These days, I don’t even know what a cohesive economic philosophy looks like. I don’t know when the government should be involved and when it shouldn’t. The best I can do is offer my gut instinct. I had trouble with the enormous rescue package for the financial industry, based on a lot I was reading. I’m still not sure that it was the right thing to do, though the argument could be made.
But I am finding, as time goes on, that I am an instinctive protectionist. Unmitigated free trade and the globalism which is inextricably intertwined with it is savaging our economy and making us vulnerable strategically. America needs a manufacturing base, particularly as we risk hyperinflation in the coming year (yes, the dollar is up now, but wait and see how long that lasts) and the economy, fragile as it is, cannot sustain another critical blow.
Which brings me to the auto industry. I am a consultant to that industry, and am restricted from speaking about my work in this space. So I will let others do the talking. Suffice it to say that I think Tom Piatak is dead on, Pat Buchanan makes some excellent points about our situation in general, and John Derbyshire’s reader knows what he is talking about.
Whatever you feel about how they get there, if Detroit goes down, get ready for Great Depression II. The economic impact will be astronomical - we’re talking 1 in 10 jobs here, many of them only indirectly related to actual manufacturing but nonetheless dependent on that revenue stream- and over 3 million people affected.
However you feel about government mingling with capitalism, the fact is that it’s the system we’ve got. The government is so involved with our economy (largely through artificially-imposed regulations rather than market-driven ones) that they have had a big hand in creating the messes we’re in. Now, the question is simple - will getting us out of this mess cost more or less than doing nothing at all?
Steve,
Quite right! Saving these companies is absolutly essential. If the big 3 go under we are looking at 1% of our population–not our workforce mind you but our population– being unemployed. At least then we won’t need to worry about INflation.
Computers, paint, steel, plastics, electronics, how many are even made in the US anymore? Still, I agree we need to keep a vialbe auto industry. How about just giving them a huge tax break?
Make better American cars and you wouldn’t be in that situation…
North,
That’s an overly simplistic answer. Again, having worked with the industry for several years (and having bought nothing but japanese imports since I was able to buy a car) I would happily buy American cars.
The myth persists that American cars are inferior to their Japanese counterparts; the fact is they are far superior in design, equal in quality, and reaching parity on fuel economy. They also have better warranty coverage.
If you look at both MotorTrend and the North American International Auto Show cars/trucks of the year for the past two years, you’ll see Chevy Malibu, Saturn Aura, Cadillac CTS, and Chevy Silverado all getting top honors.
J.D. Power has been consistently bumping them up on the quality satisfaction scale, and the Harbour report actually ranks GM’s Oshawa, Ontario plant as the MOST efficient in North America.
People think they’re still making Ford Taurus Wagons and Pontiac Sunfires. It’s not like that anymore.
The real problem here is that most people still think what you think, so it’s hard to get them to test drive anything. Compound that with legacy costs that derived from an entirely different economic environment, an unlevel playing field with imports (Japan, for example, exercises protectionism and companies like Toyota benefit from government subsidies) while we offer huge tax incentives for imports to build factories here. So while Toyota sells millions of cars at home, we are only allowed to sell a few thousand. While Toyota builds cars with non-union labor, we build cars with legally protected union jobs. We also have hundreds of thousands of retirees living off of pensions and health care which was promised when market share was double what it is now.
America stopped defending itself economically, and the automakers rode the globalism wave as America opened up free trade agreements with everyone. It’s one problem with pure free-marketism - you go after profits in the short term and often miss the long-term repercussions.
The brakes have been on in Detroit for a while now. It takes a long time to turn a nearly 200 billion dollar company around.
And when they got hit with suddenly high fuel prices before their plans to implement the more fuel-efficient cars (that Americans frankly weren’t buying when they could run sports cars and SUVs on cheap gas) could reach fruition, and then the credit crisis came home so that nobody with less than a 700 FICO score could get a loan, all their efforts to turn the ship around came to a screeching halt.
If they were still producing crap, I could see the argument to just let them die (although it would still destroy our economy). The fact is that at least Ford and GM are not producing crap, and it’s a shame more people don’t know.
