Corporate Welfare
A stockbroker named Fred Schwed wrote a book in 1955 called "Where Are The Customer's Yachts?", which leads me to the tale this morning of the Big Three auto execs flying into Washington on their private jets to plead their case of poverty to the U.S. Congress. Democrats and the new Obama Administration have to be very mindful that there is very little sympathy abroad for either the managers of the car companies or the head of the UAW, Ron Gettelfinger who recently told the Wall Street Journal, "This industry is in a crisis situation not of its own making." GM and Ford are equally clueless, spending millions of their precious cash lobbying lawmakers.
So far this year, G.M. has spent $10 million on lobbying, out of $95 million in the past 10 years, placing it at No. 16 on the site's "top spenders" list. Ford, which ranks No. 19 on the list, has spent $5.7 million this year, out of $80.6 million the last decade.
There is only one way that the government should provide any aid for these braindead companies--in the bankruptcy process. GM has over 7000 dealers in the US, while Toyota services the country with fewer than 1500. The only way this radical restructuring of closing plants and dealerships can happen is in Chapter 11. The government may have to guarantee some of the pension obligations as part of the restructuring. As I have said before, the Pontiac, Buick, Hummer and GMC brands have to die for the two iconic brands Chevy and Cadillac to survive, with maybe Saturn positioned as the Eco-friendly Hybrid label.
It would be a mistake of monumental proportions for the Obama administration to begin its term as the advocate of corporate welfare. If Pelosi doesn't realize how politically poisonous this is, she will soon.
I'm sorry, but I must disagree. GM especially has made great strides in restructuring, retooling, and is poised to be ahead of even Toyota in producing plug-in hybrid cars. Their investment in restructuring is what has left them without enough cash on hand to ride out the economic crisis.
The shareholders have already been wiped out. The UAW has already suffered loss of membership and power. There is no moral hazard left to be concerned about.
But the car companies' collapse will take millions of jobs with it. And those jobs will be disproportionately in places like Michigan, Ohio, Indiana, etc. And whichever party is seen to be at fault will lose the Midwest for a generation. So pure Machiavellian economic and political self-interest, as well as simple human decency, dictates action.
November 18, 2008 4:23 PM | Reply | Permalink
I, too, have to disagree with you, Mr. Taplin. But I'll do so without apology.
You seem to have a very strong opinion about this issue. I suppose that's your job as a professional pundit -- to have very strong (if not that well informed) opinions. But I don't think you're seeing the whole picture.
Don't get me wrong. I agree that the automakers painted themselves into a corner over the last 30 years. But the proximate cause of their current distress is not of their making. I see this problem as very nuanced, not nearly as black and white as you paint it.
There is value in maintaining a viable automotive industry in the US. It's worth some investment. (Compare buying AIG, for example, to helping General Motors. WTF does AIG make? Next war you have, try moving the troops around on insurance policies instead of actual motorized vehicles. And we gave AIG what? $150B so far??)
This is a complicated issue. Your post today does not address it well. I am skeptical of anyone who is so cocksure about something like this.
-- ARG
November 18, 2008 5:36 PM | Reply | Permalink
But I don't think you're seeing the whole picture.
Now, that's funny.
November 18, 2008 7:52 PM | Reply | Permalink
In this case, the comedy was unintentional.
-- ARG
November 19, 2008 10:06 AM | Reply | Permalink
3rd to disagree.
Your ideological sentiments are laudable, but pragmatically you're wrong - no bank will loan the Big 3 anything for restructuring purposes in the current environment...which is to say, hyping Chapter 11 bankruptcy is unrealistic; rather, see Chapter 7: liquidation and the loss of millions of related jobs.
(OT/tinfoil hat/conspiracy theory: gaspump prices dropped amazingly fast, no?)
November 18, 2008 6:08 PM | Reply | Permalink
You're wrong. The Federal Reserve Bank will lend GM money in Chapter 11 if nobody else will do so on reasonable terms.
The question is this: How much equity to force out of the stock and bond holders before "rescue" money comes in?
That is, or should be, the ONLY question on the table whether as stated briefly here or in equivalent full form. You can add quibbles about executive compensation and more, but those are second-order at best.
