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11/16/2008

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paulbyrne

Bailing out the Detroit automakers WILL NOT save jobs in the US economy it will, at best, simply shift jobs around. Every single dollar that the government spends bailing out Detroit MUST be offset by $1 of higher taxes or decreased spending somewhere else in the economy (or at some other time) This in turn will decrease economic activity (and jobs) in other sectors of the economy. The question then becomes: "Where do we want these jobs to be?" My vote would be to keep the jobs at the companies that produce goods and services that customers place a value on which is greater than the costs of providing the goods and services. If the American people truly believed that Ford, GM and Chrysler were of such importance to the fabric of America they would willingly pay an adequate premium to cover their costs.

bigAl

One question I have - Are the big three going to Mexico and Canada asking for money too - isn't this where a lot of the cars are made? So should the US taxpayer be subsidizing their plants in other countries? I don't think so!

vice

Most Americans do pay a premium to cover their costs. We purchase their vehicles rather than an import. Maybe we should put an additional tax on imports so people like Paul can contribute also.

Stuart Bell

The American automobile industry has slowly been restructuring itself for years. Unfortunately, while they have built some better cars, their executives and unions still demand higher wages than the competing companies that have begun to assemble "foreign" cars in the southern US - often with substantial incentives from the states where the new factories are located.


We can learn from the success of Toyota, Honda and Kias that are assembled in the US.


Had the presidents of the big 3 and their respective union presidents come to Washington on a commercial economy flight and said to Congress something like "we will reduce or maximum executive pay to $350,000 per year and our labor costs to $45k/year during the years we are receiving US bailout money." the result would have been quite different than the result we are likely to see.

Had they further said, "we will reduce the number of different cars we will build by cross branding" and "we will reduce our dealer network costs by closing less effective dealerships," the results would have been even better.


Some, but not all, the big 3 problems are caused by the current economic troubles. To that extent, the Government should help the companies stay viable to preserve the jobs until the economy recovers. But, that is only a small part of the problem.


The real problem is the excessive management layers and costs; the excessive labor costs; and the excessive legacy costs. The car companies, not the Government, must fix these. the details don't have to be completed, but the executives and unions must agree to significant cuts to save their jobs -- immediately -- and these cuts must start while Congress does the details of the bailout.


Liquidating the executive jets could start immediately as a symbolic first step.

Argel

More than once in the comments I have read people have assumed that because the Democrats have a majority a bailout is a given. The truth is that in the Senate 60 votes are actually needed to overcome procedural hurdles and the Democrats do not have that many members. And that's why no deal was reached this week. Maybe one will be reached in December, but the Republicans can block it if they want to. And that's assuming the Democrats even allow it to come to a vote.

Jim

At what point did our government become our economic sugar daddy and for what purpose. We send big piles of money to Washinton so that the incompetents can decide who gets the money and for what and when. If that is not enough, they borrow money to keep themselves in office at the public trough and hobnob with each other to feel powerful and important.

Disgusting!!!

Jim

At what point did our government become our economic sugar daddy and for what purpose. We send big piles of money to Washinton so that the incompetents can decide who gets the money and for what and when. If that is not enough, they borrow money to keep themselves in office at the public trough and hobnob with each other to feel powerful and important.

Disgusting!!!

Scott

The logic that ".. although at present the companies are probably losing money on virtually every vehicle they sell, at a lower level of production the price at which they sold their vehicles would exceed marginal cost" confuses me. Is he saying the price would go up simply because they're no longer building excess inventory? Or that marginal cost would go down despite the loss of economies of scale? The real answer is to let the stronger, surviving competitors pick up that demand. That's how capitalism works.

david Sieverding

The auto industry can become enormously successful, creating hundreds of thousands of new jobs by leapfrogging the competition technologically. That can be done by developing and switching to the turbine engine. This is discussed in www.economic-plan.com.

MikeF

I also think that Ch. 11 and gov't DIP loans is the preferable strategy. The labor contracts and the management failures make me very pessimistic about the Big 3's ability to thrive even when the economy recovers. Zombie firms lurching along under staggering debt are not a long-term solution.

But, a bailout seems inevitable at this point. The big surprise for me was how poorly the CEOs performed in front of Congress. They truly don't understand the importance of symbolism and appearance. Who told these guys that refusing to concede any mistakes or take any responsibility was the correct way to curry favor with an angry legislature?

George Hanshaw

What people don't understand is that A BAILOUT IS IMPOSSIBLE WITHOUT BANKRUPTCY.

Look, the problems are multiple. These companies are paying the second highest corporate tax rate among major manufacturing countries.
http://en.wikipedia.org/wiki/Tax_rates_around_the_world

That is the soak the corporation mentality the dems have been feeding people for years. The fact is, corporations don't PAY taxes, they simply collect them.

