Category: auto industry

Economic patriotism

Conservatives spend a lot of time belly-aching about “patriotism.” (Actually, they’ve been pretty effective at it and have pretty much owned the word. More work for liberals to do…)

But what counts as patriotic is not that simple, especially in a globalized economic age.

The bailouts of the auto industry being managed by the Obama administration might end up being good for “General Motors,” the entity that just happens to be headquartered in Detroit, but as William Greider points out in the Nation, it’s important to remember that some American citizens are being thrown under the bus:

So this is how the auto bailout will work. American taxpayers pump tens of billions into rescuing General Motors from bankruptcy. Then GM pays us back by shipping more jobs overseas — the equivalent of four assembly plants.
…
The United Auto Workers sent a letter to Capitol Hill the other day that revealed the terms. GM’s restructuring plan envisions a doubling of the vehicles it will import from overseas factories, from 372,000 to 737,000, in the next four years. GM’s imported cars — already 15.5 percent of its domestic sales — will rise to 23.5 percent. “The overall number of vehicles GM will be importing in 2014 represents the production of four assembly plants, the same number that GM plans to close in the United States,” UAW legislative director Alan Reuther noted.

Now, personally, I’m for globalization and trade. I think the general benefits of trade are well-proven, and I think that, ultimately, humanity will benefit from becoming more interconnected, not less.

However, that does not mean we should sacrifice people in the short-run.

And since we still have nation states, it certainly begs the question of why our national trade policies would be run to the detriment of its citizens. William Greider:

Other nations like Germany, Japan, France and of course China impose national obligations on their producers and multinational corporations–demanding that companies retain their highest value-added production and best-paying jobs in the home country. The US gives its multinationals a free ride–even assisting them in dispersing production and capital to low-wage economies while keeping open the US market for their imports. Our own companies game this system endlessly–producing cheaply abroad, then selling the “US brands” back into the home market.

Economic entitites, like corporations, really have moved beyond the nation state, playing in a global economic system. Nations, meanwhile, have remained, well, national. And as long as we have national governments, they should serve their citizens – all of their citizens. That would be true economic patriotism.

Update: This isn’t just an American issue. And it’s not just for auto workers.

At the Wall Street Journal, Robert Frank runs a great blog called “The Wealth Report.” He tracks the lives of the truly wealthy – people that live in a different world he calls “Richistan.”

The other day he had a post about how some wealthy Brits are threatening to leave the country (take their toys and go home) because the U.K. government was considering raising the top tax rate from 40% to 50%:

“I won’t pay. I’ll leave,” British entrepreneur Peter Hargreaves told the Times. “Why wouldn’t I? If I stay I’ll pay half a million more a year in tax. If I leave the country I can save [three million pounds] a year. It’s almost like the government is offering me a bribe worth [three million pounds] a year to go and live abroad.”

The actor Michael Caine has voiced similar concerns.

Quite some British patriotism there.

I’ve seen this “flight of the rich” argument in different places before. If ever there was a time for public shaming, this would have to be it. How strong could your patriotism really be if you just run away from your country because of policies you don’t like? I’d like to see some conservatives stand up rake these kind of “patriotic” rich people over the coals, but of course, they won’t.

And this brings up another point related to my comment on corporations in the original post above. The truly wealthy have already gone “post-national,” just like corporations. The world is truly their oyster, while the rest of us are left “patriotism” and “nationalism” – both “isms” that must seem like sucker’s games to them.

Frank continues in his post with an interesting conclusion. The rich might complain about higher taxes, but really, they “have no where to go:”

Almost every developed country in the world is raising taxes on the wealthy. Germany is boosting its capital-gains taxes. Other European countries also are turning to tax the wealthy. The U.S., of course, is likely to raise taxes on the affluent. Many states, from California to New York, already have imposed a “millionaire’s tax” that hits nonmillionaires.

Sure, they wealthy could move to Monaco or the Caymans or any other tax haven. But the fact is, the wealthy like to be at the center things–of ideas, culture, finance and socializing. After three months of coconut drinks, even the Caymans would get tiring. Not to mention the bad PR that comes from living in a tax haven, as with Johnny Hallyday in France.