November 19, 2008 1:48 AM | Reply | Permalink
It seems like the unbridled capitalism of lo these many years follows its own evolution path. It creates Corporations so large and so irresponsibly run that they become insolvent but too large to be allowed to fail.
November 18, 2008 6:47 PM | Reply | Permalink
Call them Corporate Welfare Bums in memory of the criticism leveled by many of the priviledged against Welfare Bums. Same deal only white shirts, designer shoes and high priced hookers. Welfare is welfare.
November 18, 2008 8:38 PM | Reply | Permalink
Grey,
tsk, tsk, tsk, you have yet to learn the proper language. One must never use the term "corporate welfare", instead, one must refer to it as "a growth package."
November 19, 2008 9:54 AM | Reply | Permalink
Ok, I get the too big to fail argument. What I don't understand is why the various corporate welfare strategies leave GM still too big to fail.
November 19, 2008 8:25 AM | Reply | Permalink
The shareholders have only taken a haircut if they've sold at the bottom. They made some nice dividends during the SUV years, and if a bailout works, thy'll make a bunch more in capital gains. That's why bailouts need to include warrants. And management is doing just fine.
For me what's emblematic of the problem at US automakers was the most recent "news" I saw out of the chevy Volt program: that they've made some minor tweaks to the shape of the buttons on the dashboard. Is that what's been keeping it out of production?
November 19, 2008 10:24 AM | Reply | Permalink
So GM shouldn't have spent "their precious cash" on lobbying.
Assuming the $10M they've spent on lobbying this year was distributed evenly, that would be $3.33M spent in the third quarter.
So their net loss for the third quarter could have been $2.4967B, instead of $2.5B.
Gee, I see your point, Jon.
How much did AIG spend on lobbying this year?* (It seems one could make an argument that GM should have spent MORE, not less, on lobbying!)
-- ARG
*answer: more than $8M
http://undertheinfluence.nationaljournal.com/2008/11/aig-lobbyists-employed-but-not.php
November 19, 2008 10:27 AM | Reply | Permalink
Heard this morning that Detroit makes a car for the European market that gets 40 miles/gallon. The exact same car, but made for the American market gets 15 miles/gallon.
So where does Detroit go for a hand-out? To us, naturally - screwed us for years why change screwees now.
Where should Detroit go for a hand-out? Big Fatted Oil which, afterall, has been the beneficiary of cars that get 15 miles/gallon. (Strange that nobody in Congress has suggested this alternative.)
November 19, 2008 10:29 AM | Reply | Permalink
Care to cite your source? You can't even "name" the car!!! I really get upset when people make up myths with no facts behind them. Here's a citation for you. GM's fleet mileage is much higher then Toyota's. http://www.automotivetraveler.com/index.php?option=com_content&task=view&id=305&Itemid=131
I don't understand this "hate" toward the American car companies. They have done absolutely amazing engineering over the past decades. GM has a hybrid system for trucks and large vehicles. That's a much harder engineering problem, and saves more gas to boot then the Prius ever will.
Expensive small cars don't sell in America no matter what the fuel costs.(yet) Every year, GM dealers have small cars left on the lot that they have to "give" away. As a company, you make what people buy. The current financial crisis that the big 3 are in is _NOT_ a result of people _switching_ to buy smaller cars... It's a result of people buying 50% less cars in total!
For that you need chapter 11 restructuring. Not bail outs. Notice I'm against the bail out. I just want to correct the myths about GM. We as Americans should be very proud of our Engineers and all their accomplishments.
November 19, 2008 11:32 AM | Reply | Permalink
It sounds to me as if you're denying that the Big 3 have been relying almost exclusively on SUVs and trucks for their profit centers.
November 19, 2008 1:20 PM | Reply | Permalink
Sure. Mike Barnacle on Morning Joe this morning and the car was a Ford, I'm pretty sure but not absolutely sure which is why I used 'Detroit.'
As to what Detroit produces depending on what their market projections indicate the public will buy - true. Possibly a reason why, if Barnacle wasn't talking out of his butt this morning, Europeans wouldn't buy 15 mile/gallon cars so Detroit produced a 40 mile/gallon version for that market.
