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Detroit Will Fail Eventually (Gulp! Don't Hate Me!)
Now, don't hate me, I care as much about America's working middle class as the next guy/gal, but I have been looking for a reason to endorse the automotive bailout deal for a while now. The reasons are just not there, Detroit will fail eventually anyway.
Yes, as an environmentalist and a liberal I am angry at Detroit for "killing the electric car", ignoring market signals for more fuel efficient cars, and mass-producing the abominable hummer; but these are the wrong reasons to oppose the bailout
Unless Detroit does something to drastically reduce its competitive disadvantage of labor, it will never be able to compete in a global society and it will fail. In order to make the bailout work, it will require nationalization and subsidization at the taxpayers expense or hefty and costly trade protections on our auto markets. Now, I am all for government intervention in markets to provide public goods. But Detroit, at best, only qualifies for intervention as a producer of an externality - and this warrants mere regulations and not nationalization. Furthermore, tarriffs on our auto-markets will make the global auto market less competitive and more expensive, set back trade relationships that took years to develop, and pose serious risks to diplomatic relationships with other auto-producing nations.
Now there is one argument in support of the bailout with some validity: that there is some value to preventing further unemployment during the worst recession since the great depression. This argument may have some merit. Unemployment in the United States is bound reach over 15% in some parts of the country over the next year. Despite the fact that this recession is not a typical recession, it is important to know that recessions are necessary. They restore inflation to normal levels, they force firms with bad business models out of the market, they force firms with good business models to evolve to become even more efficient, and they clear the economy of wasteful practices. This recession is severe - to the point where government aid approaches justification on humanitarian grounds, but we must weigh the prinicpal that bad firms must fail with these humanitarian instincts. It would probably be more efficient to take that bailout money to use to expand unemployment benefits than to give it to firms that are doomed to fail anyway.
Finally, the cliche "main street vs. wall st." debate should be addressed. The world must have a functioning financial system. A systemic failure in the financial system is an apocalyptic event. Without a financial system, well - you get it - everything stops - everything. The world can live with a few less auto companies.
This recession will last at least two years - it sure would suck to get out of it, after having bailed out Detroit (probably multiple times) that we are sent right back into another when they finally do fail.
Yes, as an environmentalist and a liberal I am angry at Detroit for "killing the electric car", ignoring market signals for more fuel efficient cars, and mass-producing the abominable hummer; but these are the wrong reasons to oppose the bailout
Unless Detroit does something to drastically reduce its competitive disadvantage of labor, it will never be able to compete in a global society and it will fail. In order to make the bailout work, it will require nationalization and subsidization at the taxpayers expense or hefty and costly trade protections on our auto markets. Now, I am all for government intervention in markets to provide public goods. But Detroit, at best, only qualifies for intervention as a producer of an externality - and this warrants mere regulations and not nationalization. Furthermore, tarriffs on our auto-markets will make the global auto market less competitive and more expensive, set back trade relationships that took years to develop, and pose serious risks to diplomatic relationships with other auto-producing nations.
Now there is one argument in support of the bailout with some validity: that there is some value to preventing further unemployment during the worst recession since the great depression. This argument may have some merit. Unemployment in the United States is bound reach over 15% in some parts of the country over the next year. Despite the fact that this recession is not a typical recession, it is important to know that recessions are necessary. They restore inflation to normal levels, they force firms with bad business models out of the market, they force firms with good business models to evolve to become even more efficient, and they clear the economy of wasteful practices. This recession is severe - to the point where government aid approaches justification on humanitarian grounds, but we must weigh the prinicpal that bad firms must fail with these humanitarian instincts. It would probably be more efficient to take that bailout money to use to expand unemployment benefits than to give it to firms that are doomed to fail anyway.
Finally, the cliche "main street vs. wall st." debate should be addressed. The world must have a functioning financial system. A systemic failure in the financial system is an apocalyptic event. Without a financial system, well - you get it - everything stops - everything. The world can live with a few less auto companies.
