Gary Becker (Nay) and Richard Posner (Yea) Debate U.S. Auto Industry Bailout

18 11 2008

Gary Becker – a highly respected economist, and Richard Posner, an esteemed lawyer and former judge, debate the benefits and costs of the U.S. government bailing out the U.S. auto industry on “The Becker-Posner Blog” (http://www.becker-posner-blog.com/index.html).  

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A. Gary Becker – Opposing a U.S. Auto Industry Bailout

Gary Becker, 1992 Nobel Prize Winner in Economics (Dr. Becker’s website), presents his reasons for being against a U.S. Auto Industry bailout (here) in a blog entry titled “Bail Out the Big Three Auto Producers? Not a Good Idea-Becker“.  Following are a few key exerpts…

“If GM is not bailed out, the company claims it will be forced into bankruptcy within a few months, and Ford’s situation is only slightly better. GM is blitzing Congress, President Bush, and President -elect Obama with pleas for a bailout, followed by a warning that bankruptcy will also hurt auto suppliers throughout the nation that depend on GM’s business. GM is also claiming that bankruptcy will put major financial pressure on the Pension Benefit Guaranty Corp, the federal agency that insures benefits to retirees in the auto industry as well as to million of other workers.”

“Nevertheless, I believe bankruptcy is better than a bailout for American consumers and taxpayers. 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. Only a couple of years ago, GM was paying $5 billion per year in health benefits to retirees and current employees because their plans had wide health coverage with minimal co-payments and deductibility on health claims by present and retired employees. In those days, the UAW was one of the most powerful unions in the US, and it bargained aggressively with the auto manufacturers, carrying out strikes when its demands were not met. When the American auto industry began to face tough competition from Japanese and German carmakers, they were saddled with excessive pay to their workers, and vastly excessive pensions and health benefits to their current and retired workers.”

“Is GM “too big” to fail? I do not believe the company is too big to go into a reorganization-which is what bankruptcy would involve. Such reorganization would abrogate its untenable labor contracts, and give it a chance to survive in long run. A bailout, by contrast, would simply postpone the needed reforms in these labor contracts, the business model of GM, and its management.”

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B. Richard Posner – Supporting a Bailout of the Big 3 U.S. Automakers

Richard Posner (Judge Posner’s website) presents his reasons for being in support of a U.S. Auto Industry bailout (here) in a blog entry titled “Bail Out the Detroit Auto Manufacturers? Posner’s Comment“.  Following are some of Richard Posner’s thoughts on the subject…

“Becker has laid out the case for refusing to bail out GM, Ford, and Chrysler. It is a powerful case, and if the drop in auto sales that is driving these companies toward insolvency had occurred two years ago, there would be in my view no case, other than a political one, for a bailout. But in the current financial crisis, I believe a bailout is warranted, provided that the shareholders and managers of the companies are not allowed to profit from it.”

“The major problems with allowing the automakers to be forced into bankruptcy within the next few months are three, all arising from the depression that the nation appears to be rapidly sinking into. The first problem is that the companies might have to liquidate, because they might be unable to attract the substantial post-bankruptcy loans that they would need to enable them to remain in business. The credit crunch–less politely the near insolvency of much of the banking industry–has made that industry unable or unwilling to make risky loans, and loans to the auto companies after they declared bankruptcy would be risky.”

“Second, not only the size of the automakers, but peculiarities of the industry, would cause bankruptcy to greatly exacerbate the nation’s already dire economic condition. In the very short term, the automakers would probably stop paying their suppliers, which would precipitate a number of the latter–already in perilous straits because of the plunge in the number of motor vehicles being produced–into bankruptcy. Many of the suppliers would probably liquidate, generating many layoffs. At the other end of the supply-distribution chain, consumers would be reluctant to buy cars or other motor vehicles manufactured by a bankrupt company because they would worry that the manufacturer’s warranties would be unenforceable. So more dealerships would close, producing more bankruptcies, liquidations, and layoffs. With the demand for the vehicles made by the Detroit automakers further depressed and the supply-distribution chain in disarray, the liquidation of those companies would begin to loom as a real and imminent possibility. Liquidation of the automakers would produce an enormous number of layoffs up and down the chain of supply and distribution. Such prospects reinforce the unlikelihood that a reorganized industry could survive on debtor in possession loans.”

