My Thoughts on the Auto “Bailout” in Kristof’s Words
Dec 14th, 2008 | 12 responses
In response to my post yesterday, decrying the fact that Republican Senators from Southern states with foreign car manufacturers fiercely oppose the proposed emergency loan to save American automakers Ford, General Motors and Chrysler, I received several comments supporting the Senators and attacking the auto workers unions.
Worried about what the failure of one of the pillars of American industry would do to our economy, even to our society, I crudely answered one comment as follows:
I am sure some “no-mercy-for the automakers proponents” will come up with all kinds of esoteric rationale for letting our vital auto industry fail. As our financial/economic crisis then rapidly snowballs into a real depression and perhaps they themselves, their relatives, their friends stand in the 2009 equivalent of our past soup lines, such high-minded clinical analysis will be of little consolation.
In addition to the poor style and grammar, such a comment from an amateur blogger probably did not make a very big impression.
Fortunately, more “experienced hands” came to my rescue this morning in the shape and form of none other that Op-Ed Columnist Nicholas D. Kristof.
In his New York Times Op-Ed “A Finger in the Dike,” Kristof says what I would have tried to say—if I had a fraction of the talent and experience Kristof has.
So here it goes, my thoughts through Kristof’s talent lens and in Kristof’s words:
Look, there are plenty of sound arguments against a bailout. But there’s a practical argument that trumps everything: when conditions are so fragile, we can’t risk a staggering blow to the national economy. When you see a hole in the dike, don’t discuss the virtues of laissez-faire policies — plug it!
There were also sound arguments for not rescuing Lehman Brothers. So the government allowed Lehman to collapse — and almost everybody now recognizes that it was a mistake that cost taxpayers more than a bailout would have.
Lehman Brothers was small potatoes — a tiny French fry — compared with America’s automakers. Lehman Brothers had 25,000 employees worldwide; General Motors alone has 250,000.
The Big Three have almost 400,000 employees worldwide, including about 230,000 in the United States. In addition, several hundred thousand people make car parts for the Big Three, and a half-million more sell or distribute cars from them. All told, considerably more than one million jobs in the United States depend directly on the American automakers, and many more indirectly.
Kristof then cites some of the reasons we have heard ad nauseam for “washing our hands of the auto companies” and refutes each and everyone of them.
The final reason cited by Kristof to do nothing is: “A bailout is hopeless: This is a bridge loan to nowhere.”
And Kristof agrees—with caveats and conditions:
Yes, the Obama administration will have to come back in January with a full rescue package. The package should focus on saving jobs, not stockholders or bondholders. Shareholders should lose most of their investments, bondholders should get a haircut, managers and board members should be ousted, autoworkers should have their pay and benefits trimmed to market levels, and taxpayers should get an equity stake that they could profit from.
But saving the auto sector isn’t hopeless. Car companies have made progress in recent years, as underscored by the Chevy Volt, a plug-in hybrid that can go 40 miles without using a drop of gas. (The catch is that if gas prices stay as low as they are now, consumers may instead be demanding gas-guzzling S.U.V.’s.)
Think of a bailout as part of the huge planned stimulus package. It’s much cheaper to keep people in their existing jobs than to create new jobs elsewhere.
I lived in Tokyo in the 1990s, as perfectly reasonable arguments for government restraint led to acquiescence in the face of escalating economic disasters. Anyone who lived through Japan’s “lost decade” understands that the risks of inaction are greater than the risks of action.
Now, wasn’t this much more elegant, effective and convincing than my “soup lines” specter?
Thank you, Mr. Kristof, you took the words right out of my mouth.
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12 Responses to “My Thoughts on the Auto “Bailout” in Kristof’s Words”
To blame the Republicans for the failures of the Democratic Party lead Congresses is blatant partisanship.
The biggest problem in the Senate is that Harry Reid and his staff seem incapable of being the leaders in the Senate. Until the Democrats start acting like they are in charge two years after being put in charge, the failures will continue. Reid failed with the Wall Street bailout and he is failing now with the bailout of Detroit. Consdiering that most of the government is operating under continuing resolutions, Reid does not seem to now what his duties really are.
Second, The Democrats are incoherent and inarticulate in the matter. Where did the figure of 15 billion comes from. Is 14 Billion not enough but 16 bilion too much. Now one Democrats has been calable of doing on a talking head show and explaining how $15 billion leads to a long term solution to anything. The Democrats cannot even agree on what the problem is. There is no plan, no metrices, and no exit stratgegy. For all of the Ivy league and government schoos advanced degrees, the Democrats seem incapable of have a functional legislature.
And last, where is the leadership of President-Elect Obama. If this was really important, he would be all over the media demanding a solution. I guess DAvid Axelrod cannot be bothered to tell President-Elect Obama what to think about Detroit, so now we have a soon to be President who is incapable of exercising anymore leadership than the current idiot in the White House.
I don't believe Kristof's column was about fixing blame, but rather about fixing an industry vital to our economy, our nation, our finacial security and even our national security.
As far as Barack Obama, I believe that he is not the president, yet.
Dorian
D.E.
The Obama ADministration is the one whose is going to have to ensure that the funds are handled properly, are put to good use, and that the automotive industry does not come back for a second helping.
