If GM was subject to Chapter 7 liquidation, and Ford and Chrysler entered Chapter 11 reorganization. Ford and Chrysler may have a shot at survival with the larger market shares available to them. And by removing the unproductive GM from the market place, give Ford and Chrysler a fighting chance.

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good~~!

Dead on! Thank you.

GM seems to be afraid of the UAW, even if they file a chapter 11. I think GM must think the UAW will use wildcat strikes, political muscle, and the courts to block any meaningful reorganization. The UAW has the political muscle to make life hell for GM if GM management tried to make meaningful labor changes. The UAW has already said that they will make no concessions to GM.

The UAW would pick the bones of GM in bankruptcy. Don't forget that a majority of UAW GM are seniors who have less interest in the long term stability of GM. They want to make sure that their health and welfare payments stay high.

The UAW may play a game of chicken with GM because they think if they can make the situation dire enough, their political allies will come to the rescue.

Plus I think Judge Posner has a point that the government, in the current market, may still have to provide DIP funding in order for GM to have a reorganization.

I agree with Prof. Becker analysis. However I would like to add one more point.

The American car industry is also a good example of what could happen for having a close-mindset ruling your destinies. They were always looking at the domestic market and few times (Ford mainly) they were able to think about the rest of the World's needs.

So now in a global economy, if you want to keep costs low you have to target a global reach for your models, however very few Europeans or Asians would buy an ugly, high maintenance-cost, American car.

Japanese and German automakers have been doing the opposite for decades. They tried to understand other's needs, they invested hundreds of millions in Formula 1 and other ultracompetitive engeneering competitions (versus that TV soup opera called NASCAR), etc. etc.

I think the car industry is another example to remind american people that the times were the USA was a superpower that could do and undo without caring about others are gone. Now the USA is "just" the largest economical and political power, but it needs to take others into account to keep being so.

I think we best be getting on with the promise of making America energy independent.Iran just asked OPEC to reduce production by yet another 1.5 million barrels per day.This past year and the record gas prices played a huge part in our economic meltdown and seriously damaged our society.We keep planning to spend BILLIONS on bailouts and stimulus plans.Bail us out of our dependence on foreign oil. Make electric plug in car technology more affordable. It cost the equivalent of 60 cents a gallon to drive an electric plug in car. The electric could be generated from wind or solar. Get with it! Utilize free sources such as wind and solar. Jeff Wilson's new book The Manhattan Project of 2009 Energy Independence NOW outlines a plan for America to wean itself off oil. We need a plan and we need it now! www.themanhattanprojectof2009.com

The criticism of the unions is spot on, but you will be accused of partisanship.

I think that the executives are just as culpable. Every case I have ever read compares and contrasts the management style, the management organization, the way management deals with its suppliers, the way the supply chains are organized, ad infinitum!

Bankruptcy is the only way to bring discipline to the US automakers. We need regulatory change, like ending CAFE standards, but a reorganization of the automakers will allow them to reallocate human and machine capital in the manner that will make them most productive.

The Big Three do make some good cars. There is demand for some of those cars. They will survive bankruptcy, but they will look far different. It's not just the unions, which are indeed overbearing and increase legacy costs per car by around $2000 per car. But it's the entire structure of the industry.

The only reason the Pelosicrats want to do this "bailout" is to pander to the unions. Talk about anachronism!

Becker is right on. Let the auto guys reorganize (Hey, I hit on our political cry). They will keep operating and hopefully become smaller, more efficient oligopolies, get rid of the present management with no severance and try market responsiveness.

I'm against this proposed bailout as well as the others in process. But if the pressure on Congress is strong enough for a Detroit bailout to move Senate conservatives in that direction, I agree with Judge Posner's concluding paragraph - put Detroit in Ch 11 with the U.S. govt as super-priority-secured DIP lender. I.e., cut the banks out, or else they'd be coming back for another $ Multi-Billion bailout just to do DIP financing. Besides, they're supposed to be using the TARP money to make and restructure other loans, like viable businesses and home mortgages.

Under no arrangement will a rearrangement of the Detroit autos' financial affairs be quick or simple. United's latest Ch 11 was a piece of cake in comparison, and Judge Posner's court there in Chicago must have seen it at least a dozen times, meaning there were multiple dozens of contested proceedings in the lower courts. In the case of the Detroit autos, restructuring isn't feasible unless, besides the unions, the parts suppliers and Delphi (already in bankruptcy) and the financial subs (chiefly GMAC and its subs) are all pulled in. In the aggregate their balance sheets may add up red to the tune of a $ Half-Trillion, counting healthcare and pension promises. Understand, much of this they owe one another. Whose claims get washed out will turn on who holds strong liens and how big a haircut the unions and retirees have to take. But we'd see the same Jarndyce v. Jarndyce of tedious litigation with a bailout as with bankruptcy, and end up in bankruptcy anyway. There's no happy answer other than, for the good of the country, get on with it and get it done.

UAL may be the worst BK airline example you could have used. They are still a mess and will probably file again since they didn't get their wages to a market rate. Hopefully the big 3 can learn from their mistakes.

In addition to all of the other arguments, a bailout would amount to a bankrupt government bailing out a bankrupt industry. The only reason the world is willing to lend money to the government so it can lend money to the auto guys instead of lending money to the auto guys directly is the belief that the government can take money from the GDP in the form of taxes. Obviously there is a limit to that as well. So let me get this straight: the taxpayer has less and so cannot purchase the bailed-out cars and trucks So the auto guys need more from the government which in turn takes more form the taxpayer. That isn't even circular reasoning, it's a whirlpool

I have concerns about management quality - poor judgement (hummer acquisition), inadequate preparation for job (nepotism), etc.