“The U.S.-owned auto industry may be doomed; it may simply be unable to compete with foreign manufacturers (including foreign manufacturers that have factories in the U.S.); or a reorganization in bankruptcy may be the industry’s eventual salvation. But the automakers should be kept out of the bankruptcy court until the depression bottoms out and the economy begins to grow again. …  Any bailout, however, should come with strict conditions, to minimize the inevitable moral hazard effects of government bailouts of sick companies. The government should insist on being compensated by receipt of preferred stock in the companies, on the companies’ ceasing to pay dividends, and on caps on executive compensation, including severance pay.”

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Some Comments

As economists say, this reasoned discussion of the pros and cons of this issue is “good stuff”.  Generally, I would side with Becker in thinking that the inexorable and ongoing economic pressures upon a noncompetitive economic enterprise such as the U.S. Auto Industry essentially doom it to perpetual unprofitability and eventual economic inviability. 

From an individual point of view, I have never in my life bought anything other than a General Motors or Ford automobile.  However, now that “the veil is completely pulled back” in regards to the noncompetitive position and future inviability of these two companies who are so heavily dominated by noncompetitive union labor contracts and costs, I as a consumer wish that now I had the local option of at least considering the purchase of a Toyota, Honda, Kia or Nissan. These are the companies that are competitively positioned to survive in the current economic downturn, and to prosper beyond that. And they are not mortgaging the future of my children in this country by seeking to deepen the U.S. government’s debt at the present time.  Good will capital is a precious thing to preserve among your customer base. It could be that the Big 3 U.S. automakers are squandering their public goodwill with their intranscience over dealing with their noncompetitive labor cost issues. 

 

 Mount Hood, Oregon (www.summitpost.org)

 Another picture of Mount Hood (www.weiss-miller.com)

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U.S. Auto Industry Noncompetitiveness – Higher Labor Costs

17 11 2008

From an Economics Blog titled “Carpe Diem” (http://mjperry.blogspot.com/) comes the following information on wages earned by the Big 3 U.S. auto makers (i.e. Chrysler, General Motors and Ford) versus the “Japanese Transplants” (i.e. Toyota, Honda and Nissan).  Kudos to Dr. Mark J. Perry, a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.

See the following post in Carpe Diem for the full story (here). Note the $29 per hour pay gap between the U.S. based automakers and those originating in Japan with plants in the U.S..  These types of cost differentials are one of the primary reasons for the non-competitiveness of the U.S. automakers in Detroit. 

 

Daniel Ikenson of the CATO Institute also has a strongly written article on this issue at the Cato@Liberty blog.  See “A Cancer on the Big 3” (here).  Here is a selected quote from his aricle…

“Why is GM (and Ford and Chrysler) seeking taxpayer subsidies when Toyota, Honda, Nissan, Kia, BMW, Daimler, Hyundai and other foreign nameplate producers, who are facing the same contracting demand and credit crunch quietly weathering the storm, are not? Because the latter have costs structures that haven’t been made obsolete and uneconomic by ludicrous union demands.  And, of course, they make cars that Americans want to buy.”

 

Swiss Alps (Eiger Glacier) (travel.webshots.com)





Government Assistance for Ford, Chevy and Chrysler?

16 11 2008

Among the host of critical financial issues facing the U.S. government at this time is whether to provide additional financial assistance to the U.S. auto industry to help them through the current recession.  Along with concerns about additional debt obligations by the U.S. government and the jobs and retirement accounts of longtime Ford, General Motors and Chrysler union employees, there are serious economic concerns about not allowing competitive economic forces to work themselves out in the U.S. economy.

Following is a thoughtful article written on the subject from Daniel J. Mitchell of The CATO Institute (http://www.cato.org/).  It was original published on CNN.com (www.CNN.com). The article supports a free market approach toward this issue, allowing for a financial reorganization of the “Big 3” with the likelihood of a more efficient, profitable and competitive U.S. auto industry developing in the future.

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“Say No to Auto Bail Out”

Daniel J. Mitchell, CATO Institute (here)

General Motors, Ford, Chrysler and the United Auto Workers union are pouring millions of dollars into a lobbying campaign for a taxpayer bailout. The money devoted to influence peddling in Washington would be better spent on improving quality and finding ways to reduce a bloated cost structure, but both management and UAW have decided that fleecing taxpayers is a better option.