This recession will last at least two years - it sure would suck to get out of it, after having bailed out Detroit (probably multiple times) that we are sent right back into another when they finally do fail.
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I disagree. The reason US automakers are having trouble is because all odds are stacked against them.
Currently Japan, Germany and Korea all provide massive state support of their automotive sectors in the form of direct investment and subsidized health benefits for workers. Additionally, all of them provide market protection in the form of high tariffs or outright closed markets.
At the same time, American tax dollars flow to these foreign companies in the form of state incentives that ultimately are underwritten by our federal government. Not surprisingly, the states funding foreign manufacturers (loved for the lack of labor protections and liberally dispersed kickbacks) are violently opposed to providing similar funding for our own manufacturers.
It seems to me if a competitor is funded by their home country, provided additional incentive funds locally in America, and have a protected market at home so they don't have to compete with American brands ... they do better.
Even with all this support (that our companies don't have), these foreign manufacturers are hurting. Imagine what they would look like if their respective governments actively tried to put them out of business like America's government is doing to our automakers.
I see it as a national security issue. You don't build a strong national infrastructure by investing in foreign companies. Our manufacturing ability is what permitted our effective participation in WWII. Without the ability to mass-produce locally, we are at the mercy of nations who may not be our friends and allies 10 years down the road. We are also dependent on foreign production schedules and competition for hardware from other buyers who could theoretically be our enemies.
IMO if a country's market is closed to American autos, their manufacturers should face similar hurdles in bringing products to market in America. I also feel states providing incentives to foreign companies that are not offered to American manufacturers should be harshly penalized by losing federal funding. We also need to address abuse of H1B visas by tech companies currently used to decimate worker rights, wages and protections in the software and IT sectors.
Give them an even playing field - and let's see what American workers can really accomplish!
December 22, 2008 3:23 PM | Reply | Permalink
I'm sorry, the so-called "massive labor disadvantage" of having unions is bullshit.
Unionized labor has never made the kind of money the Republicans like to claim that they do. The average union guy makes about $17.00 an hour. If that isn't currently part of the new poor, I don't know what is. WHy should auto plant workers need to be poor? The only excuse for workers being poor working for anybody, is when they work in an industry that is currently undergoing extreme stress, and there is no other valid reason. I don't think that the american worker has to live like shit in order to be competitive.
This line of shit out of the Republicans about the "labor disadvantage" is all about the Repubs hating that any labor has any leverage to bargain for decent pay. What a surprise.
Will Detroit have to change? Sure. WE ALL WILL, JUST TO SURVIVE. Will they downsize? Sure. WE ALL WILL IF WE WANT TO SURVIVE. WE NEED TO HAVE MANY FEWER PEOPLE. PERIOD.
Nor do I think that their working conditions need to be shit, either. And that's what happens when the unions are gone and the workers in big plants have no backup.
Get universal health care and the so-called "labor disadvantage" evaporates. Period.
December 22, 2008 4:31 PM | Reply | Permalink
Thank you Arse. Couldn't have typed it better myself.
Couple points to the other posters:
1) State funding to create state jobs is NOT the same thing as federal funding to bailout one industry. Also - the mid-west states give lots of tax breaks to the Big 3 but people don't like to bring up this fact. GM also receives major technology grants from the federal government each year that Uncle Sam doesn't give to Toyota et al
2) National security?? How can you seriously make that argument? What would the Big 3 start building if we had WW3?? GM is not the one building the F-18. Raytheon will continue to build F-18s without GM. Northrop and L-3 don't need the Big-3 to build their Predator surveillance missiles, etc
3) How can anyone quote wage rates without including benefits for both current and legacy workers? That's the heart of the problem - the previous Big Three managements agreed to pay union retiree benefits that they could never afford to pay. It's a tragedy but we have to fix this root cause of the problem
December 22, 2008 11:37 PM | Reply | Permalink
#1: Alabama receives $1.71 for every $1 in federal tax dollars they collect - and give $700M yearly to foreign manufacturers. In contrast, Michigan gets back $.85 for every dollar they collect. Our federal dollars reward the states that give the money to non-American manufacturers(ironically, they are almost all in GOP dominated regions - so much for republicans supporting American companies).
