Commanding Heights II
If I were running a presidential campaign, I would definitely be saying to myself “whatever Michigan wants, Michigan gets.” But beyond that, I have a very hard time seeing a good rationale for providing federal assistance to U.S. automakers. But between the fact that bailoutmania’s already hit Wall Street and the strong electoral college argument, it seems that momentum is building for $25 billion in loan guarantees “which would cost taxpayers $7.5 billion.”
This seems particularly weird because if I’m understanding the proposal correctly there’s no nationalization or government takeover of anything. It’s just a straight-up giveaway to keep politically sensitive firms in business. Who knew the “Washington Consensus” would die in Washington, DC under a Republican President in a mad fit of bailouts and nationalizations?
34 Responses to “Commanding Heights II”
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September 18th, 2008 at 9:09 am
The obvious thing to say–which I’ll say anyway–is that the current Republican party isn’t pro- free markets, it’s pro- big business, which aren’t at all the same thing. Even ‘pro-big business’ is probably much too kind–it’s more a matter of helping out a small class of business and investors, not the companies overall. Maybe ‘pro- crony capitalism’ would be the right term.
September 18th, 2008 at 9:13 am
I think it was pretty predictable, actually, in its outline if not in its details. The current Republican party has no particular intellectual moorings. It represents crony capitalism, war, and bigotry - it has a constituency, but hardly a coherent agenda other than defining “us” and “them” as loudly and divisively as possible.
Which isn’t to say that an intellectually consistent conservatism isn’t possible - just that neither the current government nor the current slate of Republican candidates have *any* connection to that hypothetical entity.
September 18th, 2008 at 9:24 am
Where’s the Fed getting the funds for all these bailouts? Are they literally printing the money? That’s going to work out real well.
September 18th, 2008 at 9:39 am
Well, one public policy issue is the large number of retirees living off pension and health benefits provided by the automotive companies. Another would be that the financial health of these companies will likely end up being a factor in how quickly the U.S. car fleet changes over to higher fuel-efficiency models.
September 18th, 2008 at 9:42 am
There is an odd phenomenon happening. It turns out, there are a lot of people with money to lend, they are just afraid to lend it. No one knows which companies have mountains of bad debt hidden in a closet. Because compannies have been so dishonest about their holdings, there is almost no such thing as a good credit risk anymore. People with cash don’t want to lend it, don’t want to invest it in stocks and are only willing to buy so much gold. They’re afraid gold has topped out and may be experiencing a bubble, and that foreign currencies may begin to collapse too.
I think it was yesterday that the treasury auctioned off a batch of bonds. You bid on them by offering an interest rate - lowest interest rate wins. Most bids were extremely low, some bids were even for zero percent. People are actually giving the treasury money to hold at no charge. They are treating the treasury as the best mattress to shove their cash into.
September 18th, 2008 at 9:43 am
Actually, I don’t think it’s an issue of just being pre-big business. It’s being pro-big-business that’s been throwing money my way for 30 years. Ford GM and Chrysler are in bad shape because they’ve been poorly run. There are a bunch of other automakers in business in this country, but they’re not begging Congress for billions in free money. Let’s see here: Honda, Toyota, Hyundai, Mercedes, BMW, Nissan. Did I forget anyone? And before someone says “but those are all nonunion workplaces,” that’s a different discussion. GM in particular has known about all these issues about fuel economy, the pressures of their health care costs, and their encumbrances for retirements for at least 20. But they went after the fast money (bigger and bigger trucks). When the Clean Air act passed in the 70s it passed giving the Big Three a pass on CAFE standards - giving them more time to catch up with Toyota. That was 30 years ago folks, and they’re still saying they need more time. How long has the Prius been selling like hotcakes, and they latest entry, the Volt, probably won’t even be in the showrooms until 2011?
Now, I’m not saying we shouldn’t lend them a hand, given they employ a lot of folks, and in many places, their plants (and suppliers) are the primary employers for an entire community. But they shouldn’t get a blank check like the airline industry got post-9/11. If you’re going to give them a hunk of money, there ought to be strings attached. Strings that either make the company stronger and more competitive, support the workers in finding new (better?) jobs. You can do a lot of economic development for that much money. How many communities would be hit by GM collapsing? How much would it take to do some real economic development in those communities to put folks back to work?
