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11/16/2008

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Aima

I definitely agree that the current position of the American auto industry calls for some major changes, but I am no sure that with holding the bailout is the remedy to the crisis. Instead, I believe that the bailout should be allowed to fall through, under strict conditions.

The CEOs and big-shots of the Detroit three should take major pay cuts; how can the fact that a vast percentage of the company profits are paid to the few executives at the top, when the money is clearly needed elsewhere? Some may argue that salary cuts for these people may be fatal, since these strong business executives will quickly move into industries that offer better pay. This would then leave the auto industry to untangle itself. However, in my opinion, this may be exactly what the industry needs: new leaders. Clearly, the current superiors are not capable of making wise decisions that better the company and its employees. While they ride up to their lavishly furnished offices in the private executive elevators, enjoy gourmet company lunches every day, and fly about in their private jets, the rest of the nation is left with a nagging worry about its future. As a Detroiter, I know first-hand: fear is rampant here.

Also, while the economy is so weak, unions hold far too much power. In the 1880s, the big business were taking advantage of their workers. Thus, laws like the Sherman Anti-Trust Act passed, Unions gained ground. Now, these Unions have begun to take advantage of the companies, and the balance has been lost, yet again. They demand more benefits and salaries, giving rise to janitors who earn 150 thousand, and the like. With unions demanding so much, the business have been put into a position which forces lay-offs and debt.

The auto-industry can still be salvaged, though it may yet fall before it begins the daunting climb upward. Abstaining from a bailout means giving up. Cannot the issues be resolved by our lawmakers and intellectuals? This is America.

hermy

All the commenters seem to think that the auto industry is the big three ... or nothing. If the big three went bankrupt, and couldn't reorganize, then new, leaner companies would emerge. I can't see any upside to keeping the big three when a couple dozen new companies are probably waiting on the sidelines, eager to compete.

We need to wipe the old slate clean.

Demeron

I agree with your assessment. Having spent 25+ years supplying parts to Japanese automakers, it is very apparent that the US automakers have fallen far behind in engineering and development practices relative to their Japanese counterparts.

That must be corrected for any bailout measure to take effect. Otherwise, the bailout only delays the inevitable.

I think the trend can be reversed (not easily, but can be done). In fact, I authored a book on this very subject titled, "Becoming Re-Successful". It's available on Amazon and at the publisher www.lulu.com/content/4339719.

Chris Spagnuolo

Do you know how many hourly jobs GM has laid off from 2006 to July 2008? Take a guess. How about 34,000? And now, they're talking about another 5,500 layoffs. How many hourly jobs has Toyota’s American production system laid off in the same time frame? Zero. That’s right. ZERO. So, what does Toyota know that GM doesn't?

Read more at http://edgehopper.com/what-toyota-knows-that-gm-doesnt/

Jim

It dosen't matter what we say or think.They will get their bailout, the execs and the board will get their fat compensations, employees will be fired as token to "efficiency" The GM board of directors is chuck full of people with ties to the Democrats and the Republicans including Erskine Bowles, a Clintonista, a VP at Dupont, a Bidenista, etc, Armando Cordina, a Bushista and on and on. You can look for yourselves at

http://www.gm.com/corporate/investor_information/corp_gov/board.jsp

Whole lot of back scratching going on. Several of the GM board members are affilliated with the University of Chicago. Maybe Becker and Posner can speak to them directly about the company's deficiencies and their thoughts as posted on this blog.

Matthew C

CEO ultimately sets the direction. Which markets will the company enter? Against which competitors? With what product lines? How will the company differentiate itself? The CEO decides, sets budgets, forms partnerships, and hires a team to steer the company accordingly. The big 3 CEO's decided not to make this part of thier job a priority, insuring and protecting the welfare of millions of jobs just wasn't that high up on thier list of things to do, but spending $20,000 to fly to washington DC was, along with ther $10million dollar homes and bentlys, rolls royces, and the many other expensive cars that the three guys own. Instead they pay lobbyists and nogotiate bad UAW contracts. White toyota BMW and mercedes benz are aiming for better fuel economy and cars that the consumer wants the big 3 are thinking of ways to a new designs to older lines of cars (Charger, Challenger, and the Mustang) They all produce bigger trucks and SUV's every year while companys like land rover are pusshing for a more compact and fuel efficient product. Could the big 3's demise be from simple lack of concern for the consumers?? I THINK SO!! This is the reason that bankrupcy laws and practices were set into play. But ultimately if youe don't compete in a global economy like everyone else, then this is what happens, I say let them go bankrupt, restructure rom the top down get new CEO's that dint need $20 million dollar salaries and $36 million dollar gulfsteam IV jets. Hell I'll do that job for $80,000 and fly coach to where ever i need to go to ensure that those millions of workers keep thier jobs