Years ago Detroit held back on producing a variety of small, cheaper cars - even though that's what the public was into then - because their chrome-laden behemoths yielded a much higher profit margin. Hello Volksies and anything coming out of Japan. Myself is my source on that one because I lived through it.
November 19, 2008 2:56 PM | Reply | Permalink
I'm from a town in Michigan that was very intertwined with the auto industry. My hometown (my mother and sister are still there) has been dying for 25 years. No one has been a bigger critic of the auto industry than I. [Or is it me?]
But let's get something straight: the SUVs are only the most visible part of the problem. I had already sworn when I graduated high school that I would never buy an American car made after 1969. That's because you could see that they were cheaping out on a lot of stuff, the cars were capital-U Ugly, and the quality control was getting out of hand. That was before any of the big three Japanese companies (Toyota, Honda and Nissan) had a significant presence here.
Then came the 70s and the 80s. Detroit management became more focused on shareholder value at the expense of putting out a good product. Toyota and Honda came in and said 'Look - we make cars that will run for over 100,000 miles and the door handles don't break off in your hand'. And that's where they really lost the war. Roger Smith was oblivious. So was the management of the other companies.
Even though I have good reason to hate on 'em, I'm in favor of them surviving. That's because, over the last 5 years or so, they've actually been trying to do the right thing. At this point they're getting trapped (somewhat) by circumstance. They have very promising technology (like the Chevy Volt), there's the potential of health care reform helping to mitigate some of the legacy costs, and they've been improving in quality - to the point that I, who have been buying Toyotas for 25 years, would seriously consider a Malibu.
If you're going to be against something, don't rail on about past f-ups. The people in charge now are not the people who are responsible for all that crap in the past.
November 19, 2008 6:28 PM | Reply | Permalink
I am also skeptical that this is true, and I am troubled that people are so willing to believe such a thing.
What would be GM's motivation for de-tuning a car to get lousy gas mileage here, when they secretly know how to make it get better mileage (and sell it that way over in Europe)? That does not make any sense at all!!
I do like your idea about linking the automakers to the oil companies, however. In fact, that thought occurred to me last night, while watching the NewsHour: Let's place a special tax on the oil companies, and feed that money directly to the car companies! I think it's brilliant.
-- ARG
November 19, 2008 12:01 PM | Reply | Permalink
Skepticism is all well and good.
I'll rely on my own empirical evidence, from 1999.
I spotted no less than 3 different models of Ford sedan in London, that were not offered in the US.
The only name that sticks out is the Ford Orion.
Another may have been the Focus - which they then started selling in the US in the early 2000s.
European designs have had some advantages over US-market designs for some time.
The lowly Chevy Chevette was designed by Opel. The diesel version had an Isuzu engine in it, to boot.
Here's a thought - do suppose the advent of smaller, more fuel efficient, Big 3 US-market vehicles has anything to do with the advent of B0N3R pills?
November 19, 2008 1:10 PM | Reply | Permalink
The issue of dealerships is also quite complex.
I'm not sure those numbers are exactly right, but the point is valid. GM has more dealerships than it needs, and it will be very difficult for them to "close" these without the help of a bankruptcy court.
GM doesn't own its dealerships. (Neither does Toyota.) They are franchises -- locally owned small businesses. Saying that GM needs to close dealerships is the same as saying that we need to put a number of these franchisees out of business. Turns out that states have passed laws to protect franchisees, so it isn't quite so simple to do. Here is a good article about that:
http://www.newyorker.com/archive/2006/09/04/060904ta_talk_surowiecki
By the way, dealers make most of their money from their service shops and from selling used cars, not from selling new cars. So most of these franchises are profitable, even when the parent company struggles.
So, on this point about dealerships, I'm not really disagreeing with you, Jon. But the way you state it makes it sound like it's stubbornness or poor management that's led to all these dealerships. Not so. As with many other things, it's part of the legacy stretching back 80 to 100 years. GM has been working for some time now to reduce the number of dealers they have. But it can't be done overnight.
-- ARG
November 19, 2008 11:52 AM | Reply | Permalink
Another aspect of the legacy you mention is that the Big 3 have retirees and a much older ( = more health care needs) workforce than the foreign assemblers. This translates into much higher labor costs they are contractually (and morally!) bound to.