Obama should be leading on this instead of allowing President Bush to lead on this.
If saving the automotive industry was important, they would have had real hearings instead of media events where the scolded the presidents of the companies for flying in private jets. If how the people are the Congressional hearings is the most important issue, they must have been pointless events where nothing was accomplished.
If anyone saw Barney Frank on 60 minutes. He could not put together a coherent thesis of why the U.S. auto makers need $15 billion right now. The best he could do is that the automative industry needs to be keep functioning as a form of welfare for the UAW.
And the scenes from the hearings as pathetic. The Congressmen seemed totally incapable of asking a coherent question that was meant to actually solicit information.
But… how exactly is this $15 billion supposed to fix anything? GM and Chrysler's problems are that they have excess capacity, too many workers to produce too few salable cars, and too much labor cost per worker, as well as having designs that thrill nobody and poor quality in manufacturing. A short-term loan doesn't fix a single one of those problems. Fixing the mess is going to require major changes – and those changes can just about only be done by a bankruptcy court judge. All this bailout does is allow the company to extend its money-bleeding status quo.
Bankruptcy does NOT mean laying off all the workers and shuttering the factories. It means that the finances and operation and contracts of the companies come under review of a bankruptcy judge who has the power to order changes in all of them.
Superdestroyer–
Have you given up on our one party state so soon?
; )
Dorian, Kristof may have taken the words out of your mouth, but you took the words out of mine! Thanks for the post!
FuzzyFace…. your comment about bankruptcy… Kristof also says this, which makes sense to me:
“Bankruptcy would be a gamble because we just don’t know whether cars from bankrupt companies will still sell. I’ll buy a $400 air ticket to fly on a bankrupt airline, because it’ll still be honored in a month’s time, but that doesn’t mean I’ll spend $30,000 on a car from a bankrupt company when I’m counting on its resale value in 10 years’ time.”
Bankruptcy judges would also cut the debt owed to financial firms, who are also in trouble. And there are tens of billions of dollars in loan to the auto companies. That's like robbing Peter to pay Paul. If you throw the auto makers into the bankruptcy courts, you just push their problems onto others.
If it were a single (and smaller) company then yes, bankruptcy would be the answer. But the automakers probably produce as much (directly and indirectly) as some small countries.
I believe that the automakers contribute to a significant portion of the nation's economy and that they are too large to fail, or to go into bankruptcy. Personally I feel that the government should keep its hands out of private enterprise and if a company gets into trouble under ordinary circumstances, then the company should go into bankruptcy. But these aren't ordinary times and we're not talking about a single company- we're talking about an entire industry in the US and its support companies. For that reason I think the US government SHOULD go in and run these companies, since the management of these companies is unable to do so. THen once the companies get back on their feet, they can go back to private enterprise. I think the people who got us into this mess- the automakers' management teams, ought to be held accountable and lose their jobs…. (they will still be worth millions). We should not punish the workers (and the vast number of companies in the supporting infrastructure) who just followed the automakers' management and these line workers are not worth millions and can not afford to be laid off, especially when we are facing a severe recession. I think we want to find ways to keep workers in their jobs. We don't need to find ways to lay off workers in the auto industry and send into bankruptcy the supporting companies. You and I as taxpayers will have to pay (sooner or later) the unemployment benefits, retraining costs borne by the government, and indirectly (through higher health premiums for all of us) all those unpaid hospital bills by all those people without jobs or health insurance.
SB let me return the compliment. You said “these aren't ordinary times…” I would add–and I am sure it has been said before– “and they require extraordinary actions by extraordinary people whether it pleases the 'teach them a lesson crowd' or not.”
Dorian
Anything but bankruptcy is probably even more of a gamble. How in the world is the government going to run a humungous business like GM? Do you really believe that there are people who know much more about running auto manufacturers than the people already doing it? It appears clear that a lot of bloat is going to have to be excised – how is a public servant who has to answer to the voters going to make those kinds of choices?
Yes, the question of whether people would buy a car from a company in bankruptcy is an interesting one – but not to the extent that Kristof suggests. The real concern is whether you will be able to get parts and service – and there is no real worry there, as there is already a thriving third-party market there. As long as there is demand for replacement parts for GM cars (and believe me, the demand is not going away anytime soon), there will be a market for them. And this is not just a guess: the Yugo vanished ignominiously from the market a decade ago, yet you can still buy parts and get service, if by chance you still have one that runs.
The thing is, you don't expect ongoing support from a car manufacturer. The warranty that they provide is almost worthless, as they only tend to guarantee the parts that don't fail – and find ways to get out of supporting anything that does. If the company goes belly-up (which of course is not what happens in bankruptcy anyway), the car continues to work. Buying a car from a company in chapter 11 is thus actually *safer* than buying a ticket from an airline in the same state, as the ticket requires the airline to be in business. The car does not.
At least others are admitting that the automotive bailout is really just a form of middle class welfare. IT is to keep the union members employed whether the U.S. really needs their economic output or whether the economy can survivie long term.
Of course, the big three are all heavily leaveraged. How is loaning them more money going to fix the problem?
When Ben Stein approves the auto bailout hell must be freezing over.
http://www.balloon-juice.com/?p=14653
http://transcripts.cnn.com/TRANSCRIPTS/0812/12/…