Besides the high corporate tax rates, these companies have legacy costs from retirees - artificially inflated by decades of NLRB bias toward the UAW.

THESE are the things that have made Detroit non competitive. Until/unless Congress REDUCES the corporate tax, and controls the unions that trade their votes and Congressional donations for unwarranted advantages in the marketplace, Detroit is ALWAYS going to be uncompetitive.

dcuser

The problems seem to be:

1) Auto company liquidations would be disasterous for the U.S. economy; so the nation needs for the companies to be restructured in Chapter 11.

2) No private companies are in a position to provide the funding -- and certainly they can't provide the funding for all 3 automakers. (Cerebus isn't feeling too hot about their investment in Chrysler; and nobody wants to make the same mistake now.) This is made even worse by the potential govt bailout: Even if a private source wanted to invest in one of the automakers, the prospect of a govt bailout for the competition makes it unlikely.

3) The auto companies can't survive in the long-term without a tremendous cram-down for existing obligations of all kinds -- debt, stockholder, current labor, and retirerees. This could happen under normal Chapter 11 -- but there's no private funding. (See #2).

4) So the best bet is a govt bailout. BUT, with democrats controlling both the WH and Congress, the government is in a terrible position to achieve the labor/retiree cramdown that successful reorganization requires. Because it's going to be awfully hard for democrats to tell union workers and retirees that they have to accept the significant cuts that would be required for this to work.

On the other hand, if the new Obama team can pull it off, then hats off to them!

Chris Graves

Judge Posner's purely pragmatic perspective really comes out in this post. Philosophical pragmatism a la William James (and others on this point who are not so obviously pragmatists including David Hume, Ludwig Wittgenstein, and Jean Paul Sartre) assumes that reality is unstable and unpredictable. There are no natural laws or rational structures to the physical universe or to human affairs. We are driven to an agnosticism about the future on this view since nothing is knowable past this present moment. Thus, we see William James accepting Darwinism, which is a biological version of the atomism of Democritus and Lucretius where everything at its most basic level is purely random in opposition to the teleology of the Stoics, Plato, and Aristotle (incidentally the Intelligent Design objection to Darwinism is rooted in this controversy, not in defending Christianity per se).

The fact of the matter is that we do know economic laws that govern human affairs. We do know that if the central bank holds down interest rates below the market for loanable funds for long, then a bubble will develop and the bubble will burst at some point. Then the economy, especially sectors heavily affected by the inflated money supply, will suffer when the correction comes. That is what is currently going on in the housing market. As Professor Becker pointed out in his essay, GM was heavily involved in finance. Of course, many cars sold by any auto maker are financed and so will be affected by the credit crunch. But the companies which were in otherwise good shape are likely to survive. But this liquidation process is a necessary adjustment to correct for the past sins of the Federal Reserve. If we do not let the liquidation process occur (in this case through Chapter 11 Bankruptcy), then the problems in the American auto industry will simply be perpetuated.

If this were some sort of short-term quirk in the market that caught an otherwise productive set of firms off guard, then I could see bailing them out this one time. But Chrysler has been here before. GM and Ford have had consistent problems for decades. I do appreciate the argument about the suppliers. But it is not as if GM, Ford, and Chrysler will cease to exist. They will still need suppliers in order to produce the cars that they can manufacture efficiently. Those that are not needed will go under. That is simply part of the dynamics of a free market economy. To perpetuate firms and their products that are no longer needed is a waste of resources that could go to produce goods or services elsewhere. As for the car warranties, again the companies will continue to exist so they can honor their warranties. There could be some sort of guarantee made to honor warranties in case of Chapter 7 bankruptcy.

It is imperative to allow the Big Three to file for Chapter 11 bankruptcy. We do know that in the long run, the market will sort out the most efficient and responsible firms. We are not floating on a sea of uncertainty. We understand the principles that shape a market such as moral hazard, misallocation of resources, inflation, poor quality and service being punished in the marketplace. In the long run, these companies can revitalize themselves by focusing on what they can do reasonably well and discarding assets and obligations that are holding them back from actually meeting their customers' needs. This process can take place throughout the economy as firms that are not as healthy die off freeing their assets to move to more productive uses. Again, recessions (depressions) are not bad. They are the corrective process that preserves the system that serves us all well in the long run. And we are not all dead in the long run at the same time.

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David Dzidzikashvili

If we keep bailing out failed businesses, we will have more than $1 trillion deficit, that’s shocking since such a massive (unregulated) spending can ruin America and the future of next generations, if we keep blindly giving out blank checks to companies that failed due to obsessive greed and extremely poor performance of some CEOs. We will go into historic record debt. The future generation will have to pay at some point, but at the same time we can’t just watch unemployment increase and middle-class Americans lose jobs in record numbers. There has to be another solution, another alternative…

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