Matthew C

CEO ultimately sets the direction. Which markets will the company enter? Against which competitors? With what product lines? How will the company differentiate itself? The CEO decides, sets budgets, forms partnerships, and hires a team to steer the company accordingly. The big 3 CEO's decided not to make this part of thier job a priority, insuring and protecting the welfare of millions of jobs just wasn't that high up on thier list of things to do, but spending $20,000 to fly to washington DC was, along with ther $10million dollar homes and bentlys, rolls royces, and the many other expensive cars that the three guys own. Instead they pay lobbyists and nogotiate bad UAW contracts. White toyota BMW and mercedes benz are aiming for better fuel economy and cars that the consumer wants the big 3 are thinking of ways to a new designs to older lines of cars (Charger, Challenger, and the Mustang) They all produce bigger trucks and SUV's every year while companys like land rover are pusshing for a more compact and fuel efficient product. Could the big 3's demise be from simple lack of concern for the consumers?? I THINK SO!! This is the reason that bankrupcy laws and practices were set into play. But ultimately if youe don't compete in a global economy like everyone else, then this is what happens, I say let them go bankrupt, restructure rom the top down get new CEO's that dint need $20 million dollar salaries and $36 million dollar gulfsteam IV jets. Hell I'll do that job for $80,000 and fly coach to where ever i need to go to ensure that those millions of workers keep thier jobs

Matthew C

CEO ultimately sets the direction. Which markets will the company enter? Against which competitors? With what product lines? How will the company differentiate itself? The CEO decides, sets budgets, forms partnerships, and hires a team to steer the company accordingly. The big 3 CEO's decided not to make this part of thier job a priority, insuring and protecting the welfare of millions of jobs just wasn't that high up on thier list of things to do, but spending $20,000 to fly to washington DC was, along with ther $10million dollar homes and bentlys, rolls royces, and the many other expensive cars that the three guys own. Instead they pay lobbyists and nogotiate bad UAW contracts. White toyota BMW and mercedes benz are aiming for better fuel economy and cars that the consumer wants the big 3 are thinking of ways to a new designs to older lines of cars (Charger, Challenger, and the Mustang) They all produce bigger trucks and SUV's every year while companys like land rover are pusshing for a more compact and fuel efficient product. Could the big 3's demise be from simple lack of concern for the consumers?? I THINK SO!! This is the reason that bankrupcy laws and practices were set into play. But ultimately if youe don't compete in a global economy like everyone else, then this is what happens, I say let them go bankrupt, restructure rom the top down get new CEO's that dint need $20 million dollar salaries and $36 million dollar gulfsteam IV jets. Hell I'll do that job for $80,000 and fly coach to where ever i need to go to ensure that those millions of workers keep thier jobs

neilehat

Anonymous, I prefer Emerson and Honeywell instrumentation and controls. At least I know I'm getting quality, reliability and robustness; not too mention a service staff that can trouble shoot and repair.

Unlike Union Carbide found out at Bhopal.

jim

Idea for a novel.

It is just beyond the zenith of a western democratic republic gone democratic. Population is largely non-intellectual easily fooled, and in large measure dependent upon a paternalistic government and a corrupt propaganda-style media. The elite military- industrial- political complex dominates the power structure of the country with dynastic nepotism run amuck. The population is largely urbanized. Anyone not living in a metro area is politically and economically marginalized. The manufacturing and service functions of the society have largely been outsourced to lower-cost countries. The economy is dependent upon entertainment and gadgetry. Citizens who pay taxes make up less than half of the population and pay nearly 50% of their total income to all forms of taxes. Nevertheless, the central government is $12 trillion in debt and cannot pay for its annual operation from tax revenue. The federal and local governments are essentially bankrupt. The moguls of whatever industry is left are looting their companies providing for themselves in the face of national collapse. The education system is more intent on political correctness than on content, dropout rates are increasing and literacy is decreasing. Morality is in an anything- goes mode. Popular taste, tends toward the most common denominator. The population is fascinated by athletic competitions which verge on being gladiatorial. The written word is disappearing from the common culture and pornography is rampant. While not understanding the underlying causes, the population is angry and is looking to punish those in control to the extent that they know them and replace them with a savior much as had been done earlier in other societies after major wars or revolutions leading to national disaster and suicide...