Not only that, but the problem of overcapacity in the North American auto industry is at least 30 years old, and has been fueled in part by the (mostly Southern) states' practice of throwing hundreds of millions of dollars in location subsidies at the foreign automakers.
I think the automakers should be relieved of their health care costs as part of the overall health care plan, which would need to be single payer rather than "play or pay" to shift the costs.
As for "corporate welfare" more generally, I will have to address that in a separate blog post.
November 19, 2008 12:46 PM | Reply | Permalink
Did you ever notice, that it seems like when there's a cluster of dealerships, they're all owned by the same guy or family?
Bob's Chevrolet, Bob's Lincoln-Mercury/Cadillac, Bob's Hyundai, Bob's Jeep/Chrysler, Bob's Toyota, ad nauseum.
Maybe that's part of the problem too?
November 19, 2008 1:14 PM | Reply | Permalink
Did anyone read Mittens editorial in the Times today? Basically, he's recommending bankruptcy also as the only solution to removing the legacy costs of $2,000 per car(that seems a little high but I think that's the figure he used). He used his father's leadership in pulling American Motors from the brink (didn't they fail?) as examples.
November 19, 2008 10:21 PM | Reply | Permalink
There is a big difference between bailouts of Manufacturers and Banks - there is nothing to stop the Big 3 from taking our money and then moving even more jobs overseas. Has their history ever been on the side of the workers and the communities they support. Would it be better to invest 25billion in industries that have a proven or promise for the futures of the workers?
Their crisis is that they could not adapt and lead in an environment that is certainly not all their fault or in their control. Supposedly our economic comparative advantage was fueled by those industries at the forefront and the ability of the people to support them. Why would we now want to float the losers? Although it is in our best interest to have States side Financial Institutions, it doesn't matter what kind of car we drive. The thing that should be considered is the jobs lost - If the only thing we can come up with, on how to spend 25billion to create jobs, is to give it to failed companies which produce non-specialized products - how dumb does that make us look? Does Michigan want to be an industrial kibbutzim or self sufficient. Like in most industrial depressed areas, they just want good jobs and don't care who signs the checks.
November 20, 2008 2:33 AM | Reply | Permalink
Lit, you asked an interesting question:
I would have to say, "Yes". Of course, management and the workers were always adversaries. But for decades the automakers and the UAW helped solidify the American middle class, by providing jobs that paid well, with security and benefits, so that Joe the Autoworker could provide for his family and send his kids to college, etc.
Yes, the landscape changed in the last 30 years, and both management and labor were reluctant and slow to adapt. I'm not here to sing their praises and say they never did anything wrong.
But I am deeply troubled by how the middle class is getting squeezed in this age of globalization.
And in this debate in particular, "legacy costs" has nearly become a euphemism for "the inevitable result of constantly caving in to those greedy lazy union workers".
I want a viable middle class in this country. I am a progressive, and I am pro-union. In all the back-and-forth over this question I hear serious tones of class warfare, and I hear people on "our" side often conceding the point that unions are inherently bad.
This is a serious debate, and there appear to be no good solutions. But let's not reflexively blame the unions, or the current management, for that matter. There's blame to go around. (If we could go back and magically reverse NAFTA and the 1999 Banking Reform Act, I'd bet we wouldn't be having this debate today.)
I know this is a dead thread by now, but I just wanted to make this one final point.
-- ARG
November 20, 2008 6:35 PM | Reply | Permalink
I agree with a more "honorable" past that you describe as the corporate and public relationship.
A good example on how things have changed is the difference between a Father and Son, George and Mitt Romney. The first being more hand-in-hand, the later being more slash and burn.
I never will concede the unions are bad, only some of their agreements. Here in Boston, I will honor the BPD's service and work they do, I have even worried about one coming home safe at night. Their Union has done wonders and has actually been national leaders in promoting and protecting their corps - but not everything in their contract is in either theirs or the public's interest (like detail duty), yet they bicker over it every time and to everyone else seems petty and unbelievable.
November 21, 2008 1:05 PM | Reply | Permalink