 

A taxpayer bailout would be a terrible mistake. It would subsidize the shoddy management practices of the corporate bureaucrats at General Motors, Ford and Chrysler, and it would reward the intransigent union bosses who have made the synonymous with inflexible and anti-competitive work rules.

Perhaps most important, though, is that a bailout would be bad for the long-term health of the American auto industry. It would discriminate against the 113,000 Americans who have highly-coveted jobs building cars for Nissan, BMW and other auto companies that happen to be headquartered in other nations.

These companies demonstrate that it is possible to build cars in America and make money. Putting them at a competitive disadvantage with handouts for the U.S.-headquartered companies would be highly unjust.

 Milton Friedman, Economist. Well known for espousing the principles of competitive free markets

A bailout also would be bad for General Motors, Ford and Chrysler. The so-called Big Three desperately need to fundamentally restructure their practices. More specifically, the car companies need to endure some short-term pain in order to restore long-term viability. But that won’t happen if politicians raid the treasury.

Getting access to taxpayer money would be akin to giving an alcoholic the key to a liquor cabinet. It also would be bad for American taxpayers and the American economy. For instance:

A bailout will hurt the overall economy by misallocating resources. When politicians grant special favors to a certain industry or a particular union, such decisions necessarily mean that market forces are being replaced by special-interest deal-making. This type of interference with free markets is why nations such as France, Germany and Japan tend to grow more slowly and enjoy less prosperity. But if America goes down this same path of government intervention, it is inevitable that we will suffer the same fate of stagnation and higher unemployment.

A bailout will encourage other industries to seek taxpayer handouts. The Wall Street bailout was a disaster in many ways, most notably as measured by the weak stock market and economic volatility. But another negative aspect of the bailout is that other industries have now decided that it is OK to stick their snouts in the public trough, as well. First Wall Street’s high fliers get a bailout. Now the inefficient management and union at the Big Three want a handout. Who will be next in line to pillage taxpayers? Giving handouts in exchange for political support is akin to getting high. Once politicians decide they like the buzz of campaign contributions, they’ll turn into junkies with ordinary Americans footing the bill.

A bailout is a perverse transfer from poor taxpayers to rich taxpayers. America’s Founding Fathers surely never envisaged that the federal government would take money from one group of Americans and give it to another group. Yet much of the federal budget is devoted to redistribution programs.

Bailouts are a particularly bizarre form of redistribution, however, because the corporate bureaucrats at the Big Three are among the very richest Americans. The UAW bosses make extravagant salaries, as well, and even regular union workers make an average of approximately $70 per hour, far higher than the average American.

The government should not be in the business of giving unearned wealth to any group of citizens, but surely liberals and conservatives both can agree that politicians should not be taking money from middle class taxpayers and giving it to upper-middle class and rich taxpayers.

Advocates oftentimes admit that bailouts are not good policy, but they invariably argue that short-term considerations should trump long-term sensible policy. Their biggest assertion is that a bailout is necessary to prevent bankruptcy, and that avoiding this result is critical to prevent catastrophe.

But Chapter 11 protection may be precisely what is needed to put American auto companies back on the path to profitability. Bankruptcy laws specifically are designed to give companies an opportunity – under court supervision – to reduce costs and streamline operations.

Bankruptcy would not be popular in some quarters, to be sure. The bloated management structure would be streamlined and many overpaid executives would be unhappy about having to find new jobs.

The UAW would be equally upset, particularly since bankruptcy might force an end to extravagant pension benefits and inefficient workplace practices. But bankruptcy is akin to getting an alcoholic to put down the bottle. There clearly will be short-term discomfort, but compassionate people recognize that this is the best approach.

America is on a dangerous path. The Wall Street bailout was a mistake. It transferred a huge amount of money from the productive sector of the economy to the government, and also exacerbated “moral hazard” by rewarding companies and executives who made dumb decisions. But this may be the tip of the iceberg.

A bailout of U.S.-headquartered auto companies also would be a mistake, as would bailouts of homeowners or any other constituency. If politicians genuinely want to help the economy, they should focus on reducing the burden of government, not increasing it.

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 Mount McKinley, Alaska, USA (upload.wikimedia.org)