#2 Raytheon is making tanks and transport vehicles? I think not. If the military only needed Predators and F-18s you might have a point - but this is not the case.
I don't think you realize what a real war requires or how the national infrastructure is re-purposed in these instances. Iraq isn't really a war - we dismantled and cataloged their capacity for two decades. Even in this pathetic little action we've been having difficulty delivering proper vehicles and mobile armor to our troops. Who is going to make the vehicles if we need to expand the theater and operate in all of N. Africa and the Middle East - or Europe? Toyota? What if Japan decided to be allies with Iran or China?
#3: This has already been addressed by better economic minds than mine ... and they seem to indicate your framing is disingenuous at best.
http://chinamatters.blogspot.com/2008/11/gm-toyota-japan-and-national-health.html
http://www.coastaljournal.com/website/index.php?option=com_content&view=article&id=1004:the-economy-jobs-health-care-retirement&catid=58:regional-news&Itemid=43
Nice try - but the GOP's preferred narrative just seems dead wrong on this.
December 23, 2008 12:53 AM | Reply | Permalink
#1 - Yes Alabama receives more federal tax dollars. Isn't that because Alabama is one of the poorest states in the US? Last I saw they rank 46 out of 50th. So of course they're going to get more federal dollars than Michigan. But not all of those dollars are given to the auto companies. New Mexico receives $2.00 and I can't think of anyone that has auto plants in New Mexico. I don't buy your argument that the federal government "rewards" the states that give money to foreign car companies. Toyota has a plant in Indiana but Indiana only gets $0.97
#2 - Why do you think we're going to have a "real war" that will require proper vehicles? And if proper vehicles means more Bradleys, Abrams or Strykers, we still have General Dynamics, Alliant Techsystems and the other companies I mentioned. One of them can takeover whatever military work the Big 3 do now.
#3 - I'm not trying to push any "GOP narrative" and I wish people wouldn't make this a Rep vs Dem battle. I'm all for improving healthcare but it's impossible to quantify what national healthcare will ultimately cost for us or how long it would take to implement.
We have a very unfortunate situation where GM promised benefits that it knew it could never deliver on.
December 23, 2008 8:05 AM | Reply | Permalink
GM and Chrysler are stupid for not getting that rich Christmas gravy called Pentagon defense contracts.
Then they would thrive in the 'free market.'
December 23, 2008 11:20 AM | Reply | Permalink
Aw, I don't hate you. And I don't blame you for accepting "truths" about the Big 3 that are spun by anti-labor types that are simply not true. Also, please understand up front that though I live in Michigan, I am not a Big 3 apologist. But I understand the forces of de-regulation and can extrapolate its influence on large corporations.
I could go off about how almost everyone — even the strongest deregulation proponents — now agrees that the single greatest factor as to why there is a global economic meltdown directly resulted from (insert drum roll) deregulation. The economic collapse is jerking their heads out of the sand (or other dark places) of their philosophies and forcing them to stare into the light.
Alan Greenspan, de-regulator-in-chief after the demise of Ronald Reagan even admitted before a Congressional hearing in November that he realized there “was a fatal flaw in [his] philosophy”, and that philosophy was based on killing all governmental oversight.
“I was wrong,” was his weak sounding conclusion. Yeah. Wrong. The whole world teetering on the brink of another depression and him with his heavy thumb on the scales of the world markets for oh-so-many years.
And the auto industry “bailout”? The correct term is “loan.” Just like Japan is now "bailing out" (making a loan) Toyota. Why the need for their loan? Exactly the same reasons facing Detroit right now: US-led deregulation ruined the world-wide economy and all industries everywhere are teetering. Responsible governments are attempting to keep their industrial sector from collapsing.
Reagan and McCain and other “conservative” lawmakers of the past 30 years opposed fuel efficiency regulations for the auto giants. The Big 3 were unregulated and there was no economic incentive for them to become more fuel efficient (especially as long as we good old American buyers kept buying those gas guzzling SUVs and pickups — their #1 and #2 sales items for almost 15 years now).
