Car industry bail out
I'm going to blab for a minute outside of my competent reach. OK, what else is new? :) I'm just writing this to explore the issue for my own purposes.
I'm intrigued by the question what the US government should do about the failing auto industry. GM, Ford, and Chrysler have seen sales plummet, first due to high oil prices, then due to the declining economy.
GM's current market cap is a mere $2.5bln. The government could easily nationalize GM without much pain. The problem is: GM is hemorrhaging cash at a rate of $2bln per month, so at the moment it costs $24bln per year to own. Presumably this is why the Saudis haven't shown up with a takeover bid. (Wouldn't it make sense for the oil producing nations to own the gas guzzler manufacturers? It's like HP and ink jet cartridges--subsidize car sales out of oil profits.)
Some will take a principled stand on the issue that lets them reach a relatively simple conclusion.
At one end, you can argue that the government should not prop up failing businesses. That puts government in the role of making calls on who gets rescued and who does not; it distorts The Market; it introduces the moral hazard that badly run companies are rewarded with subsidies, etc. These people will say: let GM go bankrupt--or really, let GM go into Chapter 11 reorganization.
At the other end, you'd observe that the auto industry employs three million (!!) workers in the U.S., that if one of the Big Three fails, suppliers will fail, and thus healthier competitors may take a dive as well. Auto jobs include a lot of nice blue collar jobs and a large opportunity for engineering skills. It's argued that the cost resulting from these failures will be greater than the cost of a bail-out. (This is of course entirely speculative, as neither cost is known at this point.) All this leads you to say, Yes of course we need an American auto industry.
Perpendicular to those two poles is the claim that corporations should not be so large that their failure will be catastrophic for the national economy. Some banks were thought to be to large to fail; now the automakers are too large to fail. Maybe we should steer away from these megacorporations. This would argue that GM should be splintered, perhaps with government investment in the children to overcome the bad credit market.
There are some complicating factors. One is the product mix put out by Detroit: they've been fairly successful selling bigger cars over the last decade, something that many people do not see as leadership in product development. Can a bail-out nudge Detroit back to global leadership in product development? I find this idea really attractive, but am deeply skeptical about it as well. Car models take years to develop; basic engine technologies even longer. Is there really much we can do fast enough to turn these lumbering giants into nimble innovators with attractive products? Are we willing to prop all three companies up for at least 10 years? (That'll be $600B, thanks.) Who decides what the new product strategy is? Surely not the existing management that's been bungling it thus far?
Another complicating factor is the current lending market. If you send GM into Chapter 11, will they be able to find any new financing in the current capital markets? At workable terms? (Should the government let GM go into Ch 11 and offer to support lenders in a profit sharing arrangement if certain conditions are met?)
Then there's cost overhead. My impression is that GM has crippling costs in paying pensions of former workers, paying health insurance for former and current workers, and limited room to restructure benefits because of union power. Going into Chapter 11 might let them jettison some of those, though I see in the Wikipedia article that GM already has an agreement to transfer pension liabilities to the UAW; not clear if that's only newly created liabilities or also existing pensions. I have deeply mixed feelings about the way unionization plays out in practice and am not familiar enough with the terrain to comment.
Finally, is it reasonable at all to invest in technology that's behind the oil availability curve when we need to invest in solutions to global warming? We badly need to invest in alternatives to cars and trucks, i.e., public transit and cargo over rail.
By and large, the trend for manufacturing industries has been to move out of fully developed economies to cheaper countries. Can we buck that trend? Can we do so without leveling the cost differences (i.e. reducing wages and/or benefits)? If that's unacceptable or infeasible, how do we re-employ millions of Americans? What does (should) the job mix look like ten years from now? Regardless of the "best" answers to those questions, I don't think many in political leadership positions will be willing to tell 3 million constituents, "Hang in there while we retool the economy; we'll find you a job in 5 years or so. Meanwhile, go to job retraining for free, it's on us."
So am I getting to any conclusions on what I think should happen in the short term? Oof, let's see. I'd say my preference would be that the fed gov't not become to the life support system of the auto industry. Don't make loans indiscriminately when no end to the bleeding is in sight. Instead, facilitate moves to structurally improve the health of the companies: offer to take on existing pension or health care liabilities to unburden the companies, in trade for relaxed negotiating stand from the UAW. Offer to help finance any restructuring deals, but only with third party stakeholders; extract higher fuel efficiency commitments in return. Rapidly invest in bus and rail infrastructure, drawing employees away from the auto industry.