There arises in this society, a young ambitious man with a not all too clear background. He is handsome and articulate, though somewhat naïve and inexperienced. He is in his youth, anointed by academic elitists to be a future controllable political leader. Some of those have been instrumental in previous failed governments, He is schooled in the ways of autocratic progressive liberalism, and given public exposure by a corrupt anti-nationalists media. Upon being elected to the national legislative assembly, he seeks out an entrenched, narcissistic, ambitious woman for guidance in his quest for power. They become friends and confidants. They develop a plan to increase their mutual power within the elite governing community and control over whatever is left of the social and economic structure of the country. They agree to simultaneously seek the highest office in the land, while appearing to be adversaries. They agree that whoever is included in their power structure will be those whose loyalty to them has already been demonstrated and who share a vision of totalitarianism as well as those who anointed them in the first place.

They succeed. I can only imagine what the next chapters will say but the tale could be very depressing.

Oh, I forgot. There is an old woman knitting names into a scarf.

neilehat

Jim, If you don't like the "New Political Landscape" you're still free to leave any time you want. Looks like the same "Old Political Landscape" to me. Utopia? Just around the corner, but we never seem to get to that corner. And the "Great Communicator" is laughing in his grave.

Jim

Hey, it's just a novel. But I agree with you, same old baloney. Same old entrencehed power and money mongers. My point is that the voters will never learn.

Chris Graves

I really do not see anything that I could possibly object to in economic terms in Professor Becker's essay this week. Of course, the Big Three, any or all of them, should not be bailed out for the reasons that Professor Becker stated very clearly and reasonably. I would add the problem of moral hazard to the rationale for denying a bailout so that those out there who think that they can run businesses sloppily and produce poor products and get away with it will have to think again. Allowing companies to fail, especially big companies with lots of publicity and brand name recognition, serves the same purpose that ancient armies would put to use dead bodies of those they had conquered in prominent display--a clear warning that you might be next if you don't toe the line. I would also add the problem of misallocation of resources. A bailout directs investment dollars, labor, and plant and equipment to less productive activities, as demonstrated in the marketplace by years of producing poor quality products with poor customer service and away from more productive and responsive uses of these resources.

What I would like to add to this discussion is this question: Why did the Big Three auto makers perform reasonably well for so long? A corollary question is why do Japanese and German car companies perform so well when they are part of a cartel in their respective countries? I have always assumed that free markets and the pressure of competition coupled with the fear of failure provided motivations to hold down costs, produce superior quality products, and please customers. I still think this is true. But I am not so sure that government or monopolies cannot do a reasonably good job in providing goods and services.

The first hint of these questions came as I was watching a discussion of regulation from the Hudson Institute on C-Span a couple of years ago. I recognized Irving Kristol sitting in the first row listening to the speakers. When question time rolled around, he raised his hand and asked why monopolies cannot produce good products and services and treat their employees and customers well. He recounted his experience with big monopolies and oligopolies in the 1950's and 1960's observing that people loved working for these firms and customers were generally pleased with their products. I remember exactly what he was referring to. My parents bought Fords and Oldsmobiles in that time. My first car was an Olds. They drove well and did not break down all of the time as GM cars did in the mid-70's into the early 1980's when we finally switched to German cars after a string of bad experiences with GM cars. AT&T had good quality phones and services. Government bureaucracies were much more polite and provided neat offices and tried to meet people's needs. My mother worked for the Federal government and noticed the severe decline in standards and employees' attitudes toward the public in the same time period. European workers on average in our day have higher rates of productivity than American workers. But they work in greater numbers for government or cartels. I was pleasantly surprised (shocked is a better word) after moving to Dallas that the municipality where I first lived, University Park, provided excellent governmental services very promptly, as in the next hour, all in a very, very personable and courteous manner.

I realize that monopolies in previous times were still internally inefficient to a degree. The regulatory climate that protected their market position stifled innovation and entrepreneurship. At the same time, I think we have to admit that they normally provided a certain level and consistency of quality in their service as well as job security for their employees that are not present today in a more competitive market. The cartels and monopolies also engendered a more congenial and cooperative attitude in the marketplace as well as in everyday life in general. Even when there was a degree of competition, there seemed to be a gentlemanly quality to the competition that took the edge off. There is too much edginess now.