Why didn’t the Big 3 "keep up" with fuel efficiency standards of Japan or Germany or France or Italy? Those countries' governments told their auto makers they had to do it. Add the fact the Europe has been paying in the territory of $5 a gallon for a decade or two, where this is a new phenomenon to us, and strides toward efficieny on their part makes greater sense. Foreign automakers had several economic incentives toward efficiency and immutable governmental requlations requiring they do so.
It has zero, nada, nothing to do with what they pay their workers.
True, the American auto worker does get paid more than their Japanese or Italian or German counterparts in the United States.
Where a Honda auto worker in the US makes an average of $25 per hour, his Big 3 cousin gets an average of $28 per hour.
That stuff about $70 an hour wages is total BS; those figures are based on computing all the money the Big 3 pay out to all their retirees and active workers over a 10 year time divided only by the number of active, employed workers today — whose workforce has been cut in half over the past 10 years, let alone the fact they are not counting the number of retirees receiving pensions they no longer offer.
They are being credited as receiving wages and benefits for a population more than twice their size. Cut it in half and then factor in the concessions the unions have made over the past five years and you end up with workers earning $3 an hour more than people in the Honda plants in Kentucky who have no health care or retirement benefits.
That's the reality of the situation — not what the MSM and anti-unionists want us all to believe. Regulations, oversight and public health care are the three key concepts that can make them competitive, not telling the workers they have to compete with foreign workers who have those things.
December 23, 2008 10:29 AM | Reply | Permalink
Americans are about to experience the consequences of decades of free-market hubris & mis-management.
December 23, 2008 10:54 AM | Reply | Permalink
Detroit will fail, not because of any failing on the part of labor, which has held up it's part of the social contract with the big three all these years, and not because of the thoroughly incompetent, clueless, and arrogant leadership that management has exhibited for years now.
Detroit will fail because the business model that the building and sale of automobiles has come to be based upon no longer exists. It died with the implosion of the credit markets, and it's passing spells the end of much of what we have come to understand as the middle class American consumer lifestyle.
The Big Three know this, it' s the reason that they tried to include a provision for the government to provide guaranteed loans for consumers to buy new cars in the bail out package.
The automobile is a mature technology in a mature market. It has penetrated and nearly saturated it's north American market and it has done this large part by ever greater reliance on ever more creative finance granting ever more accommodating terms to the buyer.
That party, along with many others relying on the same model or deriving from the fact that American consumers were able to effectively stretch their incomes by relying on that model, is over.
There will still be people who can afford cars in the future, and they'll still be able to get financing, but just as we'll be seeing a lot fewer interest only no money down loans for housing in the future, we'll be seeing fewer automobile loans made as well.
And when you consider the market penetration of the automobile, and realize that it has become a virtual necessity to function in our society as it is currently organized, it's clear that the vast majority of he people who formerly comprised the new car market will find it very difficult or impossible to obtain financing.
And then there is the fact that for the first time the International Energy Agency has for the first time established an anticipated date for the peaking of oil production, in 2020. Other analysts have said that in order to avoid shortages of oil we need to have technology deployed and operating to replace fossil fuels at least ten years before the peaking of production, which puts us on a pretty aggressive schedule to even hope to mitigate some of the disruption this will cause.
All in all, cars have had it.
That's not necessarily an argument to let Detroit sink, however. Those people have valuable skills that could be turned to other manufacturing, although not until somebody figures out what that's going to be.
Since they have to eat (conservatives who would dispute that assertion replace it with "to avoid revolution") maintaining the viability of the car industry for the short term is practical in the short run.
The brave new world we were promised by the bean counters, where we were all going to be computer programmers, and Wall Street Finance was going to be our competitive advantage that we exported to the rest of the world, was a bond dealer's dream that's turned into the nightmare unfolding before us now.
We won't get out of it without resurrecting manufacturing, and we won't resurrect manufacturing without Motown.
December 24, 2008 2:54 PM | Reply | Permalink