September 18th, 2008 at 9:49 am
The auto industry is asking for low-interest loans, so the size of the “giveaway” is the difference between market interest and the low interest rate–a small fraction of the loan amount.
These loans were promised to the auto companies in return for raising CAFE mileage standards.
September 18th, 2008 at 10:04 am
Ano is more or less right. The loans were actually in the same bill as CAFE last year and they are just low interest loans. Importantly, they aren’t just loans for general operating expenses, they are loans for the specific purpose of retooling or building new plants and then only if the cars produced are at least 25% more efficient than the average for that vehicle type. Also important to realize is that they are for component suppliers (like battery manufacturers) as well as OEMs. The final issue to keep in mind is that there isn’t a $7.5 billion “cost” to the taxpayers. If they pay the loans back, the taxpayers aren’t out anything. That number is a CBO score that is essentially their best guess on the risk of default. That mostly reflects the poor state of credit markets and the economy generally. If we recover and they start selling cars again, the cost should be minimal. In any event, it puts people back to work building stuff, so there’s some real good there.
September 18th, 2008 at 10:12 am
I seem to recall reading when I was in school just how much of the US economy ultimately depends on the automakers (something absurd like 25%), though I’m not sure how much it has changed since then or if I am not remembering correctly. There is a huge multiplier difference between a manufacturing job and a service job, and an auto-maker manufacturing job has a ton of jobs tied to it outside the big three in parts design and manufacture, machine tools, etc. Basically when auto manufacturing dies, you have a lot of other industries, cities, and states that die, too. We aren’t just talking about the collapse of the big three and Michigan.
And the disproportionate geographical impacts is important. Theoretically, a laid-off worker in Michigan can get another (lower-paying) job in the south or the west where all of the jobs seem to be. But people are not commodities, and the long-term psychological impacts of ripping communities and families apart should not be taken lightly. If somehow the big three failed, you would have community catastrophes. Look to the textile towns in NC like Kannapolis for an example of this. It is not a pretty picture, even in states with job growth.
So as long as we are talking about giving away money, why not move away from simple cash transfers and loan guarantees to something more productive? Why not give a small amount of the money in straight cash or loan guarantees for a start to keep the companies solvent, but then use a larger sum to help the automakers with technological, green innovation? This is I believe what happened in India when the Indian supreme court required the automakers to cut back on pollution–rather than fighting in court forever, the government and the automakers worked together on innovation through the university system. As long as we are abandoning the myth of a competitive market by giving them cash or guarantees, why not do something good with it? It does no one any good in either the short or the long term to keep the automakers around if, frankly, their cars suck and no one wants to buy them.
September 18th, 2008 at 10:19 am
Can somebody clear this up for me… What’s the advantage of turning cash into a bond that pays 0% interest? Is the bond somehow more reliable than the cash, or is the purchaser giving some other risky asset in exchange for the bond?
September 18th, 2008 at 10:21 am
IOKIYAA
It’s OK If You Are American. The Republcans are not just the party of special breaks for themselves. They also extend the exemption from self-awareness, self-criticism and self-control to the country as a whole. It’s their brand.
So, yes, the Washington Consensus is just for little nations, as surely as paying taxes is only for the little people.
We can only hope that the self-exemption from norms of sound fiscal behavior will end with subsidies to failing industries. I have trouble believing that, should our presetn troubles lead to a debt crisis, the spirit of IOKIYAA, which the Republcans do so much to foster so loudly, and the Dems nothing very audible to discourage, can be held in check enough to keep us from grabbing at the ultimate nationalst solution we have seen other banana republcs grasp in the face of debt crises — repudiation of foreign-held debt.
Now, when an Argentina tries this, there are sanctions the creditor nations can apply. But what sanctions are they going to try against the world’s only hyperpower? Who’s gonna bell that cat?
There are many, many reasons not to maintain a standing army in times of peace. Let’s add to that list the debtor’s moral hazard created by maintaining armed forces greater than the rest of the world combined.
September 18th, 2008 at 10:25 am
$7.5 billion is something like 375,000 Ford Foci.