At the same time, the U.S. and other governments are making it harder for people to use offshore tax havens. If they earn money in the U.S., it is going to be harder to shield it from the authorities.

In other words, the wealthy may grumble but they may have few options other than paying up.

Stressing the financial sector

Obviously this economic meltdown of the last couple of years is complex. But if pressed to give a one-sentence answer, I would say this:

For almost thirty years the financial sector got whatever it wanted.

Certain conditions had to be place to make this possible:

  • the widely held idea that markets and business people can do no wrong (and government can do no right)
  • massive amounts of dollars made available by China’s willingness to lend us back the money we sent to them and by Federal Reserve policy
  • a system of campaign finance that allows moneyed interests to dominate politics
  • the willingness of the American households to take on debt

In the end, all of these factors (and many others, of course) came together to empower financial players, ultimately at a multi-trillion-dollar cost to all of us.

To help make my point, I would contrast the treatment of the financial sector to the auto sector. The American car companies have been the other main recipient of government bailouts. But Chrysler has already been sent into bankruptcy, and GM could soon follow. Auto executives have been canned. Auto company workers with valid contracts are being forced to renegotiate and cut back. None of this is true of the financial services sector, especially the big banks.

And contrast what happened before the big meltdown. The federal government fashioned all sorts of policies that the financial sector wanted, from the non-regulation of derivatives to the creation of financial “supermarkets.” As for the auto industry, it never seemed to get what it was ultimately looking for. I covered the auto industry for several years, and I heard auto company and auto union executives call for China and Japan to allow their currencies to strengthen against the dollar. I heard union executives call for an “industrial policy” in the U.S. Everyone knew that health care was dragging the companies down. But I’m pretty sure that auto executives and union leaders also knew they were shouting into the wind. The federal government was simply not going to take action on any of these items. U.S. auto companies and unions simply did not get whatever they wanted (the one exception being the repeated defeat of increased CAFE standards).

Which brings me the current state of the economic meltdown. We do have some slightly encouraging numbers today on employment. Things are still getting worse, just at slower rate.

But the saddest and most frustrating thing about the government’s approach so far (by both the Bush and Obama administrations) is that they continue to give the financial services sector whatever it wants. There’s very little, if any, pushback. And very soon the window for reform will close, as the “banksters” shore up their powerbase again. After surveying the range of opinion out there, I find myself agreeing most closely with the views of Simon Johnson and James Kwak. You can find a good summary of their viewpoint here.

And you can read through some of today’s coverage of the results of the stress tests to find further confirmation that the banks are really in the driver’s seat with the government, even though they would all be out of business if it wasn’t for you and me bailing them out.

Here’s one example:

Some major banks managed to wrest concessions from the government in closed-door negotiations over their “stress tests” that helped them put the best face on their results, financial analysts, industry officials and sources said.

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The banks were intent on sending a message that they were strong enough to weather the economic storm and didn’t need additional capital infusions from the government that could all but nationalize their franchises.

Another sample:

Federal officials have repeatedly vowed to support the 19 banks, which essentially have been labeled too big to fail. Those reassurances have propelled the companies’ shares to their highest levels in months. The White House, Treasury Department and Fed hope that by restoring confidence in the industry, private investors will help troubled banks shore up their finances, eliminating the need for taxpayer-financed rescues.

And maybe most telling, from the same article as above:

A number of analysts pointed out that shares in the 19 stress-tested banks now carry more upside potential than downside risk, if only because the government said in March it would allow none of the 19 firms to fail.

With that assurance in hand, said Brad Hintz, an analyst at Sanford C. Bernstein, the only risk facing bank-stock investors “is dilution risk” — the worry that a firm will need to raise new common equity, which hurts existing shareholders.

Investors “love to have a one-sided bet, and that’s the bet on the financial institutions,” Mr. Hintz said.

Which squares with what a lot of the critics of the financial sector bailout have been saying – heads the financial services folks win; tails we as taxpayers lose.

Save the people, not the corporations

There’s a lot to chew on in the discussion over at the New York Times “Does the U.S. need an auto industry?“

I was struck by a couple of passages.

This from Roger Simmermaker, a union official:

We need a U.S. auto industry because American companies employ more American workers; support more retirees, their families and dependents; pay more taxes to the U.S. Treasury; have a much higher domestic-parts content in their vehicles, and operate far more factories in America than foreign-owned companies.

