Monthly Archives: December 2008

The Auto Bailout Issue—Posner

I’ve enjoyed Justice Posner’s writing elsewhere, and I enjoy his blog. Interesting take on auto bailout, basically advocating this to delay bankruptcy / liquidation until the US economy has enough positive sentiment to stomach it.

via The Becker-Posner Blog on 12/14/08

We blogged on November 18 about whether the government should provide money to the U.S. auto manufacturers to keep them alive. (I was for; Becker was against.) In the short period since then, there have been important developments bearing on the issue, culminating this past Friday in the blocking by Senate Republicans of the Democrats’ modest ($15 billion) auto bailout bill, and the announcement by the Bush Administration that it might, after all, agree to use part of the $700 billion financial-sector bailout to keep the U.S. auto manufacturers going until President-elect Obama takes office. So Becker and I have decided to return to the issue.

The issue has a political and an economic dimension. From a political standpoint, the current position–no bailout legislation, but possible allocation of part of the financial-sector bailout money to the domestic auto manufacturers–represents, unusually, a victory for both political parties. The Republican Senators have stood up for principle–that freedom to fail is basic to capitalism, that wages and benefits should be set by free labor markets rather than by powerful unions, which are worker cartels, that government should not manage businesses, and that government expenditures should be minimized–and for the interests of Toyota and the other foreign manufacturers that have plants in the United States; for those plants are mainly in the South, which is the stronghold of the Republican Party. By opposing an auto bailout the Republican Senators have also distanced themselves from the Bush Administration, which is at once unpopular and believed by many Republicans to have betrayed Republican small-government principles. There is a grave risk that, as I argued in my November 18 posting, a collapse of the domestic auto industry could have serious adverse consequences for the U.S. economy as a whole, which would expose the Republican Senators to criticism. But that risk is buffered by the Administration’s apparent willingness to bail out the auto industry without new legislation.

The Democrats (including the incoming administration) have scored points among their constituencies by standing up for union workers, for the “greening†of the automobile industry, for states in which the domestic auto industry is centered that voted Democratic in the November election (Michigan, Ohio, and Indiana), for the principle of active government, and for trying to avert a deepening of the current depression.

The bailout bill was a mess, but a harmless one, if I am right that the domestic producers should not be allowed to collapse at a time of profound and, it appears, worsening economic distress. The bill was a mess because of the conditions that it would have imposed on the industry, conditions that earned the justified ire of the Republican Senators because of its failure to lean hard on the collective bargaining agreements negotiated by the United Auto Workers, because of the divided control of the industry that the bill if enacted would have brought about–divided among the manufacturers, a federal “car czar,” and intrusive congressional oversight–and because of the considerable element of fantasy in the idea that Congress plus the President can revitalize the domestic auto industry. Nowhere is it written that the United States, let alone the midwest, where the domestic auto manufacturers are centered, has a comparative advantage over other countries, or other regions of the United States, in manufacturing motor vehicles. Evidently it does not, and Congress and the President cannot change that, as Japan learned from the failure of its “industrial policy” administered by Japan’s once-admired Ministry of International Trade and Industry.

For the problem of the Detroit manufacturers is not just a matter of higher wages, to be solved by renegotiation of their collective bargaining agreements. The wage difference (actually the benefits difference–the hourly wages of the auto workers employed by the domestic manufacturers are only slightly higher than the wages of the workers employed in the U.S. plants of Toyota and other foreign manufacturers) is an important but not the decisive factor in the decline of the domestic auto industry. The difference in the wage and benefits package between employees of the domestic manufacturers and of the foreign ones in the United States has been exaggerated by treating as a part of that package the annual payments to retired workers divided by the number of hours worked annually by current workers. The money owed the retirees is a fixed cost, like any other debt. Eliminating those payments, like reducing the industry’s bond debt, would improve the industry’s balance sheet by reducing its fixed costs, but would not reduce the cost of making cars, or increase their quality. Merely wiping out existing debt, the main consequence of reorganization in bankruptcy, does not improve the efficiency or competitive position of the reorganized firm, which is why most reorganizations end in liquidation. What would improve the efficiency of the domestic auto manufacturers, besides reducing wages and current workers’ benefits, would be jettisoning union-imposed work rules; that was part of Republican Senator Corker’s ingenious proposal (of course rejected by the union) to condition a bailout on the union’s agreeing to a reduction in the wages and benefits of the Detroit auto makers’ workers to the level prevailing in the southern automobile plants of the foreign auto companies. The adoption of his proposal would have been tantamount to putting the United Auto Workers out of business–if unionized workers have the identical wages, benefits, and working conditions as nonunionized ones, why would anyone pay union dues?