My view is that the bailout of the Big three US automakers will happen and the proposed $25 billion package will be approved by year end. Despite critics on both sides, the US automakers bailout proposal has strong bipartisan support and the President-Elect has publicly stated his backing of a constructive bailout plan. It is just too important (perceived and actual) to the nation’s economic recovery. The key will be how the bailout package is structured for short term and long term reform. For it to be successful the US automakers will have to undergo a radical make-over in terms of labor rates and union structures, past and current worker benefits and accelerating the move to cleaner energy vehicles. Further their executives, need to be replaced by new talent whose focus will be on making the companies as efficient as possible to compete in the 21st century and to eventually repay (with interest) the taxpayer funded bailout.

I have no disagreement whatsoever with this analysis. It may also be noted that a subsidization of the auto industry would delay the development of more marketable, competitive, and innovative products. A WSJ piece about a month ago pointed out that many of the great cars of automotive history were the fruit of tight times for the companies that created them.

Would some of you who support the bailout kindly send me some money. I have probably mismanaged my own assets and could really use a little help,say $1,000,000.00. That is only 0.004% of what the auto guys want. I don't think that my request is unreasonable and I promise to do better in the future.

If I were in charge of the bailout I have to think I'd just nationalize them. Neither the bondholders nor the stockholders nor management nor to a lesser extent the UAW deserve any great consideration insofar as i can see. Whatever management structure they came up with between them was clearly very bad. You guys seem to be very happy blaming the UAW, but while the problem with skyrocketing health care costs and underfunded pension plans is clearly an issue for U.S. car makers, I'm not at all sure the auto workers are the ones who deserve the blame for such gross mismanagement. I mean really, the elderly GM workers consumption of HEALTH CARE is the problem with the U.S. economy? We could grind them up for Soylent green I suppose.
Realistically the government is going to take over those payments, and the health care system needs such massive reform that the government might as well just nationalize that, too. I mean after the insurance company bailouts and between medicare and medicaid they must be writing the checks for 60+ percent of the system anyhow.
The pension system seems much the same, so many people are going to be in that boat that a serious look has to be taken at the pension insurance/social security system. Fixes have to be made, I see no compelling reason not to deal with the whole issue at once, the system itself being bankrupt would seem to me to justify very broad powers in breaking agreements like bonds, stock options, control, health care, pensions and such things.
When the UAW was negotiating they should have taken into account the chance of the car makers going bankrupt and asked for sufficient private market guarantees. I expect they negotiated the Federal Government to insure it somehow to force a bailout if the system broke, but I'd be strongly tempted to treat them the same as any bankrupt old people looking to the government to pay all their bills and spending money. I predict ALOT of them, and some sort of system is going to have to step up.
There are HUGE moral hazards here, but I think they are realistically unavoidable, my only hope is that between wikki's and range voting and the internet the state will be able to set up systems that are sufficiently transparent and responsive to minimize this mess and get power back in DIFFERENT private hands governed by market forces before it's too late and we end up with a monarchy or some nonsense.

The auto bailout proposals are yet another example of big government creating a problem, and the political class then calling for more big government as a solution.

Big government contributed to the carmakers’ problems in two ways:

1. Labor law. Government supports the ability of the unions to use force to negotiate compensation that is higher than their members would attain in a free labor market. A free labor market would compensate workers in line with their productivity. To the extent that unions succeed, via collective bargaining, in increasing their members’ compensation, those increases are above the level of those workers’ productivity. That situation obviously cannot continue indefinitely. The Rust Belt was created by unions pricing themselves out of the labor market. That effect is increasingly being felt in the auto industry. I don't think that economic forces will allow unionized carmakers to continue as private enterprises. American auto manufacturing will either need increasing levels of government investment over time, or be turned over to the non-unionized foreign manufacturers. Not being a socialist, I opt for the latter.

2. Employee benefits. The notion that one’s employer should pay for one’s health care was an effect of federal policy during World War II. There were price (including wages) controls, and there was a labor shortage. In a free labor market, a labor shortage would result in wages being bid up to a level that will bring enough people into the labor force to meet demand. The price controls prevented that from happening directly. Therefore, employers added the so-called “fringe” benefits, as a backdoor way of increasing compensation. Since then, those benefits have been perpetuated by federal tax law, which taxes wage income that an employee spends on health care, but does not tax compensation that is in the form of health care bought for the employee by the employer. Regardless of union negotiations, that, over time, creates a heavy weight of expense that a new entrant into an industry, such as a foreign manufacturer, doesn’t face.

I agree with Becker that, rather than perpetuating these effects via a bailout, we should allow market forces (with a little help from bankruptcy law) to sort things out.

And after you nationalize them you might as well make the workers plant trees or build spaceships or bridges or something as keep building SUV's at a loss to supply the domestic market. Maybe make them biofuel friendly and ship them to Africa in liu of foreign aid? Government should not compete with private enterprise insomuch as possible, that's the garbage that got us in this mess.

1. Language-a loan is not a bailout--this is language of naysayers.
2. Assumptions--Do you want to buy car from bankrupt company?
3. Consequences--Ok let them go bankrupt. In current conditions--why come out. So now all the pension and health liability is shifted to the PBGC-who cant handle it--and end up on our backs. Loans are a cheap alternative--even if it is buying time.
4. Management--These CEOs are not overcompensated--in top 200 they are not even on the list. I have seen little to suggest they are making the wrong decisions. Could they do it different--maybe.
5. Objective Review--who has actually provided an objective review of this industry? Currency issues, government oversight, foreign subsidized competition, and all the rest. Most have an agenda--the right, the left, the foreign, union, management. How about a common sense approach--and what is best for all of us?!! 2 Million on the unemployment line and pension and health liabilities on the rest of us--or a loan???

Why isn't anyone pointing out that these car makers drove themselves into the ground by not making a competitive car? It didn't take a brain surgeon to see that higher gas prices were coming down the road.
GM I believe has already made an electric car which they took off the roads years ago and could sell quite a few very quickly if they put it back into production.

OK. Let's face it. The "loan" has nothing to do with unions, unemployment, health benefits, Michigan, suppliers or any of that other "stuff". It has to do with keeping a production capacity for building tanks, trucks and other military vehicles so that we can start a war to get us out of this depression. It worked the last time. Why not try it again.

