Chapter 11.
Certainly I hope that the President-Elect will reconsider his previous rhetoric and votes in light of the reality that even if the bondholders and stockholders lose everything, and management were all fired or worked for free, GM and Ford still couldn't make a profit on a small car built in the US at UAW plants competing against US labor working for Toyota and Honda.
Posted by: John Thacker at Nov 16, 2008 9:57:27 PM
I've heard numerous people say that the biggest issue regarding GM's financial problems is the legacy costs. If these were not there, the argument goes, the company would be in much better shape. I'm not entirely sure how true that is, but I'm guessing that it's part of the problem. I'm also not sure of the most efficient and fairest way to deal with these issues, but if they are in fact the biggest problem, shouldn't the government be looking into dealing with that? Wouldn't we be doing it anyway, if they went under? If it's as simple as absorbing most or all of them, why isn't anyone looking into that? Are there enough companies that would be knocking at the Treasury Department's door with their hands out if the government absorbed all of the legacy costs?
I'm not really sure if bankruptcy is the best option, but perhaps it's the least bad of a bunch of terrible options. If these companies do have worthwhile parts, then I guess the viable ones would snap them up. (I'd like to hear more about this option, and what, if anything, the government could do to help, if there is anything it can do to help.)
Posted by: Brian J at Nov 16, 2008 9:59:12 PM
Of course, we do know that the President-Elect ran ads in Michigan proclaiming that he favored an industry bailout unlike Sen. McCain
I can't speak for what went on in Michigan, as I don't live there, but McCain promised that he help the auto industry, too. Think Progress, quoting from "Good Morning America":
Well, we’ve already done that to $25 billion, and we’ve delayed getting them the money. I would do whatever I think needs to be done to help our automotive industry. We’ve got to make this transition to flex fuel, battery powered, hydrogen automobiles. And, obviously — and, also, I would provide tax credits for people who buy these new automobiles. We’ve got to keep this industry alive. There’s no doubt about that.
Of course, there's no telling whether this was a legitimate sentiment of McCain's or something he would take a strong opinion on one day and then abandon the next.
Posted by: Brian J at Nov 16, 2008 10:32:00 PM
Of course the same argument could be made for the financial system bailout, but I don't hear anyone saying financial analysts should be forced to take a pay cut.
Posted by: David Clausen at Nov 16, 2008 10:34:55 PM
Note the bonus pool for this year alone will probably be greater than $25B, after the U.S. public has given several hundred billion to the financial industry, more than the cost of the auto bailout.
It might be best if we just absorbed the legacy costs, and had the U.S. auto industry move on.
It was a bad business model, but at the time it seemed wise to create what would become legacy costs. The U.S. should just absorb this stuff and let the car companies get on with making cars.
Posted by: mickslam at Nov 16, 2008 10:57:10 PM
One condition of the giveaway should be to get rid of all the top management, including the heads of design and engineering.
Posted by: Jen Tri at Nov 16, 2008 11:55:10 PM
"If he caves and just writes a blank check, everyone will know he can be rolled and he will pay a heavy political price for it."
Unlike the heavy political price he'd pay if he appeared to be, say, taking a hardline position against the unions that helped him get elected. Bartlett can make any argument he wants on theoretical grounds, but he can't possible believe that the primary objective of a government bailout will be particularly extreme labor contract renegotiations. The fact that he tries to make this argument on *practical* grounds suggests some intellectual dishonesty at best.
On a related note, there are a ton of problems with the automakers, of which their legacy costs are just one facet. I don't envy them.
Posted by: Jameson at Nov 17, 2008 12:59:09 AM
... if the alternative is bankruptcy, perhaps it is necessary, but at that point shareholders and bondholders should be zeroed out and management on the unemployment line somewhere because then the negotiation is with the workers.
I tend to agree on that specific point, but it sounds like you don't know about the gravy train contracts the UAW extracted from the big 3. Again, that doesn't excuse management, but the labor costs have to have some connection with reality going forward.
Posted by: RJ at Nov 17, 2008 1:00:36 AM
Ditto what ross said. You can't just break valid contracts, and you certainly can't demand that the big 3 try something like that. If they want to break a contract, they can do it through bankruptcy like everyone else.
