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12 Responses to “An image for 2010”

1. J Murray Says:
   November 14th, 2008 at 2:36 pm

   The real–and only–issue here is whether the taxpayers are going to be forced by Congressional action to subsidize uneconomic union pay rates and benefits. It’s not about saving Detroit or auto makers or anything else.

   Republicans are right on this issue in two ways:

   1. They should not allow themselves to be manuevered by Democrats into being shills for a UAW rescue. If Democrats want to engender such a rescue, they should stand up, speak for it, and be accountable, rather than trying to sneak it through under President Bush so that when it doesn’t work (and it can’t) they can blame Republicans and him yet again for something he tried to do to accommodate them.
   2. No amount of money poured into Detroit will solve the structural problem of the U.S. auto industry, which is that the Big (soon to be Little) Three are actually owned by UAW pensioners.

   There are as many auto industry jobs in the U.S. today as there were in the 1970’s. This is a remarkable fact, given the productivity gains that have swept American industry in that time. The auto industry jobs that have been created in the last three decades, however, are in right-to-work states in the South, where Toyota, Honda, Kia, BMW, and other foreign companies have set up shop. Jobs are fleeing union-friendly Michigan and UAW contracts.

   The rescue being discussed is, plain and simple, political payback to unions for helping Democrats get elected. Allocation of resources by political fancy is the wrong way to make economic decisions. It distorts resource allocation, increases the importance of lobbying and special interests, and replaces market decisions with political decisions.

   The emerging problem in Detroit has been as plain as day for 30 years. Unfortunately, nobody had the courage to tackle it, and the day or reckoning is upon us. The U.S. auto industry is in a similar place to where the U.S. financial services industry has recently gotten, which is a pattern neatly described by Nassim Nicholas Taleb in his series of books. His newest writings on this subject can be found by Googling his name and the term “Fourth Quadrant.”

   No, Ed, this is one the Republicans have right.

2. Ed Morrison Says:
   November 14th, 2008 at 2:55 pm

   Time will tell, Jonathan. Time will tell.

   I agree with your core point. The fundamental problem is that Detroit had been operating with a flawed business model.

   (As I have said in these pages before, I was part of the first consulting team to be allowed into a Japanese auto factory to do extensive production cost studies in 1983. I spent three weeks in Mazda factories in Hiroshima and twice that time in Ford factories in Ohio and Michigan. I am well aware of the differences.

   Union compensation account for about 30% to 40% of the cost problem. Union work rules contribute to inflexibility and reduce flexibility. It is also true that the design/build cycles for US automakers is relatively slow, the management structures are rigid and costly, and the product quality problems persist as a function of everything else.)

   With Detroit, the government is now is a strong position to accelerate change through aggressive concessions from both companies and the union: The Chrysler bailout on steroids.

   The political reality, of course, is stark when you compare the $700 billion sent to bail-out for irresponsible bankers on Wall Street and the failure of the GOP to support adjustment for manufacturing in the Midwest.

   The GOP is now largely a regional party. With headlines like this one, look for it to shrink yet again.

3. J Murray Says:
   November 14th, 2008 at 3:07 pm

   Ed, I think a proposal to restructure Detroit auto makers–including the cancellation of UAW contracts and their replacement with competitive pay and benefit rates–would receive significant Republican support.

   As to the future of the Republican Party, I would be more cautious than you are. Barack Obama received 40,000 FEWER votes in Ohio than did John Kerry. His election was largely a function of increased turnout and high support among minorities. His coattails were not big enough to carry big changes in either house of Congress, to deliver any Democratic governorships, or to change state house/senate demographics.

   Time will tell.

4. Ed Morrison Says:
   November 14th, 2008 at 3:14 pm

   J:

   I’m not sure I made myself clear.

   I have been a strong opponent of the UAW’s policies for twenty+ years.

   (In 1975, as a young legislative assistant for a member of the House Ways and Means Committee, I developed a graduated excise tax for automobiles based on their fuel economy: a market-based solution to pressing for more efficient automobiles. Management and the UAW preferred a regulatory “fleetwide average fuel economy” strategy…a policy they could more readily control.)

   I support negotiating major concessions from both the union and management as part of a bailout. The bankruptcy alternative creates enormous social costs (which will be concentrated in the Midwest.)

   But if the parties are unwilling to structure a strong deal, then I agree with you. Reorganize through bankruptcy court.

   Throwing money at Detroit without fundamental changes in their business model only postpones the final reckoning.

5. Ed Morrison Says:
   November 14th, 2008 at 3:23 pm

   Politics is a game of perceptions.

   If moderate Republicans stepped forward to spearhead a deal with Detroit, the party would benefit enormously.

   But party leaders are still playing to the base…which is narrow, ideological, and shrill.

   As for Obama getting 40,000 votes less than Kerry, I’d say he did as well as Kerry and effectively wiped out the Bradley effect (5-6%). A remarkable achievement.

   Whether these gains hold, of course, depends on how well he governs.