So, what has happened? Why have oligopolies, monopolies, and state, local, and Federal government services declined so badly in the United States in the past 40 years or so? Why do Europe and Japan avoid many of the pitfalls we have fallen into in their governmental services and cartels?

neilehat

Chris, As for the allocation or misallocation of resources, Capitalism does as about as good a job as does Government fiat. As has been proved by US and the Soviets. Regardless of what the "apologists" claim for either approach.

German and Japanese productivity and quality higher than American? I don't think so. You need to look at the Std. Production reports out of the Industries, you'll find that the number of units produced per manhour are significantly higher in America. As for qulaity levels, See Consumer Reports latest analyses. MB is at the bottom, Toyota at the top, the US someplace in between.

Friendly service with a smile? That costs, and reduces profit margins. Eliminated some forty years ago by the bean-counters in order to increase margins. Also, the institution of "Design by Bean-Counting" throughout Industry, results in lower productive cost units (hence greater margins), but then results in lower quality (cheaper) products. Which then alienates the consumer. Which is what the US has experienced.

The solution, "Harmonization of Interests: Industrial, Agricultural, Commercial, Governmental". Or shut everything down and import everything. As was noted some four hundred years ago, "But if I do that, (importation of goods and services) what will my Craftsman, Artisans and Tradesman do"? And so a Golden Age was born.

nathan

next up ... more financial sage

nathan

next up ... more financial saga

Chris Graves

Neilehat, I am afraid that over time for the most part, a free market allocates resources more efficiently than does a central planner. See Hayek's argument on the distribution of knowledge over the entire system that no one mind or committee of minds can process and grasp nor can they react instantly on changes in this information. Adam Smith touched on the same principle by observing that the worker or entrepreneur in a particular situation can intuitively see what is best. Incidentally, I applaud this kind of pragmatism as opposed to the full-blown philosophical pragmatism that I object to in my post on Judge Posner's essay this week.

http://cco.cambridge.org/extract?id=ccol0521849772_CCOL0521849772A007

Central banks playing around with the money supply leads to overinvestment in certain sectors of the economy as the infusions of money distort relative prices.

http://nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-lecture.html

As for productivity, several European countries, e.g. France, have higher rates of productivity per worker than in the United States. Their standard of living is lower because they take off more time from work. Here is a link on that issue:

http://www.euractiv.com/en/innovation/mit-professor-challenges-perceptions-us-vs-eu-productivity/article-128521

I do agree that a balance is needed. The trick is how to find it and then maintain it.

Chris Graves

Neilehat, thanks for your comments. I tried posting a reply with links to support my comments, but I do not see it. Let me try it without the links. Perhaps, the one with the links will show up later.

I cannot believe that you think that the Soviet Union and the United States allocated their resources with equal efficiency in the Cold War days. Obviously not. But you are right to say that we can see the difference between a free market ( at least, a mixed system with more market oriented processes) and a centrally planned economy. Friedrich Hayek showed why planned economies run into problems--no central planner or committee of planners can absorb and process the complex information that is continually changing moment by moment and then alter resources effectively and instantly in response.

Adam Smith got at the same point by observing that the worker or entrepreneur in a particular situation can intuitively see what is best and make the necessary corrections instantly. I am all for this brand of pragmatism while rejecting a full-blown philosophical pragmatism that I criticize Judge Posner for in my reply to his essay this week.

Central banks in trying to alter macro economic variables can easily overshoot the mark and inject too much money into the system and create distortions in relative prices leading economic players to misallocate resources.

In regard to your comments about productivity, many European countries have caught up with American productivity since the 1970's and some have surpassed us, e.g. France. I am speaking of productivity per worker in a particular time frame, e.g. per hour. The United States does have a higher GDP than Europe for reasons such as higher leisure time in Europe.

Finally, I agree that more balance is needed. How to find that balance for particular nations or even regions and then maintain that balance is the real trick.

Dave

Has anyone considered what plants will build munitions if the US goes to war with Japan, Germany or China and the Big Three go under? In WWII US automaker plants were quickly retooled to build tanks and other military equipment. Do you really think Japanese companies such as Honda and Toyota would allow that to happen if we go to war with Japan? There are national security issues to consider in the bailout of the big three. Consider that the US sold the oil to Japan that allowed it to fuel the planes that bombed Pearl Harbor. We should learn from history.

voip

I agree that the Big 3 should go bankruptcy, anyway, the $25B bail-out plan will extend their survival for a another 6 month, so what's the point of throwing that taxpayer's money into water sink? UAW is part of the problem but not all, Big 3 need more aggressive reform (fundamental change - in Obama's word) for its long term viability, - if they are still interested in that.