If the Big Three fail, the American taxpayer will be paying the pension and health care costs for the affected workers and retirees.

And this from economist Robert Reich:

The United States needs an auto industry because automobile jobs are good ones. They pay higher than average and provide good benefits. But that doesn’t necessarily mean we need General Motors, Ford and Chrysler. The American auto industry is not the Big Three. It’s Americans who make automobiles.

Foreign-owned automakers, producing cars here in the United States, now employ — directly or indirectly — hundreds of thousands of Americans. And at the rate the Big Three are shrinking, even as they’re bailed out, foreign automakers may soon employ more Americans than the Big Three do.

I think that both of them make the point that we need strong and vital industries here in the U.S. But I tend to side with Reich.

I’m not sure it makes sense to discriminate in a company’s favor simply because it is headquartered in the U.S. Think of this from the perspective of the U.S. automakers. They desperately want to sell their cars overseas. General Motors has focused on building its presence in China because of the possibilities of that market. If we’re going to insist that we simply “Buy American,” then other countries have the exact same right, to the detriment of American companies doing business overseas.

At the same time, though, we need to do everything possible to guarantee to the people of America a decent living and a decent shot at life. In economics, there can be win-win scenarios. But there are also win-loss scenarios. And it’s absolutely the case that lower-income earners have gotten the shaft out of the way globalization has been designed so far.

So what we need is a redefinition of what it means to be a U.S. economic citizen. And I don’t think our identity as economic citizens needs to be tied to a specific industry, or even a specific firm, like GM.

Does the U.S. need an auto industry?

A great discussion taking place over at the New York Times.

Economist Mark Thoma says:

But there is another rationale for policies preserving certain kinds of production: protecting industries vital to national defense. If you are an island nation vulnerable to blockades or trade embargoes intended to prevent food and other goods from being imported, it may be in your interest to protect domestic agriculture, for example.

This is something I’ve thought for a long time. Globalization as a way of providing for all of humanity only works if everybody plays nice. Nation states or groups of nations can quickly find themselves on their own if relations break down. And if they’ve given away or forgotten how to do some things critical to their basic survival, they’re screwed.

But how far do we push this? I don’t generally support agricultural subsidies, but we sure better keep enough people on the farms to grow our own food.

Don’t get me wrong. I’m all for peace, love, and understanding. (Man, I love that song.) But we’ve got to be prepared for the worst, too.

Did the hedge funds bring down Chrysler?

I’m afraid that I can’t get behind the Obama administration and some Michigan politicians who blame a group of hedge funds for pushing Chrysler into bankruptcy court.

The Obama administration desperately wanted to keep Chrysler out of bankruptcy. It secured agreements from just about everybody (management, the union, banks that are major creditors – who, incidentally, received TARP funds). But a few smaller creditors wanted more money and ownership than the government was willing to offer. So, on it went to bankruptcy court, where anything could happen – including Chrysler being completely shut down and sold off for its parts.

In reponse, President Obama said:

“They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don’t stand with them,” said President Barack Obama, adding that the holdouts threatened to “endanger Chrysler’s future.”

And from U.S. Representative John Dingell said:

The rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury – firms I label as the “vultures” – will now be dealt with accordingly in court.

But, according to the New York Times, the group of hedge funds that was pushing for more said this:

The dissident creditors said they had a fiduciary responsibility to seek the best possible returns for their own investors — which, the group said, include teachers’ unions, pension funds and endowments.

“The government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades,” the group said in a statement Thursday. The creditors suggested banks that had received bailout money were being strong-armed by the administration, a view some of the bankers privately said they shared.

The second part sounds like a cover to me. I really doubt the hedge funds that were holding out would be that concerned about legal precedent if the deal were breaking their way.

But “fiduciary responsiblity” might be a real argument.

First of all, that responsibility is a legal issue. They could be sued by their investors if they didn’t fight hard enough to get everything they could. I have no idea whether their investors were really threatening them, but it’s a possibility.