I doubt that anyone in Congress or in either the outgoing or the incoming Administration really thinks that a bailout bill will place the domestic industry on the path to salvation. The conditions imposed to achieve the “reform” of the industry are window dressing. All three domestic manufacturers (yes, Ford included) are insolvent, and while they are unlikely to close down and liquidate completely if forced into bankruptcy–Americans will probably buy 10 million motor vehicles in 2009 and they are unlikely all to be made by foreign companies (the foreign share of the U.S. car market, including both imports and cars manufactured in the U.S. plants of foreign companies, is about 50 percent, though they could take up some of the slack created by the collapse of the Detroit manufacturers, since the foreign companies’ sales are down too). Even with an infusion of federal money, there will be many plant closings and layoffs and many bankruptcies and liquidations of auto parts suppliers and auto dealers.

But formal declarations of bankruptcy by the domestic manufacturers would, I believe (as I argued in my November 18 posting), have a substantial added negative effect on the economy. Consumers are markedly reducing their purchases of durable goods because their savings are so depleted that they cannot, as in previous economic downturns, reallocate savings to consumption. Instead they are reallocating income from consumption to savings. The result is a downward spiral: consumers spend less, so output drops, resulting in layoffs that result in further reductions in consumption and in turn in output. The spiral will eventually bottom out, but it will bottom out at a lower level if hundreds of thousands of employees of auto manufacturers, auto parts suppliers, and auto dealers are terminated more or less all at once and consumers planning to buy a car in 2009 are scared off by the uncertainties associated with bankruptcy. (Will warranties be honored? Will parts be available? Will the dealership from which one bought a car survive? Will service standards slip? What about the car’s resale value? And should one believe the soothing assurances that bankruptcy is no big deal for the customers of the bankrupt firm, as long as it does not liquidate, when all the other soothing assurances by the government have proved unfounded?) Because motor vehicles are highly durable, it is easy to be prudent and defer replacing one’s existing vehicle until one’s economic situation clarifies.

Granted, with General Motors having publicly acknowledged hiring a leading bankruptcy lawyer to counsel it and announced that it will be shutting much of its North American operations for a period of months, there is increasing public recognition that the Detroit automobile industry is bankrupt in all but name. But I still fear the psychological effect of a formal declaration of bankruptcy at a time when many–probably most–Americans are anxious about their economic situation. Individually, consumer prudence is wise; collectively, it will exacerbate the depression.

The realistic goal of an auto-industry bailout is not to reform, revitalize, or restructure the domestic industry; it is merely to postpone its bankruptcy for a year or two, until the end of the depression is at least in sight and consumer confidence is restored to the point at which the bankruptcy of the domestic manufacturers can be taken in stride. To attain this goal does not require imposing conditions on the use that the auto manufacturers make of the bailout moneys. The conditions that the bill would have imposed and that any other form of government funding will impose are not an economic but a political necessity because of widespread anger at the incompetence of the industry; a majority of Americans oppose any bailout of the Detroit manufacturers.

At the very least, the Obama administration should be allowed to decide the fate of the companies; that argues for a modest government loan that will keep them out of bankruptcy until, say, February.

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Great Technologies are different than Great Products

This weekend, the Wall Street Journal interviewed Microsoft CEO Steve Ballmer and new Online Services Group President, Dr. Qi Lu, formerly of Yahoo. 