Franky, I'm appalled all the favoritism that's being showed toward dinosaur car companies that had *decades* to take care of the legacy cost problem (and the crappy car problem, and the lack of innovation problem, and the dependency on lobbying/marketing problem...). They exist solely because the market believes they can continue to rook Congress into helping them out at the expense of competent foreign companies.
More importantly, can someone please explain to me why we're considering spending $20+ billion to rescue an industry that's only worth $6 billion, and most of that is only because of the expectation of being propped up further? Geez, if you want to help, buy them out, give them to the unions, and let them stew in their own filth.
Btw, no foreign car company will buy their factories. They have standards, you know. Most likely, they'll go to some Silicon Valley upstarts that want to build the next green car.
Posted by: Person at Nov 17, 2008 1:02:03 AM
Robin Hanson's mantra, "Politics is not about policy," applies here.
Posted by: Mercutio.Mont at Nov 17, 2008 1:25:32 AM
I'm skeptical of any bailout. Should I be more or less skeptical when the government conditions the receipt or use of the money on restructuring part of the industry's business model? Such conditions almost look more like government taking over and running an industry (at which gov't is inherently worse). Of course some conditions can be wise, but any that give the government a stake in ownership or management strike me as likely worse than a pure handout.
Posted by: wes at Nov 17, 2008 1:37:28 AM
It should be clear to many that even a bailout with labor restructuring won't save these companies. They make junk cars.
It is always disturbing when people say things like "They make junk cars", as if this is some immutable fact... As if the reason they make bad cars is because the stars are aligned wrong, or because they are all stupid, or because a gypsy cast a curse on them, or whatever. It is one thing to not know a reason why something happens, but it is another thing altogether to not even consider understanding what is happening important.
The reason GM makes junk cars is because:
1 - GM has the UAW, foreign cars are made in "Right to Work" states down south, meaning that GM is paying thousands extra per vehicle in labor. So how does GM offer the vehicle at a comparable price if they have to pay $5,000 (for example) in labor extra? They cut costs elsewhere (i.e. parts/engineering/etc.).
2 - GM can't fire screw ups. Pretty much, the only way a UAW employee can get fired is to do something illegal or not show up for a month. How can you make an extremely high-quality vehicle when your employees can pretty much get away with doing the lowest quality work possible?
If a bailout was made on the condition that UAW contracts be renegotiated, that in itself could improve the quality of the cars.
Btw, no foreign car company will buy their factories. They have standards, you know.
Geez, why do people feel the need to pull stuff out of their ass? The U.S. automakers have some of the most advanced factories in the world, and foreign car companies already assemble most of their vehicles for the North American market in the United States. Foreign car companies have no problem with the U.S. factories or the U.S. workers, they have a problem with the UAW.
You can't just break valid contracts, and you certainly can't demand that the big 3 try something like that. If they want to break a contract, they can do it through bankruptcy like everyone else.
The government might demand that the UAW make concessions in exchange for the bailout... and the UAW might agree, knowing that it is either that or having all their members lose their jobs. Highly unlikely that either one is going to happen, most likely Obama will blame things on "Laissez Faire Capitalism Out of Control", and the UAW will keep believing that the gravy train will go on forever, and a bunch of money will be dumped no strings attached only to have the same problems occur just before the next presidential election... but breaking contracts with the unions isn't the problem, the problem is a lack of will on the part of the government.
I mean folks, come on, I am against any sort of bailout as well... but please, stick with the standard universal reasons why these sorts of bailouts are bad instead of inventing reasons, OK?
Posted by: Cheeze Lover at Nov 17, 2008 2:54:13 AM
Since Bartlett wants the government to decide how GM deals with its employers and its structuring, why doesn't he just outright advocate for state ownership. Soon enough, we can have the government running all of finance and industry. That would be nice.
The answer is not bail-outs with strings; the answer is no bail-outs whatsoever.
Let the market decide what's what. If the companies are worth it, they don't need bail-outs and will prosper on their own. If they are not worth it, there is absolutely no amount of money, political influence and cajoling that will make them profitable.