One of the real problems the US car makers have is their distribution and marketing system. It doubles the price of the car without providing any benefit to the customer at all. Why are there a dozen Ford dealerships in any large city, and why do they all operate on the same old “squeeze the customer for every last nickel” mentality? Most people I know DREAD having to deal with a car salesman.They know they will be lied to and pressured with every psychological trick in the book to extract every possible dime.
What would happen if the automakers simply set a realistic price for their cars and left it at that? You could go to your local outlet and test drive to find what you like, and buy it, or just order it over the internet. No bother, and no suit-clad weasel trying to remove your bank account.
When the old system doesn’t work anymore, it’s time to try a new system.
Danby,
It’s a valid question, and one that needs to be addressed. The simple answer is dealer franchise laws, which protect dealers from being shut down by the manufacturers without being bought out. Dealers have a strong lobby because they are in every community and have a significant economic impact.
When GM decided to end the Oldsmobile brand, it cost over $1 billion just to buy out the dealers. It therefore becomes more cost effective to continue operating a struggling brand than to shut it down.
I think auto manufacturers would probably love to be able to sell cars to order online, but that’s also not possible because of franchise laws (as I understand it).
Things definitely need to change for Detroit to have a future, no doubt.
I’ve appropriated and used the “national security” argument in my discussions with others. You never know when you just might need heavy industry.
Tom Piatak had a great post on Takimag about this subject that is must reading. I posted a link at my place.
Dale - perhaps you missed it, but I linked to Piatak too. I think his take was great.
Pulling my head out of my tuchus–You already posted the Piatak piece.
Time for more coffee.
Yargh.
Dale - yeah, I too think the national security angle is important.
That said, it’s all too obvious that our “leaders” have had a bi-partisan consensus for several decades now that a robust manufacturing base isn’t a national security concern … otherwise, we would not have encouraged the hollowing-out of all levels of manufacturing so.
Apparently, they also think we can have a robust agriculture without a robust and secure population of farmers, either — but that’s another rant. One also not unrelated to genuine national security (as opposed to whatever orifice the TSA goons are peering into at Detroit Metro).
The longer I’ve lived on a farm, the more I’ve realized that “self sufficiency” is unattainable — and in some respects undesirable. Rather than try to produce everything I use on my own, it makes far more sense for me to concentrate on what I do well — and then use my surplus to purchase or trade with others who do something else particularly well. I and they end up much better off than if each of us tried to be entirely self-sufficient. It’s Adam Smith’s classic theory of “comparative advantage,” and is why international trade contributes so much to national wealth — for all parties engaging in it.
If the Big Three can’t compete with the Japanese, they ought to go under and we ought to buy our cars from those who can get the job done more efficiently. The real problem, of course, is the union contracts which have strangled the Big Three’s competitiveness. If Chapter 11 enables GM to break free of those obligations and restructure itself like the foreign companies building cars in the Southern US, it could be the best thing that ever happened to our economy.
Chris,
As I wrote over at Dale’s today:
The reasons they are not cost-competitive has everything to do with our trade agreements. Read Pat Buchanan’s piece today.
We let import manufacturers walk all over our guys after our guys had already promised (based on a future where Detroit remained the sole American manufacturing industry) to take care of their workers in ways that frankly, few others ever had. There are arguments to be made about the wisdom in that, but there are also arguments to be made about the generosity of it, and how it helped prop up the American middle class.
But there is no level playing field. Japan exercises the protectionism we no longer do. We can’t sell there, but they can sell here. We’re talking a disadvantage in the millions of cars when global sales are calculated. Japan has also manipulated it’s currency for years, making its export business extremely lucrative once the stronger American dollar was exchanged against Japan-produced products.
The industry bought into the free trade globalism, because brainless capitalism tends to do that. But nobody seemed to see the handwriting on the wall about exactly HOW dangerous that type of gamble is. When you’re one of the top five corporations in the world, and the world embraces globalism, what do you do? Go out of business because you can’t compete?
Detroit was pulled out of its complacency some time ago, and it has been burning the midnight oil to restructure. It just can’t do things fast enough to react to what has been, quite frankly, an unbelievably volatile time. Whether or not Detroit should have made the promises they did is moot; they have a sense of responsibility toward those to whom they made them. Bankruptcy would not only leave those people (hundreds of thousands of them) high and dry, but the cost would STILL be shifted to the government and nobody would buy the cars of a company in Chapter 11.