Much of the interview orients towards how Microsoft will compete with Google, and how Microsoft and Yahoo might still do a deal.

For me, however, the most interesting statements were in Steve’s clear, concrete delineation from ‘product’ versus ‘technology’.  Many miss this distinction and Steve’s statements here are spot on:

WSJ: [Qi Lu’s] predecessor running Microsoft’s Online Business had more of a sales and marketing background. Did you decide that deep technical skills first and foremost were the most important thing for improving your position in search?

Mr. Ballmer: There’s a difference between technical skills and product skills. Both were important. There are a lot of people in our industry who understand the technology, but don’t actually understand really what it takes to build a winning product. So perhaps the most important thing was the product skills, and really the understanding of what people want, and what they’re trying to accomplish and get done. Then it’s also great to have the skills to map that back into the technology itself.

As it pertains to startups or those building out early phases of their career in the tech sector, its important.  Really understanding how to build a winning product is a skill set that is fundamentally different than being the most technical.  Being technical surely can help, but it is neither required (with some exceptions) nor sufficient.

 

Ballmer Wants Quick Yahoo Pact – WSJ.com

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Memo to President from Congressional Dems: Please Save Detroit

Memo

TO: President George W. Bush

FROM: Senate Majority Leader Harry Reid; Speaker of the House Nancy Pelosi; Congressman Barney Frank; and Senator Christopher Dodd

DATE: December 4, 2008

RE: Our Christmas Wish List — Please Bail Out Automobile Industry For Us

**As reported in the New York Times, the above congressional leaders sent a letter to President Bush asking him to save the auto industry.  I’ve secured the only known copy of the letter and published it below.**

Dear Mr. President,

Merry Christmas, we hope that you, Laura and the kids are having a wonderful holiday season.  It must be really weird to be considering your last holiday season in Washington. 

Its been quite a year, amazing how fast the time flies.  Oh geesh, it sure has been busy since Labor Day.  We all got back from vacation and the Olympic games, and wow, there was this huge financial crisis that’s kept us all so busy.

Anyway, we wanted to reach out and wish you a happy holiday as you and Laura .  We also wanted to see–in the spirit of the season–if you might be willing to do something special for us.  Would you be willing to unilaterally just ‘give’ $30 billion give or take to the auto industry?  Think of this as our Christmas wish to President Santa. 

See, we’ve been meeting with the auto execs, and we know we need to do it to keep Big Labor on board with us, but it sure is unpopular.  As you’ve been so willing to do unpopular stuff unilaterally, we thought that it might just be a whole lot simpler if you did it. 

We know we haven’t always been that good to you, but if you could forgive us and just consider all the good things we talked about, then you’d probably see that we deserved some kind of present.  If you could give us all just this one thing for Christmas, that would be great.  It’d be even better than the free-range buffalo jerky from Plano that you sent us last year. 

As you know, saving the auto industry is super critical to the entire economy. 

Don’t listen when your advisors tell you that the average worker in the Big Three is making around $80 / hour to make a car, don’t focus on that, whereas their competiors have the same workforce at about $30/hour.  Also, your advisors will tell you that neither investors nor Congressional representatives have the will to do this.  Don’t worry about that either–investors may think this is a suckers bet, and we in Congress know its unpopular, but we’d implore you to realize that this is exactly your kind of move.  Here’s what we mean:

  • It’s an ill-conceived plan, hastily thrown together
  • It does not have Congressional support, so you’d act unilaterally
  • There’s no data that shows that action will lead to the result we desire

In short, it’s right up your alley!  It’s got the Bush Doctrine written all over it.  As we’re getting a lot of heat, we’d really appreciate it if you could consider doing this for us. 

All our best to you, Laura and the rest of the family.

Go Longhorns!

 

PS–Seriously, if you did this and gave us what we wanted for Christmas, we’d be really thankful.  We’d say nice things about you.  We’d call it statesmanlike, forward-looking, compassionate, and maybe even environmentally friendly.  We’d even probably say a thing or two nice about you personally.

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