Jim

Dave,

Learn from history? You must be kidding. This is economics we are talking here. As Nikita Khrushchev famously said, " The capitalists will sell you the rope you use to hang them."

gdgeiss

There was an article on Seeking Alpha a couple weeks ago about this topic which cited some interesting statistics. The primary one was that GM (as an example) pays its UAW workers about 34% more in wages, health care, and pensions (per worker per hour) than Toyota pays it's non union US workers and over 50% more than the average US factory worker gets paid. Surely the UAW worker is not 34% more productive. In fact in 1999 it took those UAW workers over 24 hours to assemble a vehicle while the Japanese companies did it in about 18. This has improved. By 2006 the UAW had gotten to just over 20 hours, closer, but still shy of the Japanese makers 18.

Until and unless such "wage" disparities change the US auto industry will not be competitive, regardless of their product quality. There is absolutely no reasonable basis to ask the US taxpayer to fund continuing uncompetetiveness.

And today has brought us another US taxpayer backed bailout of a huge bank, with the Citi deal. What will it avail us if in preventing these companies going bankrupt, we bankrupt the country? Where's the end to this? It surely feels like a teetering assembly of cards. All this bailout money must either be printed or borrowed. The US simply does not have these kinds of reserves laying around and the US taxpayer is not a bottomless pit of money. And Mr Obama is going to (on top of everything else that's been doled out) author another 700 billion dollar stimulus package. Are we trading the crisis we're in now for the one we'll face when the bill comes due on all this bailing out? Are we writing checks our entire economic system and taxpayer base cannot cover?

These over leveraged over risked up finacial institutions must be allowed to fail just as the uncompetetive domestic US auto industry must be allowed to fail. The financial system needs to deleverage and all these so called "toxic" assets need to be priced and/or discharged (in bakruptcy if necessary). The domestic US auto industry needs to restructure including its ($90 billion unsecured health care costs alone in 2007) pension costs (in bankruptcy if necessary). Bailouts accomplish neither. The alternative is ugly, but will eventually be effective. The danger with bailouts is that they won't prevent the ugly, merely delay and eventually prolong it.

neilehat

Chris, You're touching upon the discipline known as, "Industrial Engineering". A well developed field. The Std. Industrial Reports list the units produced/manhours required. One of the basic toools of the IE for determining productivity. As for France's productivity, it may have come up a bit, but isn't anywhere close to the US's or even Germany's or Britian's for that matter.

As for resource allocation, that's handled by the Commodities Market and as we have seen, it can be easily manipulated by speculation. Wht's the price of gasoline now that the speculators have been driven out of the market? How about natural gas? It's the prime ingredient in all this plastic stuff we're drowning in. No allocation problems due to Capitalism?

Dave, don't forget the steel we sold them, which allowed them to build that Navy that almost wiped out Hawaii and drove the US from the Pacific for awhile. I won't even mention the rubber issue.

Jim, Actually, I think it's Lenin, "Don't worry about the Capitalists. They'll sell us the rope too hang them with."

Jim

Neilehat,

Thanks.

You are correct but you get the idea.

Relative to this entire discussion, the answers lie not so much in economics but in political science or politics if you wish, sociology and maybe ethics. Relevant to that thought is the link below to an article in The Atlantic in 1993 titled "It's Not the Economy, Stupid."

http://www.theatlantic.com/politics/ecbig/ecstupid.htm

Denis Hauptly

A first rate discussion. TGhis is a difficult situation and the two views bring out the relevant arguments clearly.
One caveat, Becker's statement:"the Democratic leadership in Congress is eager to give them (a bailout)" goes too far. Factually a handful of Democrats were "eager". A larger number were "inclined" and the largest number opposed without a plan to redeem the companies. The leadership listened to the stunningly inept presentation and immediately said "No." I think that was correct but the real villain here was the UAW. To announce the day before the hearings that the Union wanted taxpayers to throw in $25 Billion but that the Union wasn't putting a dime into the pot, was even more arrogant than the behavior of the CEOs - walking in for as loan without a business plan.

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