If everybody agrees that the US and probably many other nations can only fix the current problems by de-leveraging their balance sheets, I think it would give a bad example to bail out the car industry (at least the big 3). Would it be not much smarter to finance innovative car projects? Every crises produces also opportunities to create future winners, why then holding-on on past loosers? Why putting billions USD of tax-payers money into an industry which has failed to be competitive for such a long period?

nnno.

I'm unclear whether the person who suggests that the concept of a loan is to protect the ability to produce tanks. If so, they are pretty ignorant about our current production capabilities.

Regardless, a low interest loan IS a bailout. Let's face it.

Although professor Becker is right in as far as his post goes, it misses one point. In order to do a successful chapter 11, you need to be able to get reasonable debtor in possession financing. This is not possible because of the government caused credit crunch. If the bailout were to take the form of a subsidized debtor in possession financing to replicate what a ch11 bankruptcy would have looked like, say, one year ago, that would make sense to me.

"How about a common sense approach--and what is best for all of us?!! 2 Million on the unemployment line and pension and health liabilities on the rest of us--or a loan???"

What happens in 2 years when the auto companies have burned though all of the cash that they had borrowed from the government, and are in exactly the same position?

Let the American auto industry die! It's long overdue!

The bailout that the Democrats want, the Pelosi/Franks/ Sierra Club bailout is worse then bankruptcy.

GM needs to be a smaller company allowed to build products that have a comparative advantage in the marketplace. GM has not had the ability and will not have the ability to build economy cars that compete with Toyota, Honda, Nissan, etc. So let the Japanese firms have that segment of the market.

It is much easier and better for the economy for Honda to build more Civics, then to give GM money and force them to build cars that people have rejected consistently. GM is relatively good at building trucks, SUV's, and luxury cars (compared to their ability to build small cars.) So end CAFE, let GM shrink and we will all gain.

The Democratic plan for a bailout is the worst of all plan.

The biggest problem with the retiree HC obligation for GM is not that it was too generous, though it was. It isn't that HC inflation has skyrocketed, which it has. The biggest problem is that GM has shrunk by more than 2/3, and folks live longer, so that each worker is supporting multiple retirees. Also, perhaps unsurprisingly, the company didn't reserve adequately for their obligation.

This is not something that can be negotiated away...the government is going to be providing healthcare benefits for these people sooner or later. Ditto for the pensions - if the company is to shed the obligation, the PBGC will have to assume.

The gov't is on the hook already and anyone who thinks that letting GM fail means we won't be spending tax dollars is fooling himself.

history repeat it self in different country (see below). The another problem: how to deal with city 50K MBAs plus another 27K additional... sure they need re-training too. but what? At least Japan is come back with Honda and Toyota after the last downturn. Ford, GM possibly will come back to be great one of the days. But the financial MBAs, what they are going to do? Couldn't see any light at end of tunnel. The financial engineering, restructure engineering, etc. were all just optical engineering (powerpoint) with no assets.... bad...
st
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Six Strategies for Greater Competitiveness

The Path Towards Reviving Japan's Competitiveness and Moving into an Industrial Structure which Fosters World Class Companies

Takeo HIRANUMA,
Minister for Economy, Trade and Industry
at the 41st OECD Council at Ministerial Level
15 May 2002
JAPAN

Interim Summary: Industrial Competitiveness Strategy Council*

Contents

I. The State of Competitiveness in Japan, and Reasons for Decline
II. Basic Concepts for Raising Competitiveness
III. Prospects and Challenges towards a New and Competitive Industrial Structure
IV. Corporate Reform as a Step Towards World-Class Management
V. Six Strategies for reviving Japan's Competitiveness and Moving into an Industrial Structure which Fosters World-Class Companies

*Industrial Competitiveness Strategy Council is an advisory committee for Minister Takeo Hiranuma of Ministry of Economy, Trade and Industry

I. The State of Competitiveness in Japan, and Reasons for Decline
1. Why has Japanese Industrial Competitiveness Declined?
1. State of Industrial Competitiveness
Some Japanese industries have remained very competitive internationally, such as automobiles, machine tools, and some parts and materials industries. On the whole, however, competitiveness deteriorated significantly during the 1990s.
2. Reasons for Declining Competitiveness
Changes in "the rules of the game" during the 1990s
Against a backdrop of rapid globalization and development of information technologies, the rules of the game for business activity changed drastically.
> Shift towards an era of equity finance emphasizing returns to investors.
> As the world marketplace became increasingly integrated, industries being restructured on a global scale.
> The source of competitiveness shifted from production efficiency to uniqueness and differentiation.

Japanese industry was slow to respond
Despite this changing environment, Japanese companies stuck to their general approach of growth in size, ultimately dragged down by "the three excesses"(Debt, Employment and Capacity) and their existing organizational and business practices. Most companies lacked the strong leadership to attempt "strategic managerial reform."
> Today, regardless of size, companies need to pursue internal reforms to become "world-class companies" with a high global "profit share" in the business or product area that constitutes to their core strength.

The Japanese government was slow to respond
Likewise, over the past several years, in spite of the fact the Japanese government has pursued policies all stressing the primary importance of "structural economic reform," compared to the U.S. EU and East Asia, Japan has failed to prioritize policies properly or execute them quickly enough.
> While maintaining an awareness of the need to be competitive in the global market, Japan needs to strengthen reforms aimed at moving towards an industrial structure where world-class corporations are developed.

2. The significance of industrial competitiveness to Japan's overall economy
Industry provides the societal foundation for achieving the long-term economic goal of continually preserving and improving the country's standard of living. It is essential that industry continues to add value by generating wealth through the provision of goods and services, while maintaining high productivity.

II. Basic Concepts for Raising Competitiveness
1. The relationship between macroeconomic policy, economic restructuring, and increased industrial competitiveness
In the current era of global capital mobility, companies are reducing their capital investments and personnel overhead costs in order to improve their return on assets (ROA). While logical when considered in isolation, this strategy can have unexpected adverse consequences, leading to overall declines in investment and consumption, when pursued en masse.
To avoid this problem, public policy needs to simultaneously bolster 1) technological and managerial reforms to maximize private-sector capital investment; and 2) the expansion of household demand (personal consumption and investment in housing).