The impact on the economy, the cost for the government, and the long term spiral toward depression isn’t worth it, even if ideologically you oppose this level of government involvement. Have you looked at the Center for Automotive Research’s impact study? 3 Million jobs? Hundreds of billions in lost revenue? How would helping Detroit make it NOT constitute signing a death sentence for our economy?
The problem is that economic theory deals with abstracts, and in the abstract, I agree - the government shouldn’t be bailing out companies in a “free” market (tell that to the government regulators who make all the rules that drive up the cost of your car, make it heavier, etc.)
But this isn’t the abstract. In reality, millions of real people - people you know, or maybe you - will be directly impacted by this. In the long run, there’s no question that these companies need restructuring, but unless we do something now, they’re simply going to fall, taking all of us with them.
Opposition to this intervention isn’t simply a matter of abstract ideological principle for me. I believe it would be far worse, over the long run, for the common good of this nation, to intervene and prop up a failed company (and the unions which are strangling it) rather than let the company and the union fail and let others pick up their portion of the market share. A collapse of GM will not “take all of us down with them”. The successful companies will thrive and grow once GM is out of the way, but we can’t get an economic revival as long as we allow these bloated corporations with failed business plans and parasitical unions to survive and clog the marketplace.
We let import manufacturers walk all over our guys after our guys had already promised (based on a future where Detroit remained the sole American manufacturing industry) to take care of their workers in ways that frankly, few others ever had.
Whoa, whoa, whoa! What do you mean “our guys,” kemosabe? I don’t recall ever signing on to a perpetual Detroit monopoly on the cars that I buy.
I don’t want GM to implode. I want it to be restructured, and quickly. If Pat or Pelosi want to instead escalate a frozen trade war with Japan to protect high-wage workers in key swing states, he’d better make it revenue neutral and cut my payroll taxes while he’s at it, or the recession will be harder and deeper.
Chris,
I don’t think you understand the underlying issues here. This is not a failed company - it is a company which has not only been an American institution for the past century, but one which was poised to restructure itself for the 21st century. Circumstances outside of its control (and practices rooted in an American past that saw no future for our then enemies, Japan and Germany, as manufacturers of automobiles in this country) have led to this situation. The government, I’ve noticed, is trying to pretend that they have had no hand in this predicament.
And yet, the government imposes safety standards that are far more stringent than those in Europe and Asia, bringing up the cost of vehicles and increasing their weight (and decreasing their fuel economy.) The government then imposes emissions standards which increase the cost of vehicles substantially, while simultaneously imposing mandatory fuel economy standards which couldn’t be met with heavier vehicles and existing combustion engine technology. Why not bring over the fuel-efficient small cars detroit sells in Europe and Asia? Because to make them small and fuel efficient, they are also lighter, smaller, and don’t meet those aforementioned American safety standards.
What about the laws protecting Unions? What about the laws protecting dealers so they can’t be closed when a brand is no longer profitable? What about the fact that European and Asian manufacturers have government subsidized R&D, have socialized health care (one of the big costs in American manufacturing), and have government-mandated gas taxes making fuel-inefficient cars undesirable and giving them an edge in producing small, high-economy cars because their home markets demanded them in exactly the way ours did not?
This isn’t simple. And if you think that the transplant manufacturers will fill in the gap if Detroit goes down, you’re sadly mistaken. First, the supply chain will collapse, because most American plants buy parts from the same sources - sources that are barely making it on razor thin margins and depend on volume produced by multiple manufacturers. Many (if not most) will go out of business, damaging the imports.
But there’s also the problem of shipping over $400 billion in automotive revenue to overseas companies. You’re taking all but operating costs for U.S.-based foreign plants and sending it straight out of our economy. How is that good for our country either?
And Joe, “our guys” are the American manufacturers - the manufacturers that helped build this nation and make it an engine of technological innovation. The same guys who are not allowed by law to sell their cars in Japan, and who have had their industries undercut by America’s asinine trade policies - the same trade policies that have made that great human rights violator, China, an economic behemoth on our nickel - which incentivize the building of foreign owned, foreign-profiting, non-union plants in the U.S.
What part of shipping most of our money overseas for manufactured goods makes sense, particularly when 70% of our economy is fueled by consumption of those goods? We are bankrupting ourselves, and leaving ourselves vulnerable, not just economically, but defensively.