6. J Murray Says:
   November 14th, 2008 at 7:32 pm

   Ed, my point was that there were no “gains”–certainly not in Ohio. The Democrats held even and the Republicans lost ground. This was both due to their ticket–the base was unenthusiastic about McCain and Palin was anathema to independents–and to their get-out-the-vote efforts.

   Pundits who are pontificating a permanent shift are not reading the numbers right.

7. Ed Morrison Says:
   November 15th, 2008 at 7:35 am

   My point: Republicans are disconnecting from reality.

   Or, as the Economist puts it, the Republicans have become “the stupid party”.

   http://snurl.com/5itx9 (Thanks to Valdis for his tweet.)

8. Ed Morrison Says:
   November 15th, 2008 at 2:22 pm

   More from the Economist on why bankruptcy for the automakers might not work:

   However, there is considerable scepticism both within the industry and among analysts as to whether Chapter 11 is a way forward for GM and Ford (though it may, some concede, be more appropriate for Chrysler). Mr Cole says that “it would kill them in the market”. The fear is that rather than give the firms a breathing space in which they could complete the restructuring of their operations and extract further concessions from the union, Chapter 11 would set off a downward spiral….

   A further reason why Chapter 11 might not work for the carmakers, says Mark Oline, an analyst at Fitch Ratings, is that they have very little scope for further cost-cutting. “They’re not being crushed by wage and benefit costs—it’s about revenue and products now,” he says. Bankruptcy would do nothing to speed up the introduction of vital new models….

   Mr Cole’s firm has modelled a scenario in which Detroit’s production falls by 50%. He estimates that in the first year that would cost 2.5m jobs: 240,000 from the carmakers themselves; 795,000 from suppliers and 1.4m from other firms indirectly affected. The cost in transfer payments and lost taxes would exceed $100 billion over three years…

   http://snurl.com/5jl4z

9. J Murray Says:
   November 15th, 2008 at 3:30 pm

   Among the Brits, I prefer what Gordon Brown had to say in today’s London Times:

   “Mr Brown was already risking confrontation with the President-elect in barely coded criticism of a planned measure to bail out America’s ailing carmakers, a plan Mr Obama supports. “I do think it is really important that we send out a signal today that protectionism would be the road to ruin,” the Prime Minister said, in a speech to the Council of Foreign Relations in New York.

   “If we get into a situation where countries made decisions irrespective of what happened anywhere else, then we will see the same problems of other times. The dividing line here is between an open society capable of trading round the world, against a protectionist response that happened in the 1930s and is totally unacceptable.”

   The EU said that it was ready to take action against the US at the World Trade Organisation if aid for the stricken US car industry was judged by the European Commission as illegal under international rules. The US Congress approved a $25 billion (£17 billion) aid package for American carmakers in September, although no timetable was fixed for payments to be made.”

   For all of those who loved using analogies between the current economy and the Great Depression before the election as a way to get Obama elected and Congress in firmer control of Congress, be careful what you wish for; here it comes.

10. J Murray Says:
    November 15th, 2008 at 3:32 pm

    That’s “Democrats in firmer control of Congress,” sorry.

11. Ed Morrison Says:
    November 15th, 2008 at 11:53 pm

    Jonathan:

    It’s hard to imagine a worse mess.

    (Bush’s sentiment in the NYT: “Mr. Bush said his administration had thoroughly briefed the president-elect about this process, and that he wished Mr. Obama the best in confronting the economic problems.” http://snurl.com/5knzo)

    Of course, it could happen that Obama reverts to Hooverian policies, but I do not see it.

    (In 1930, Congress passed and President Hoover signed into law the Smoot-Hawley Tariff Act, a protectionist measure vigorously opposed by the nation’s top economists.)

    My sense is that Obama will adopt a more pragmatic, inductive policy stance. He will think big, like Brown has been doing on his proposals to reform regulation of international capital markets.

    At the same time, Brown faces some counter pressures that might end up deflating his rhetoric about a US auto rescue.

    http://snurl.com/5kp5d

    My sense is that we are heading for a “Muddle Through” recovery: a slow and prolonged recovery, as markets work though the bursting of the twin bubbles of the housing markets and the credit markets.

    Your fears of Democratic protectionism, I think, are overblown.

12. J Murray Says:
    November 16th, 2008 at 3:09 pm

    The problem Obama faces, however, is that he is so beholden to labor unions, and they are so invested in maintaining the Big Three as they are, that he is painted into a corner. There is a reason that he would like to see this issue addressed while Bush is still president. There is no way to restructure Detroit without abrogating the uneconomic UAW contracts that have played such a large part in driving U.S. auto companies into the ground.

    Obama is also exceedingly beholden to the environmental lobby, which through CAFE standards and other Green religious tenets has contributed mightily to the public policy failures at the root of Detroit’s ills. The U.S. auto industry cannot make small, fuel-efficient cars profitably at UAW factories. Cars they import from overseas, where they can make small, fuel-efficient cars profitably, do not count for CAFE purposes.

    The goals of the UAW and the environmental lobby do not intersect. It will be interesting to see how Obama handles this. I do not think he is going to get the help he wants from President Bush.