2. Strategies to increase the overall competitiveness of the Japanese economy
The following steps need to be taken in order to increase the overall competitiveness of the Japanese economy.
1) A prospect for the desirable industrial structure in the future needs to be provided and the challenges to achieve it need to be identified.
2) Companies are expected to pursue decisive managerial reforms.
3) The government must deploy policy package with speed and priority, keeping the following three points in mind:
- In order to cultivate competitive companies, the government must do its part to promote business restructuring and corporate reform.
- Policies should create a better business environment with the aim of developing an industrial structure where world-class corporations are fostered.
- Policies must stimulate demand by expanding personal consumption at the macroeconomic level and encouraging the development of new markets in the 21st century.

III. Prospects and Challenges towards a New and Competitive Industrial Structure
1. Prospects for an industrial structure that will create world-class corporations and improve industrial competitiveness
Japan's manufacturing industry, with its export capability, high rates of productivity growth, and scientific and technological leadership, should continue to be the pillar of the country's economy. Therefore, we need to strive to move toward a new industrial structure that will foster world-class companies with high profitability, as well as service industries that are organically linked to the development of the manufacturing sector, creating employment opportunities and raising productivity.

2. Promising fields which lead a new industrial structure
There are three promising manufacturing fields that will lead Japan's future industrial structure (a structure that develops leading global corporations) and propel the growth of the overall economy: integrated finished goods, high-performance parts and materials, and unified product/service offers.
Moreover, three promising services can be identified: business support services, lifestyle support services, and privately run public services. These are the areas where we can expect increased productivity and expanded employment.

Promising Manufacturing Sectors
Integrated finished goods: Finished goods that are tightly linked to their components, with a high level of overall optimization required for assembly. Examples: automobiles, machine tools, next-generation flat-panel televisions, etc.
High-performance parts and materials: Employing advanced technology at their core that other companies will not be able to mimic easily. Examples: advanced semiconductors, new types of video displays, performance chemicals, new glass, etc.
Unified product/service offers: Will combine products with related services, such as maintenance and repair, packaged for maximum customer convenience. Examples: consumables for copiers, content creation for console game boxes, etc.

Promising Services Sectors
Business support services: Services that are cultivated as manufacturing industries increasingly outsource their support departments as cost centers in the hope of increasing productivity as they pursue a strategy of emphasizing core competency. Examples: information systems, distribution, personnel and pension/insurance services, etc.
Lifestyle support services: As society undergoes structural changes relating to trends such as the aging of the population and environmental constraints, we can expect the needs for individual services to both expand and become more apparent. Examples: health and welfare, daycare, leisure, etc.
Privately run public services: Services that are now government monopolies are in the process of being deregulated, privatized, or shifted to private companies under government contract. Examples: medicine, nursing, education, etc.

3. East Asia and the new industrial structure
Over the past few years, against the backdrop of a cheap, competent labor force, the accumulation of component manufacturers, and the rapid growth of the Asian market, the pace of investment by Japanese industry in the markets of China and East Asia has been accelerating. There is concern, however, that this trend could ultimately lead to a hollowing-out of the Japanese industry.
Nevertheless, Japan has a market with a high level of demand, a high concentration of research and development facilities, and a manufacturing base for integrated finished goods, all of which give the country a general strength that should preserve its competitiveness in many sectors.
If Japan is slow to reform its industry and stagnates, East Asia can pose a threat. On the other hand, if Japan accelerates the pace of its reforms, in promoting an evolution toward a higher value added Japanese industrial base,East Asia can be turned into an opportunity for Japan. An important precondition here is for the infringement of intellectual-property rights Government and private sector to deal aggressively with in accordance with international rules, such as those set by the WTO.

4. Problems in shifting towards a new industrial structure
Smooth restructuring of operations and the development of an environment that encourages technological innovation and investments in operations presupposes an effort to preserve and carefully manage the results of technological innovation and a shift to a dynamic style of management in the manufacturing sector, and efforts to lower costs such as those of energy and transportation to a comparable level. But these efforts alone may not be sufficient.

Business Restructuring
Compared to the restructuring efforts of U.S. and European companies, the pace and scope of Japanese corporate efforts toward selection and concentration are disappointing, and they have not gone far enough in paring their operations down to their core competencies. In addition, Japan still lacks a fluid labor market, and this poses an obstacle to corporate efforts towards selection and concentration. Japanese companies also lag their U.S. counterparts in embracing IT to revolutionize business processes, company organizations, and inter-corporate links.

Research and development
While R&D expenses have ballooned, the risks of commercializing the results have increased, forcing any company making investments to pass through "the valley of death," an obvious obstacle to adding more value. Furthermore, the universities and public research institutions doing basic research are being underutilized, leading to indications of a general decline in the quality of researchers.

Dealing with intellectual-property rights
Most Japanese companies do not necessarily have a strategic approach to acquiring and managing intellectual-property rights. Compared to U.S. companies, there seem to be a large number of cases of "unintended" technology transfer. Furthermore, it is not sufficient for companies to deal on the own with counterfeits from Asian economies including China. The patent protection system needs to be expanded.

Streamlining the environment that companies operate in
With high taxes, intricate regulations, and expensive infrastructure, Japan's business environment is increasingly unattractive, raising the concern that manufacturing will be transferred abroad even more quickly, with extremely little inward direct investment. Furthermore, the supply of risk equity capital is inadequate, labor mobility is low, making this a difficult environment for dynamic entrepreneurs to found new companies.

Ties with the rest of Asia
While the lack of mobility of people, products, capital and information remains a problem in Japan, Japanese corporate revenues from their overseas business are also insufficient. Especially in China, where the systems of law and government, and environment for intellectual property and investment all lack in transparency, the problems are significant. In addition, achieving a balanced development throughout East Asia and ASEAN remains an important concern.