Government making it clear that it will always be there for these companies whenever they next fail is the reason they keep coming back for more and more candy and bail-outs, and the reason they continue to fail.
Posted by: sumayya at Nov 17, 2008 4:24:14 AM
Both Honda and Toyota opened new factories in Ontario earlier this year. I assume that the workers there are all UAW members and have the same work rules as in Michigan. Maybe the union-contract problem is really a health care cost problem, since in Canada health care is paid for at the national, rather than the corporate level.
Posted by: Hal at Nov 17, 2008 6:16:56 AM
15 reasons the US economy will get worse: Link Here
Posted by: Owner Earnings at Nov 17, 2008 6:54:59 AM
Are you assuming GM and Ford can wait until January?
Posted by: RUBBA at Nov 17, 2008 7:00:35 AM
Can one of you brilliant citizen of the world types tell me what percentage of Toyota and Nissan are owned by Japanese and Japanese institutions and corporations? And what percent of Ford and GM are owned by Americans? Unlike you I prefer that profits from a major industry go to my fellow citizens. Perhaps you can indulge me
Automobile manufacture is a classic developed nation (first world) industry that an intelligent nation does not yield to foreigners. Unless it has much more profitable "industries" such as bundling sub-prime mortgages and palming them off onto Europeans and selling credit default swaps to each other
Posted by: dennisw at Nov 17, 2008 7:07:34 AM
The Detroit Free Press this morning is running a "six great myths" of the auto industry story.
I have never seen so much misinformation in the media in such a short period of time.
It is all about destroying blue collar jobs and income, a really trendy idea among economists and the media.
Get rid of those dirty old jobs, and those dirty old workers!
Posted by: save_the_rustbelt at Nov 17, 2008 7:09:52 AM
The Big 3 are one of the biggest buyers of computer chips in the country.
I can't wait until the layoffs start in California (assuming they still make computer chips).
Posted by: save_the_rustbelt at Nov 17, 2008 7:12:58 AM
Franky, I'm appalled all the favoritism that's being showed toward dinosaur car companies that had *decades* to take care of the legacy cost problem (and the crappy car problem, and the lack of innovation problem, and the dependency on lobbying/marketing problem...). They exist solely because the market believes they can continue to rook Congress into helping them out at the expense of competent foreign companies.
_____________________________
How about those dinosaur insurance (AIG) and Wall St companies that got bailed out? Talk about totally crappy (financial) products! How's that for an ultra corrupt business model based on *too big to fail*? How come no one ripped up their compensation contracts for a bailout? A bailout up to five trillion dollars now. How about the (now) Federal Government employees at Fannie and Freddy? Did they get their contracts broken to get bailed out?
At least GM makes tangible useful items
Posted by: dennisw at Nov 17, 2008 7:21:15 AM
It would be a terrible mistake to write a blank check to Ford Motor Co. -- as opposed to, say, AIG -- because, after all, Ford makes stuff.
Posted by: Steve Sailer at Nov 17, 2008 7:23:49 AM
I think that Obama's political committment is to bail out the auto workers (and flight attendants), not the companies. Giving the money to the workers would be:
a) Better for the workers.
b) A more effective fiscal stimulus to demand.
c) Cheaper for the taxpayer - given that any loan will turn into a low priority claim in bankruptcy.
Posted by: D iversity at Nov 17, 2008 7:27:34 AM
Both Honda and Toyota opened new factories in Ontario earlier this year. I assume that the workers there are all UAW members and have the same work rules as in Michigan.
Wrong on both counts. First, the UAW isn't in Canada -- the CAW is a separate union. And second, the CAW has never managed to organize any of the Japanese transplant factories there just as the UAW has failed to organize the transplants here.
And it's easy to see why the organizing drives have all failed. The workers see that staying out of the unions has given their employers a clear competitive advantage, which means secure jobs. They understand that genuine job security doesn't derive from union contracts -- it derives from strong, healthy, profitable companies. Which is a lesson that the UAW seems completely unable to grasp even after losing 2/3 of its membership over several decades.
Posted by: Slocum at Nov 17, 2008 8:03:07 AM