Second, it is true that big insitutional investors – yes, representing pension funds for teachers and other average folks – use hedge funds. It is really the case that there could be a trade-off between the people who work at Chrysler and the people who have their retirement funds tied up in Chrysler’s debt. That’s one among many damnable positions our financial system has put the average American electorate in.

I’ll freely admit I could be wrong about this excuse of fiduciary responsibility. Maybe these guys really were just a bunch of greedy bastards. I want to believe that, in fact. But I’m leery of over-doing it. Yves Smith over at Naked Capitalism – whose opinions I follow and respect – seems convinced that’s the case:

But the banksters are eagerly, shamelessly, and openly harvesting their pound of flesh from financially stressed average taxpayers, and setting off a chain reaction in the auto industry which has the very real risk of creating even larger scale unemployment than the economy already faces. It’s reckless, utterly irresponsible, over-the-top greed.

She’s even concerned that this episode could lead to class violence against financial managers in the country. Yikes.

I’m absolutely convinced that the power of the financial elite must be broken in this country. But we better make sure we’re right and do it the right way.

Chrysler’s bankruptcy

A sad day. Both I and my wife have many connections to Chrysler, Detroit, Michigan, and many other places supported, in part, by Chrysler. Many friends, acquaintances, and family members will get hit hard.

The Detroit News has a quick summary of the impact of the bankruptcy filing designed to save the company:

The Obama administration says the bankruptcy of Chrysler LLC should not affect “ordinary” operations of Detroit’s No. 3 automaker.

But Day One of Chrysler’s Chapter 11 era was anything but ordinary — two top Chrysler executives said they will leave, nervous suppliers refused to ship parts and Chrysler said it will shutter most plants during bankruptcy and disclosed plans to close six U.S. factories as part of its restructuring, including three in Metro Detroit by 2010.

“Once you pull the bankruptcy trigger, there’s no such thing as business as usual,” said Aaron Bragman, a Troy-based auto analyst with IHS Global Insight.

Nothing really all that good for anyone in Detroit or Michigan, although I suppose it beats a straight-out liquidation.

But I have to admit that I’m conflicted by this.

There is nothing new about car companies failing or getting absorbed by other automakers. That’s been happening for the entire history of the car industry. (Chrysler itself absorbed American Motors in the 1980s.) This also happens throughout our economy. I believe there is a value to this kind of economic churn. It’s how we free up the resources to create the new things we want and need. So, I don’t find myself fretting about the disappearance of the organization called Chrysler itself.

No, I’m far more worried about the human suffering that will result from this. A great many people will see their prospects in life quickly and permanently diminished. In the short-term, many people will struggle to provide themselves with the essentials of modern life – like food & water, shelter, adequate health care, and having the resources to educate their children. In the medium-term, many of these people will struggle to find a new economic life – because of the poor economy in general, but more specifically because of the housing bubble bust. It’s hard to leave Michigan – or any state or town where a Chrysler-related employer is located – if you’re underwater on your mortgage. (The Census Bureau recently reported that fewer people are moving nowadays, with large economic consequences.) In the long-term, some people might recover, but it’s unlikely that many of the unionized workers will find anything remotely like what Chrysler provided.

I’ve said this before. Liberals shouldn’t worry much about saving organizations. Economic churn is a good thing. But liberals should fight with every ounce of energy to make sure that people – actual human beings – don’t get flattened along with an organization.

It’s time for health care reform. It’s time for retirement reform. It’s time for educational financing reform. And, most importantly, it’s time for wage reform.

The auto industry future is turning Chinese

Jeez, I’ve been linking to the Wall Street Journal a lot lately, but they’re the only ones reporting right now that the Chinese automaker Geely is apparently going to try to buy the Volvo brand from Ford.

I am confident that Chinese automakers will eventually become a major force in the auto industry – even in the U.S.

A little history – you had the shake-out in the U.S. that left only GM, Ford, and Chrylser standing as hundred of competing companies were out of business or were acquired over the first few decades of the auto industry during the 1900s. Then the Japanese automakers came in and exploited the product line gaps and lethargy of the US car companies in the 70s and 80s. Then the Korean manufacturers came in and started to undersell the Japanese automakers. (The European makes have come and gone as mass market vehicles during this time.)