IV .Corporate Reform as a Step Towards World-Class Management

There is a pressing need for individual enterprises to establish world class corporate management, based on management leadership with the clear allocation of responsibility, a focus on profitability and distinctive strategies, etc.. It is essential that the Government too should, as a priority, lend support to "management reform" by individual enterprises.

5 Responses aimed at management reform.

Strength in developing technology / active use of intellectual property rights
Maintaining competitiveness based on distinctiveness, through strength in technological development, strength in planning in high-end fashion and design and establishing brand power.

The creative use of IT to realize new business models
Realizing new business models through the use of IT - aiming at substantial cuts in administration costs, substantial cuts in delivery times, reductions in inventory through forecasting demand for products; speeding up management decision making.

Developing the fusion of products and services
Developing new business lines which are distinctive, hard to imitate and at the same time able to secure higher levels of customer satisfaction - by bringing together distinctive and high value added products with the service standards customers require. Establishing a "virtuous circle" in which addressing the service-related issues results in strengthening the competitiveness of the product itself.

Asian connections
Setting up the most appropriate cross-border structures for production, with clear-cut strategies regarding the place of Japan and other Asian countries. Repatriation where appropriate to Japan of profits earned elsewhere in Asia, for use in bringing on new added value through R&D etc.

Strengthening the development of the human resources which underpin high value added; having the right person in the right place
Actively take steps such as raising the level of specialist skills in staff, maintaining identity, clearly stating recruitment conditions to enable appropriate matching, and trial employment . Deploying the "right person in the right place" in the widest meaning of the expression - e.g. in some cases, through strategic outsourcing, involving postings outside the parent company and corporate division - thereby further strengthening staff training and retention.

V. Six Strategies toward Reviving Japan's Competitiveness and Moving into an Industrial Structure which Fosters World-Class Companies

[Strategy #1 Promotion of technological innovation]

1. Establish 3-5 year action plan in the following four areas to boost emerging markets and industries:
(1) environment and energy
(2) broadband communications and IT
(3) medical, healthcare and biotechnology
(4) nano-technology and material technology to support the above three areas

2. Start a new R&D funding program which focuses on bridging the research stage and the product development stage

3. Drastically improve R&D tax incentives

- Partial direct tax deduction of total R&D spending
- instant write-off of R&D related investment
- tax incentive for joint R&D with universities etc.
4. Develop an intellectual property protection strategy
- set reference guidelines for better protection of trade secrets [FY 2002]
- legislation to strengthen measures to combat trade secrets infringement
- shorten processing time for patent approval
- set up a joint government-business body to deal with counterfeit goods produced overseas
5. Reform universities and strengthen basic education
- greater flexibility in the structure of academic organizations to overcome departmental boundaries
- greater flexibility in fund allocation (more funding provided on a competition basis etc)
　

[Strategy #2: Promotion of corporate restructuring with "selection and concentration"]

1. Promote restructuring at both enterprise and industry levels
*Extend and reinforce the extraordinary law for revival of industrial vitality in order to promote scrapping of overcapacity, corporate reorganization such as divestiture and IPO, and spin-out ventures
(FY 2002).
- provision of tax incentives and financing measures
- exceptions to Commercial law
- employment adjustment measures
* Stricter delisting rules in securities market (improvement of capital markets to promote fundamental management reform)

* Increased disclosure of the results and reasoning of Japan Fair Trade Commission decisions on corporate mergers

2. Corporate reform through IT investment
* Institute tax incentives for boosting IT investment

* Regulatory reform in the fields of medicine, energy, and distribution to enhance productivity in these areas through IT

* Promote reform of company to company relationships through IT, such as SCM (supply chain management), and foster training of highly-skilled IT personnel

3. Promote corporate restructuring
* Promote management skills by creating a Prime Ministerial Award for managers who spearhead new business models

4. Rectify the high cost structure of Japan's domestic infrastructure in areas such as energy, distribution and communications

[Strategy #3: Enhance labor mobility and create more employment in the services sector]

1. Improve the quality of human resources and optimize its allocation through greater labor mobility
* Promoting greater labor mobility
- Strengthen re-employment infrastructure through such measures as trial employment
- establish clearer standards for evaluating white collar workers
- increase matching through revitalization of job placement industry especially through the expansion of private sector activities.
- increase flexibility in labor contracts allowing for different worker needs
- streamline employment insurance systems to emphasize job creation and labor mobility rather than job preservation
- reform tax structure for retirement benefits to take into account changes in increased labor mobility etc
- improvement of defined contribution pension system
- set up rules for dismissal
* Strengthen re-education infrastructure
- Expand scholarship programs for students and workers
- establish practical training institutions at an early date
2. Transition to an economic system that supports "challengers" (entrepreneurs)
* Establishment of infrastructure and safety net for individual entrepreneurs
- Establish comprehensive tax incentives to support challengers
- expand the scope of non-attachable assets through revision of bankruptcy laws
- speed up the process of establishing new companies to as little as 1-2 days, or equal to the time required in the U.S.
* Establish a nation-wide program to match up entrepreneurs with labor resources, individual investors (angels) and institutional investors (capital funds)

* Make provision for moderate-risk moderate-return financing

3. Establish rules to promote greater productivity and growth in the services sector (care of elderly; nurseries and child care, franchising, content production, tourism, etc.)