That’s a lot of cars!
September 18th, 2008 at 10:29 am
How come we’re loaning the Detroit automakers a hefty multiple of their market cap? Why don’t we just buy them up, since it would put fewer taxpayer dollars at risk?
September 18th, 2008 at 10:30 am
Re “Who knew the “Washington Consensus” would die in Washington, DC”
————
I thought the “Washington Consensus” was to fuck the widows and orphans –take care of the rich guys.
That seems pretty healthy to me.
September 18th, 2008 at 10:33 am
I don’t understand a rationale for keeping US automakers around. Free trade, people. Toyota, BMW, etc. can all build plants in the US and provide the same benefits to the US economy while creating fuel-efficient cars. What’s so great about the (US-owned) Big 3? They’ve certainly done a terrible job over the last couple decades in adopting to the auto market.
September 18th, 2008 at 10:36 am
Can somebody clear this up for me… What’s the advantage of turning cash into a bond that pays 0% interest? Is the bond somehow more reliable than the cash, or is the purchaser giving some other risky asset in exchange for the bond?
When you are a major corporation or a money market fund, it’s pretty hard to hold massive amounts of cash — as in, physical pieces of paper with pictures of dead presidents on them. So what you end up with are either demand deposits (checking account balances) or short-term notes (CDs, repos, commercial paper, Treasury bills, etc.) that are denominated in those same pieces of paper.
But we’re to the point now where nobody trusts anybody to hold their “cash” — not even overnight. The markets are full of various short-term IOUs that may become worthless overnight(like the Lehman Brothers notes that just brought down the oldest money fund in the country). Even the banks are now somewhat suspect, FDIC insurance notwithstanding.
Treasury bills are about the only game left in town. So investors are willing to accept a zero interest rate on them — or even pay Uncle Sam for the privilege of owning them.
It’s like with your checking account: you don’t earn interest on the balance and you probably pay the bank a fee for keeping it for you. But in return you get instant liquidity and a reasonable assurance that your money will be there when you need it — although maybe not reasonable enough.
September 18th, 2008 at 11:00 am
Re: Mary (#9) and jamie (#15) - if you actually look at how much of a GM car is actually manufactured by GM, it’s pretty small. I used to subscribe to Automotive News, and once in a while they do cutaways (subscription required for the full pics, but you’ll get the idea) of a car, and show how many other companies were involved in manufacturing the car. It’s really quite stunning. Most of the action is with the suppliers. And these suppliers could just as well be supplying (and most are) the other automakers (foreign and domestic). My frustration with GM and Ford is that they have squandered their influence over the industry in the interest of short-term gain. And, very similar to AIG, they have insinuated themselves into all kinds of nooks and crannies of this economy so that when something breaks, they can go to Congress and talk about how important they are, and if they fail then all these folks will be unemployed, communities will crumble, etc. GM is a major multinational company, and for at least the last five years, the business that they do in building cars in the US is less than 50% of their business. They’ve really only been making money in the European and Asian markets with their cars, and the US, it’s really only GMAC that’s been making any money. Of course, GMAC got caught up in the mortgage crisis, so…
Meanwhile, companies like Toyota, Honda and Hyundai have been making strategic investments in infrastructure in this country (and building communities along the way) and they’re now crushing the domestic makers. I mean Nissan is making trucks in Texas for crissakes. GM and Ford made huge strategic blunders in putting all their eggs in the big truck market. As for GM, where is their small econo-box car made? Korea. By what used to be called Daiwoo. I remember when GM bought Daiwoo, and the UAW was kinda pissed (for a lot of reasons), so UAW asked GM, are you going to rebadge these cars as GM and sell them in America. At the time, GM said “no way” this is a strategic investment in the Asian market, yada, yada. Fast forward 6 years: how many Aveo’s do you see on the road?
Long and short, how many more years do you give a company (or three) to get its act together?
September 18th, 2008 at 11:56 am
Marktopolis:
Now, I’m not saying we shouldn’t lend them a hand, given they employ a lot of folks, and in many places, their plants (and suppliers) are the primary employers for an entire community. But they shouldn’t get a blank check like the airline industry got post-9/11. If you’re going to give them a hunk of money, there ought to be strings attached. Strings that either make the company stronger and more competitive, support the workers in finding new (better?) jobs. You can do a lot of economic development for that much money.