And ask the Saudis if they'd like to buy the SUV producing part of GM.
I'm intrigued by the question what the US government should do about the failing auto industry. GM, Ford, and Chrysler have seen sales plummet, first due to high oil prices, then due to the declining economy.
GM's current market cap is a mere $2.5bln. The government could easily nationalize GM without much pain. The problem is: GM is hemorrhaging cash at a rate of $2bln per month, so at the moment it costs $24bln per year to own. Presumably this is why the Saudis haven't shown up with a takeover bid. (Wouldn't it make sense for the oil producing nations to own the gas guzzler manufacturers? It's like HP and ink jet cartridges--subsidize car sales out of oil profits.)
Some will take a principled stand on the issue that lets them reach a relatively simple conclusion.
At one end, you can argue that the government should not prop up failing businesses. That puts government in the role of making calls on who gets rescued and who does not; it distorts The Market; it introduces the moral hazard that badly run companies are rewarded with subsidies, etc. These people will say: let GM go bankrupt--or really, let GM go into Chapter 11 reorganization.
At the other end, you'd observe that the auto industry employs three million (!!) workers in the U.S., that if one of the Big Three fails, suppliers will fail, and thus healthier competitors may take a dive as well. Auto jobs include a lot of nice blue collar jobs and a large opportunity for engineering skills. It's argued that the cost resulting from these failures will be greater than the cost of a bail-out. (This is of course entirely speculative, as neither cost is known at this point.) All this leads you to say, Yes of course we need an American auto industry.
Perpendicular to those two poles is the claim that corporations should not be so large that their failure will be catastrophic for the national economy. Some banks were thought to be to large to fail; now the automakers are too large to fail. Maybe we should steer away from these megacorporations. This would argue that GM should be splintered, perhaps with government investment in the children to overcome the bad credit market.
There are some complicating factors. One is the product mix put out by Detroit: they've been fairly successful selling bigger cars over the last decade, something that many people do not see as leadership in product development. Can a bail-out nudge Detroit back to global leadership in product development? I find this idea really attractive, but am deeply skeptical about it as well. Car models take years to develop; basic engine technologies even longer. Is there really much we can do fast enough to turn these lumbering giants into nimble innovators with attractive products? Are we willing to prop all three companies up for at least 10 years? (That'll be $600B, thanks.) Who decides what the new product strategy is? Surely not the existing management that's been bungling it thus far?
Another complicating factor is the current lending market. If you send GM into Chapter 11, will they be able to find any new financing in the current capital markets? At workable terms? (Should the government let GM go into Ch 11 and offer to support lenders in a profit sharing arrangement if certain conditions are met?)
Then there's cost overhead. My impression is that GM has crippling costs in paying pensions of former workers, paying health insurance for former and current workers, and limited room to restructure benefits because of union power. Going into Chapter 11 might let them jettison some of those, though I see in the Wikipedia article that GM already has an agreement to transfer pension liabilities to the UAW; not clear if that's only newly created liabilities or also existing pensions. I have deeply mixed feelings about the way unionization plays out in practice and am not familiar enough with the terrain to comment.
Finally, is it reasonable at all to invest in technology that's behind the oil availability curve when we need to invest in solutions to global warming? We badly need to invest in alternatives to cars and trucks, i.e., public transit and cargo over rail.
By and large, the trend for manufacturing industries has been to move out of fully developed economies to cheaper countries. Can we buck that trend? Can we do so without leveling the cost differences (i.e. reducing wages and/or benefits)? If that's unacceptable or infeasible, how do we re-employ millions of Americans? What does (should) the job mix look like ten years from now? Regardless of the "best" answers to those questions, I don't think many in political leadership positions will be willing to tell 3 million constituents, "Hang in there while we retool the economy; we'll find you a job in 5 years or so. Meanwhile, go to job retraining for free, it's on us."
So am I getting to any conclusions on what I think should happen in the short term? Oof, let's see. I'd say my preference would be that the fed gov't not become to the life support system of the auto industry. Don't make loans indiscriminately when no end to the bleeding is in sight. Instead, facilitate moves to structurally improve the health of the companies: offer to take on existing pension or health care liabilities to unburden the companies, in trade for relaxed negotiating stand from the UAW. Offer to help finance any restructuring deals, but only with third party stakeholders; extract higher fuel efficiency commitments in return. Rapidly invest in bus and rail infrastructure, drawing employees away from the auto industry.
And ask the Saudis if they'd like to buy the SUV producing part of GM.