4. Promote e-government initiatives on the national and local level; open up local government services to privatization

- Start on-line procedure at the latest by FY2003 and device action plans to reduce administrative procedures and administrative costs
- Establish and set specific goals for outsourcing of regional government services to the private sector
　

[Strategy #4: Attract foreign direct investment and talent from overseas]

1. Introduce tax reforms consistent with global standards
- Institute a consolidated tax payment system that is comparable to prevailing international standards
- Lower overall corporate tax rates, including local taxes

2. Introduce new methods of regulatory reform focused on specific zones (At latest FY 2003)

3. Promote inbound direct investment as a catalyst for structural reform

- Facilitate cross border M&A by allowing for holding of parent company stocks by subsidiary etc
- Provision of one stop shopping, inbound investment promotion system including the appointment of a senior official responsible for FDI promotion (FY 2002)
4. Introduce a 3 year plan (FY2002) to attract foreign talent to Japan that covers the following:
- Relaxing the issuance of working visas
- Expansion of a scholarship program for talented foreign students
- Improving housing and educational environment for foreign workers and families
- concluding bilateral agreements on double payment of pensions
　

[Strategy #5: Establish the "East Asia Free Business Area" ]

1. Establish an "East Asia Free Business Area" at an early date
*Ensure free movement of goods, services and people
- eliminate customs duties within the area
- simplify customs clearance and trade procedures and introduce electronic processing
- liberalize services trade
- expand personnel exchanges
*Facilitate economic activities within the area
- Establish investment rules and make the rules common in the area
- harmonize regimes and increase transparency
*Ensure stability and sustainable development
- Stability of the financial system and exchange market
- Liberalize capital transactions
- Energy security
- Protect the environment
2. Points requiring attention in order to realize this concept:
*Ensure a balanced development in the East Asia by providing investment risk information and making strategic use of ODA
*Adhere to WTO rules and membership obligations
*Establish a framework in which Japanese companies can readily draw upon their strengths
- Technology management strategy to protect intellectual property rights
- Legal support for Japanese corporations operating overseas
3. Implement economic partnership agreement and make strategic use of ODA

[Strategy #6: "Create New Markets for the 21st Century"]

1. Reform the tax and social welfare systems to stimulate medium-term demand

* Consolidation of inheritance and gift tax regulations
* Achieve financial stability of basic pension and other public pensions, and strengthen the corporate pension system (abolish the special corporate tax, review the limits on defined contribution pensions, etc.)
* Enhance the tax provisions for housing investment
* Establish tax incentives for investment involving the creation of new markets for IT and other industries
2. Create large-scale markets (demand) which will lead the 21st century
* Establish a national strategy in the following four areas

1) environment and energy
2) digital consumer electronics, broadband communications and IT (making Japan, a Digital Consumer Electronics Island, a new global center for IT innovation)
3) medical, healthcare and biotechnology
4) nanotechnology and materials needed to support the above three areas.
,which covers the following points

- a market-oriented strategy covering technology development
- intellectual property protection
- standardization
- redesign of the regulatory framework
- government procurement
METI Policies Top

How can one seriously refuse to consider a bailout of the American car industry, when state governments have been subsidizing Japanese and other foreign car manufacturering plants in the United States, by paying for their land, facilities, and worker training? The State of Mississippi, for example, has gone so far as to take by eminent domain some 2.5 square miles of land for a Nissan plant at a cost of hundreds of millions.
Why isn't what's sauce for Toyota, Nissan, Subaru, Hyundai, Mercedes Benz, BMW, etc. also sauce for GM, Ford and Chrysler?

Sherry,

Check the capital costs on that "free" wind & solar. You can't get baseload power from wind & solar because it is intermittent causing spikes in power that take the grid offline. The economics on wind/solar are completely non-viable and the energy to manufacture the required millions of turbines and solar panels means that they are the furthest thing on the planet from green. Electric cars are a nice idea but you will need to get to like second and third generation nuclear. The upside is that the latest nuclear reactors are designed so that there is no possibility of a nuclear meltdown.

With regard to GM, you have to also consider that GM has 8 different brands while Toyota & Honda each have 2 as well as numerous models which compete against only 1 or 2 from Toyota. Agree with Gary Becker, GM should go bankrupt but will likely get a bailout from the Democrats for services rendered by the UAW during the election.

Buy the companies from the shareholders for cheap, hand the shares over to the UAW in satisfaction of all employment and retirement benefits and tell them to make the best of it.

There is no point in the government throwing in money simply to cover the gap between what the UAW wants and what the companies can afford.

Old Curmudgeon, two wrongs don't make a right. States providing corporate welfare to businesses that move into their states, in the name of "economic development", makes no sense. That's a further argument against an auto bailout, i.e., that every additional piece of corporate welfare creates a precedent for more.

So, if GM goes bankrupt, what happens to their overseas companies? Since that is where they are actually making money (they did see an increase) is that being considered in the BAILOUT??? AS IN FORGET IT. An article in a China paper today talks about the Big 3, but GM appears to be doing somewhat good over there.

So, if GM goes bankrupt, what happens to their overseas companies? Since that is where they are actually making money (they did see an increase) is that being considered in the BAILOUT??? AS IN FORGET IT. An article in a China paper today talks about the Big 3, but GM appears to be doing somewhat good over there.

wow giving them to the UAW is the funniest and greatest idea i've heard so far

Becker sheds light on how the American auto workers are paid too much relative to their piers putting GM/FORD/CHEVY in a disadvatangious position. It should also hold true that management was likely overpaid relative to their piers putting the companies at a disadvatage. The latter would likely seem to be more of a problem..maybe I am missing something?

It is funny how we rushed blindly into shelling out $700 billion to companies with few jobs to and are not going to help protect hundreds of thousands of jobs in the mfg. sector which is where the middle class with and without college degrees live and breath. The only reason I can think of for not helping them is that if they file Chapter 11, they can break the back of the union and end their contracts in court as part of reorganization and offer them their jobs back as less pay. My vote is to help them out now. I think $50 or $75 billion is better spent here and than $700 billion was previously. Here is a sample letter I found and a site to locate your representatives as well to support bridge loans to the auto industry. They loaned Chrysler money years ago and they were a strong and growing company until Daimler bought them raped them and they threw them out with little to nothing. Oh, I am sorry that was a merger of equals. Ha.

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What happen if the budget deficit will grow larger and larger? Can USA be sure that other countries will still support dollar? I can't even imagine what will happen if some big countries decide not to support dollar anymore...

If I could buy an american electric truck with excellent service protection (/warranty ?) I would do it - immediately. Get on the ball guys ! Reorganize , Innovate, Dominate.