Howbout $85 billion for AIG? etc. etc. Talk about your market ineffiencies.
Yes I agree. My ideal is a democratic socialism where the economy is democratically planned for the benefit of the average citizen (and the environment). This means we need to elect noncorrupt politicians who appoint smart regulators who attach really well-thought-out strings to these loans and bailouts we’re giving to these incompetent, fraudulent private businesses. Seems far fetched? Yeah but it’s the way forward. We need a creeping appropriation of the means of production via strings attached.
September 18th, 2008 at 12:00 pm
The market cap of GM + Ford + Chrysler seems to be about $24 billion, so maybe the US should just buy the damn companies.
September 18th, 2008 at 12:11 pm
If I were running a presidential campaign, I might better say this to Michigan.
September 18th, 2008 at 12:41 pm
Well the auto industry pretty much floats on credit and GMAC, in particular, diversified itself into home mortgages and everything else. I’m not surprised at all.
Consumers need credit to buy a car. Dealers need credit to add 2009 cars to their inventory of 2008 and 2007 models. Manufacturers need credit to tool the factories up for 2010.
Still, for 7.5 billion dollars, they could just as well let GM go out of business and give its 100,000 poorest employees a check for $75,000 each. When Chrysler bought out AMC, they extorted a ton of tax subsidies from Wisconsin (thanks, Governor Tommy Thompson!) to keep the Kenosha factory open. It only lasted a couple of years.
So as long as we’re all being grown ups about moral hazard now, I guess I’d rather deploy some of that sober adulthood for ordinary workers and homeowners, not just for Wall Street and the companies that trade there.
September 18th, 2008 at 1:38 pm
For $24B the Feds could buy the companies and give it to the employees. before you get your panties in a twist, GM has already transfered responsibility for health care to the UAW, so it’s not like they’re unaccustomed to dealing with a large bureaucracy. That way you get rid of all the upper management (VPs and abve) which is costing the automakers a few $100M already. Without having to worry about “shareholder value” every quarter, maybe an employee owned company would be willing to make some of those long-term investments that the last 25 years of leadership haven’t done.
Of course, I don’t know if we’d have to re-write the FLSA since you’d have owners as union members…
September 18th, 2008 at 4:06 pm
Long and short, how many more years do you give a company (or three) to get its act together?
Right. It’s literally been decades since we’ve been hearing about Detroit’s ills. Enough is enough.
Some mischievous person out there out to organize a boycott of the big three’s products if they go back to the taxpayer well yet again.
September 18th, 2008 at 4:12 pm
I don’t understand a rationale for keeping US automakers around.
There is no rationale. It’s about politics, not “rationale.” I think that’s the whole point of Matt’s post.
Just a thought: does anybody out there besides me strongly suspect that the US auto industry and the state of Michigan would be in much better shape right now had Chrysler been denied the money it sought to borrow from the government in the early 1980s? I think it’s highly likely a leaner, nimbler, more efficient, and more proactive and innovative US auto industry would have emerged from the shambles of the crisis, had we had the balls to actually allow it to come to shambles…
September 18th, 2008 at 5:38 pm
Admittedly, on the west coast, it’s kind of difficult to not think there’s a boycott of the big three’s cars already sometimes. An indication of how deep the problems are for them out here is that Portland has had two Lincoln-Mercury dealers close their doors this year, leaving one left in a metro area of 1.5 million people. Meanwhile, you can’t keep Priuses and Minis on the lot…
September 18th, 2008 at 6:03 pm
Somewhere along the line, rightwing philosophy took a turn, and
adherents decided to become Konservative rather than American.
Konservatism is America’s Enemy Within.
We will only fail to discredit it at our extreme peril.
September 18th, 2008 at 8:05 pm
Matt, you’re also kinda anti-car, so it’s not as though you’re neutral on bailouts. These are companies that make a product you don’t like in the first place.
There ought to be some sort of structure here that could assist the auto companies while helping transition us off of fossil fuels.
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