Now, we’ll have Chinese car companies. They’ll likely be able to undersell or at least compete directly with the Korean car companies. And, it now looks like, they’ll be in a position to grab up some of the established luxury brands that Detroit’s automakers are having to dump.

Lots of things could go wrong (oh, like global economic slowdown, fr’nstance), but it’s beginning to look more likely that the Chinese car companies could become major competitors in the U.S. one way or another.

The Southern Strategy

And I don’t mean the famous political strategy of Kevin Phillips.

No, I’m talking about overseas automakers.

One reason Detroit’s automakers have had such trouble with their bailout is they have an opposing constituency among southern politicians. It’s something the Wall Street Journal wrote about today.

Overseas automakers have mostly invested in southern states, largely because of their historical opposition to labor unions.

As I’ve mentioned before, I covered the auto industry for several years, but I never ran across an explanation for why the South hates unions so much. A quick Google search today didn’t help. I’ll let you know if I come across something, or if I get the time to look into it myself.

Also today, the ethics of an automotive bailout.

More on the auto industry

Following up on my previous post regarding the possibility of a Detroit bailout, here are a few interesting links I’ve run across.

First, on the UAW. In my post I mentioned that yes, indeed, Detroit’s labor costs are higher. Here’s another way to look at it from Felix Salmon:

You might expect it from right-leaning commentators like Will Wilkinson. You wouldn’t expect it from someone like Mark Perry, who lives in Flint, Michigan. And you certainly wouldn’t expect to see it in the New York Times, from the likes of Andrew Ross Sorkin. But 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. But it won’t mean anything, unless you’re trying to be deceptive.

James Surowiecki also adds:

It’s true, of course, that G.M. does have to pay retiree costs, and mentioning those costs in any discussion of the financial burdens G.M. is under makes sense. But that’s not what people are doing, rhetorically, when they use the seventy-dollars-an-hour number. What they’re doing is trying to make it sound as if G.M.’s current assembly-line workers are earning outrageous compensation for their labor, in order to demonize the U.A.W. U.A.W. workers are well-paid by industrial-worker standards. But they are not getting rich building Buicks, and making it sound as if they are is pure propaganda.

I think they both makes good points, and I agree – if the commentator is trying only to bash the UAW. But let’s face it, what commentators like to label “legacy costs” – those benefits for retirees and surviving spouses – are a real financial problem for the U.S. automakers and the UAW. (And for the U.S. taxpayer if the pensions end up at the PBGC – the FDIC of pension plans.) You can’t just leave them out of the discussion completely. If anything, let’s work those legacy costs back into a larger conversation on health care and retirement insecurity in this country and what we can do about it.

On the subject of environmental regulation, I tend to agree with the views in this post by Greg Mankiw:

Allan Sloan joins the Pigou Club:

Having permanently high gas prices would let the market, rather than incomprehensible, loophole-ridden Corporate Average Fuel Economy regulations, make the decisions on what kind of vehicles Americans get to drive. As part of my plan, I’d scrap these CAFÉ standards, abandon the current attempts to force automakers to spend tens of billions of dollars to meet higher fuel-economy standards. Instead, the market, guided by a high gas tax, would rule.

And so do many CEOs:

Members of the Journal’s CEO Council tasked with discussing priorities for the U.S. economy and finance offered several fairly uncontroversial suggestions to the incoming administration: implement a fiscal stimulus plan without worsening the long-term deficit, appoint a panel to address financial regulation, create an economic vision.

Tucked away in the proposal, in the category of long-term tax policy, was this political grenade: “consider raising taxes on gasoline.”

Yes, THAT Greg Mankiw. Even conservatives can bring something to the table. If you remember, Barack Obama also supported keeping a gas tax in place, although his argument seemed to be that it was necessary to sustain our roads and that it wouldn’t help consumers very much.

The problem, of course, with raising the gas tax is how regressive it is. The people who are least able to pay it would suffer the most. But we could look for other ways to help people, like tax refunds, that would make them whole. So, we’d get the market incentives necessary to finally get more environmentally friendly cars on the road, while making sure the less-well-off didn’t fall behind.

By the way, I’d also like to see us fold all of the money we spend on the military protecting our Middle East “interests” – that is, oil supplies – into the gas tax. That’s pure rational accounting, baby. But that’s a different post.