If the government bought 1,000,000 $25,000 fuel efficient cars, and gave them to 1,000,000 people who cannot afford to buy a new car, it would solve a lot of problems and probably stimulate the economy to boot.

The thought of bailing out privately-equity owned Chrysler, which would essentially be bailing out wealthy private investors (incidentally, whose tax rate is alarmingly more favorable than my earned wages tax rate), with my taxes dollar is abhorrent and should be summarily discarded as criminal.

The thought of bailing out privately-equity owned Chrysler, which would essentially be bailing out wealthy private investors (incidentally, whose tax rate is alarmingly more favorable than my earned wages tax rate), with my taxes dollar is abhorrent and should be summarily discarded as criminal.

It turns out that the Gulfstream jet taking Mr. Waggoner to DC to beg for billions cost GM $20,000. These guys could use a class in public relations not to mention budgeting skills.

Bailing out Big Auto in a world that cannot sustain increased petroleum consumption is unwise. Corporate "leaders" are blinded by short term profit and dividends.

Though "Green" advocates push hybrids and electric cars, they, too, are dependent upon cheap and plentiful petroleum for plastics, synthetic rubber tires, and asphalt paved streets - which all will become progressively more expensive and eventually unattainable.



America's sole viable alternative is steel wheel on steel rail - the most energy efficient land transport. And we need to electrify existing rail tracks, to reduce diesel consumption. To replace the automobile, we must build a new urban rail infrastructure to accommodate the inevitable end of the Oil Age.



Time for America to "Get Back on Track!"

what about bailing out the companies - but using their assets to lower barriers to entry in the automotive industry ,by changing industry structure ? this would enable more startups to compete , increase innovation , do alot to reduce global warming , and since america is the best country in the world in building startups , it might enable america to have the best automotive industry in the world .

while not without risks , currently there are no low risk options to this crisis.
maybe worth a try ??

For all that say buy American, I say to you Make A Better Product and Make it in America. Most "American" cars are not made here, we support Mexico, Canada and who ever else will make them at a lower wage. Open new plants in America and implement them with new pay scales. We know labor is the most expensive part of auto industry. People will work for a reasonable and fair wage and benefits. If the UAW does not agree to the new terms, they are out of business as well. If things are done fairly, it should work. Foreign auto has proved that in America. Stimulate America.....
Those of us who do not buy American, we are not traitors or any of the other names that you like to call us. First of all , we probably have and would buy american autos, if we went by looks alone, but we don't. Our money is hard earned and we look for quality and longevity in a auto. American auto makers have depended on us to buy there product because they look good, not quality of the auto. They depended on us coming back for expensive repairs or trade- in a few years, because we are tired of spending money on repairs. They knew we had little choice on where to go. They were Three Big Shots who forgot about the little niche that foreign car companies held. They are not so big , now are they....
I was in the market for a new auto three months ago and ran into the same old things in "American" autos, as I did years ago. Little things to start out with matter. Open and close the doors they rattle and don't have that solid sound when you close them. Screws that are not all the way tighten or laying on the floor. Sloppy interior carpet, leather and dash finish. A solid and quite cabin feel when you are driving, not the engine noise that make you wonder if it running o.k. or the hard transmission shifts. Drive over a pothole and more rattling. We build some awesome engines, but we build some horrible ones also and continue to use them. Get rid of the old cheap to build engines. Surround the awesome ones with quality materials and craftmanship and "We Will Come". The auto industry has known this for years and done nothing about it. They though that Americans would always be like "Cattle Lead To Slaughter" . Now they are reaping the whirl wind and looking to "The Cattle" for help. I say help them now, if they address some of the problems that they know caused there failure. Instead of making quantities of autos with good Iooks . Make quality autos that look good. If this doesn't happen, we will be pouring money into the same bottomless pit.

"Americans" make some of the best looking auto on the road. Now we have to make some of the best built autos they can stay on the road.

Ron, quality made American Cars? No longer a fantasy, but reality. I've got one right now that's got 245,000 miles on it. Although, I've had to put in two brake jobs and one clutch. Still runs great and gets 30 miles to the gallon.
Quality and reliability is no longer an issue.

Apparently, the 2nd loan is about to be announced. Many a lender, esp. venture capitalist, impose conditions on a loan, such as changes to the business model. Here, the U.S. is likely wish, hope or recommend that Detroit make some needed changes, but then hand over the dough.
From the larger view, why is so easy to loan $135B, or more, to hold up AIG, and so unpalatable to lend a fraction of that to keep the payrolls of Detroits going?

Big oil should bail out the big 3

Think about it:

- Big oil influenced heavily in GM buying Hummer
- Big oil is part of the reason why the big 3 abandonded fuel efficiency standards and went into "gas guzzling" mode
- Big oil killed (or played a key role in killing) the electric car
- Big oil made TRILLIONS in profits last year
- Big oil needs crappy gas guzzling cars on the rodas

If you have more reasons, pile them on and pass it on! Lets see if this reaches big oil!

The comments are starting to look like baby Hillary's. (E.G., see Senator Clinton's 1300 page health care paper). I was thinking about Posner's comments about Hollywood folks. They are the ones who get chatted up thus must talked about...they are the tragic heroes and they are less healthy etc. Is that the price for being chatted up? Anyway, see the Alfred P Sloan Foundation funded PBS special on the 1929 stock crash. You can watch all of it for free via the Internet. Note the astrologer that predicted which stocks to buy etc. Reminded me of Nancy Regan. Does history repeat itself? Best comment was to have oil bail out auto boys. They all make too much anyway. Their salaries are outrageous and they pay no taxes! Today's health tip: ground garlic with V8 juice so we can all keep blogging with Becker and Posner.

Big Oil as the solution to the woes of the auto industry? Great solution! Does anyone here realize that it takes billions of dollars a year to maintain Refinery infrastructure so that crude can be converted into Fuel product, Pet Coke, Sulphur and Asphalt? Didn't think so.