I am not going to reiterate the data - you can read it for yourself in the CAR report. And what happens if we let American manufacturing die, and allow all our goods to come from overseas, instead of just most? What are the coming consequences of our monetary and trade policies? Paul Craig spells it out:
What of course I forgot to reiterate is that people CAN’T buy cars now, because they can’t get credit. That, also, is not an industry-created problem.
One other aspect to remember. All those Asian cars built in the South, you can kiss those assembly plants goodbye too, if Detroit goes down. They exist only as a political sop to the US, built to dissuade the US from imposing import quotas, and would be gone in a year if Ford and GM were to close their doors. Cars built in those plants cost substantially more than the same car built in Asia, due to our labor and environmental laws.
And Chris, you neglect the important question. Who will build our tanks? Should we import those from China?
Danby -Who builds our tanks now? Do you really anticipate another massive land-war scenario where it’d be necessary to retool GM and Ford to make tanks, rather than expanding our current facilities? I believe that model of warfare is past, and would be like asking where the cavalry horses would come from if farmers switch to tractors. Low intensity conflict strikes me as the warfare model of the future.
Steve - Excellent point about government regulations. American auto makers do much better overseas, where they are not hobbled by all the safety and emissions regulations our government imposes for the domestic market. The answer is to greatly lessen these mandates, which would also provide consumers with more low cost choices. (I speak as the owner of a Fiat, a wonderfully inexpensive brand in Italy but which hasn’t been imported to the USA since 1982 due to government regs.) Instead, the Democrats want to double-down, and attach even more uneconomical mandates to any bailout $$$. This is becoming textbook corporatism.
And yes, I do believe unions have an important role to play. But the UAW has sucked these companies dry with labor contracts that are simply unsustainable in a competitive marketplace. The labor contracts are so strangling the Big 3, I think the only realistic solution is reorganization under Chapter 11. Mitt Romeny’s piece in today’s NYT is dead-on. Don’t get me wrong: I’d love to see GM survive. I recognize that it’s an important component of the American economy. But I think saving GM is only possible if we get the unions and the government out of the company’s way so it can produce products at a competitive price.
Chris,
I think in an academic sense, the Chapter 11 argument makes sense - until you look at the data. Independent research shows that about 80% of consumers polled said they would NOT buy a car from a manufacturer in bankruptcy. It’s too big of a purchase to risk them never coming out of Chapter 11 (and if you look at companies in Chapter 11 now, like Delphi, or Circuit City, you see the issues in doing that cleanly.)
That’s why the line you’re hearing out of these hearings is that a bankruptcy for one of the Detroit 3 won’t be Chapter 11, it will be Chapter 7 - liquidation. And that starts the domino effect that brings down the other domestic makers and potentially damages the ability of the transplants to manufacture in the U.S.
A soundbite that I’ve been hearing today that I like is “We can’t trade our dependence on foreign oil for a dependence on foreign manufacturing.” That’s particularly true if this dollar rally is as short lived as some analysts think it is, and inflation brings the price of imported goods out of reach.
I think you’re seeing, with the Chapter 7 talk, the automakers holding a gun to their own heads and threatening to blow their brains out all over our nice suits of clothes. I believe they’ll do fine under Chapter 11, but I guess that’s where we’ll have to agree to disagree.
Hyperinflation is a foregone conclusion, IMO, given the promises being made by the Treasury, auto bailout or no auto bailout. Buy precious metals while you can.
I agree with you Steve
For the record, I bought plenty of (expensive) airline tickets when UAL was in chapter 11. If it was explained clearly up front that Ch 11 was about ditching unfair union contracts, I think the American consumer would stick with GM in the same way.
Chris,
Also for the record, those tickets weren’t $30,000 (or more) a pop, your entire family didn’t depend on them to be reliable 24 hours a day, for trips large and small, and they didn’t have a 5 year, 100,000 mile warranty you expected to be honored.
There’s a different expectation for a several hour flight than for a car you keep for five or ten years that you use every day. The cost to risk ratio is substantially lower.
What they need to do is spin off the service providers into special-purpose entities, and then split the service levels into several “risk tranches”. The major customers will get the AAA levels of service, while the junior tranches will be held by the restructured company in a separate hedge fund offshore…