The reality is a large gross profit, but a minimal net profit.

If you want large net profits look to drugs and alcohol. Crack, smack or bootleg liquor anyone?

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.

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.

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.

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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/

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.

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

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

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

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.

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.

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.

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.

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?

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.

next up ... more financial sage

next up ... more financial saga

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.

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.

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.

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.

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."

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.

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."

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

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.

gdgeiss, And so what's your solution? General economic collapse and deep depression. I certainly hope you're one of the ones that ends up living under a bridge, selling pencils and crack on the corner to make ends meet.

Denis, Yes, Let's demonize the UAW for standing behind Managment in requesting support from the Government. As for wages and benefits, It's a collective contract. There is power in numbers. As opposed to the single indvidual trying to contract without support.

I would agree with most of the comments stated above. The auto industry has simply done a poor job at creating competitive cars. I quit buying domestic vehicles a long time ago.

Great site!

Would you like a Link Exchange with our new blog COMMON CENTS where we blog about the issues of the day??

http://www.commoncts.blogspot.com

It seems the CEOs of the Big Three will be headed back to Washington DC early December. And, this time they might carpool instead of flying the private corporate jets. But that does not change the fact that bailout is the wrong solution. I have written a detailed article entitled "Big Three Auto Bailout is Wrong Solution" to make my case. You can read in the detail here:

http://commonsensetopics.blogspot.com

Dr. Becker,

In Obama's infomercial, he featured autoworkers who were having their pensions bought out for pennies on the dollar and were having their health care trimmed back. He said that corporations should keep their promises to the people who were promised defined-benefit pension and health care packages. How do you respond to that? Obviously, these promises have killed the competitiveness of the auto industry, but at the same time, they were made and there are many people who are now suffering greatly and will suffer greatly if their retirement and health care are eliminated. What's the solution?

btw: this is an issue that is faced in many of our municipalities as well. it is not limited to private and public corporations. How do we deal with the broken promises of the past? How do we get out from under promises that we have no ability to keep and remain competitive on the worldwide stage?

neilehat,

No one roots for anyone to be jobless out of all this, let alone homeless. We might spend 10% of the 1.5 trillion dollars these bailouts will cost, all of which must, I reiterate, be printed (which must eventually be wildly inflationary) or borrowed from overseas interests (whose future actions relative to the debt are problematic) and ameliorate 90% of the temporary dislocation and suffering that will result from allowing both Wall Street fatcats and UAW to perish.

In the end, I don't think the bailouts will "fix" anything. I think they will only delay and perhaps intensify the ugly results. If we spend on the bailouts now we'll have less ability to spend on amelioration measures later and dislocations will be longer and the suffering more severe.

Anyhow, if I end up under the "El" at 54th and Chestnut, I'll save you a seat, you can read alternating passages to me from Sartor Restartus and Past and Present...

gdgeiss, Temporary dislocations? Where are all those jobs in IT and computers that were supposed to cover the last round of dislocations that all those Machinists, Steelworkers, Tool & Die Makers, and the like trained for? Oh! That's Right! They went to India.

Don't expect to see me at 54th Chestnut, I prefer the Wacker Underground. It's easier to get to Michigan Ave. to panhandle.

Neilehat,

Not to worry. Congress just passed THE PANHANDLERS SOCIAL RESTORATION AND FINANCIAL ELEVATION bill. It was a rider on LIMITED CHOLECYSTECTOMIES FOR THE PUBLIC bill, all landmark legislation. There was controversy though because the APU (Amalgamated Panhandlers Union) felt that such legislation would lead to unemployment.

Close all three down. They are run by idiots. Better cars are made by other companies and without these three, car prices will probably go down.

Of course, this isn't going to happen. Too many politicians will see a need to try to 'save' them.

Saving defective car companies from the inevitable didn't work in the UK and won't work in the USA.

Jim, Unlike most of my peers, I'm not from the Alfred E. Newman Graduate School of Business and Economics.

"What me worry"?

;)

I’m glad to see no mention of moral hazard this time—the usual bromide against a bailout. But the reason Becker gives against bailing out the big three automakers is no less misplaced. Instead of distributing blame among bad executive decisions and an aggressive UAW, Becker overemphasizes the aggressive UAW and downplays poor management (that gets agnostic consideration at the end of his analysis). In light of the last few decades, this lopsided emphasis on causes is not convincing, and therefore his argument against a bailout suffers.

Becker states: “The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits.” To support this claim, he points out that foreign companies who rely on American workers but avoid the UAW still profitably make cars; therefore the American worker is not the problem, but the UAW is. By forcing up the cost of labor to beyond uncompetitive levels—presumably against market mechanisms—the UAW has made the big three uncompetitive, and that’s the main reason they are in shambles today. A bailout, Becker points out, will not address the high cost of labor, but a bankruptcy will.

Setting aside the possibility that a bailout could require the UAW to concede its “overly generous settlements” and accept competitive replacements, Becker’s causal emphasis on expensive labor is suspect because it downplays an obvious confound: those profitable foreign competitors employing American workers are under different management, and management—not labor—determines what gets produced and how well it gets produced, etc. As it happens, poor decisions in these two sectors have hurt domestic automakers for decades, and for that it’s more likely that management, not labor, is to blame.

For instance, it’s hard to see how the big three’s declining market share (GM from 36% in 1990 to 19% in 2008; Ford from 26% in 1990 to 15% in 2008) has been mainly affected by increasing labor costs, when over the same time period, Honda and Toyota have consistently offered more expensive alternatives to comparable Ford and GM models. Presumably, then, some other factor is contributing to this loss, since consumers neither know nor care how much health care GM pays for each car, or what Ford’s profit margins are compared to Toyota’s, etc. Yet consumers are migrating to foreign manufacturers in droves. Increasing labor costs would explain decreasing profits or increasing loses with sales being constant, or increasing, but by itself it doesn’t account for lost revenue because of declining sales. But poor quality (or what amounts to the same thing, a reputation for it) and/or bad