Really. In this New York Times article, Mitt says no to the proposed bailout. He’s right, of course. Any bailout now is like putting a bandaid on a chest wound.
Instead, I say let the auto industry suffer from its poor management decisions over the last three decades. Yes, it will mean the loss of probably three million jobs and huge pension obligations in the short term. But as this highly pessimistic study shows, by 2011 most of the people who lose their jobs will find employment elsewhere. That’s the way the market works.
A bailout for Detroit will only keep in place an unsustainable cost structure, as Mitt indicates in the attached.
I’m of the belief that under normal circumstances, letting the big three fall to bankruptcy is the right thing to do. But these are not normal circumstances. Under normal circumstances, other industries and sectors could provide jobs for most of those who would lose under a Big Three failure, but currently no sector of the economy is doing well enough to absorb those losses.
This is what happened in the early 30s. Republicans believed the best solution was to let the market play out. Let businesses fail and somehow, magically, they would get back up again. Of course that didn’t happen.
The solution I think works best is to help keep American automakers afloat with strict rules on restructuring. They’ve got to change while still employing their workers. What we need right now is the complete opposite of sending more workers out of work, which is what Mitt Romney wants to do. That puts even more pressure not just on the overall economy but also on local and state governments to assist the newly unemployed. They will in turn seek federal assistance, and you’re right back where you started except those same workers have no jobs.
Furthermore, Mr. Romney is wrong (and conservatives in general) to put the blame on American automobile companies failure on their workers. It isn’t the unionized workers that are undermining the sustainability of GM, Ford and Chrysler. It is the lack of innovation from management. They have simply not kept up with the times. You think that GM is unable to create a carbon copy of the Toyota Prius? It’s not that hard. You think it is really that hard to create vehicles that provide 45-50 miles per gallon? No it isn’t. GM, Ford and Chrysler simply chose not to create them. Their organizational culture is what ultimately defeated them. They chose to pursue the bigger vehicle, the larger, the gas guzzler. That was their identity. When I think of GM, that’s what first comes to mind. Look at Honda and Toyota. They’ve had a very consistent organizational culture to create fairly simple vehicles, focusing on making them more efficient, not bigger.
Don’t blame the worker when the manager failed.
Let me show you the power of unions
http://www.enquirer.com/editions/2004/05/18/biz_biz1toy.html
Yes, foreign companies, like Toyota, don’t have unionized employees. But they do so for a reason. They pay their employees equal or better to the union factories or face the threat that their workers would unionize.
So if Toyota pays its workers about the same as GM, it seems to me the real difference between Toyota and GM is not the amount they have to spend on their employees, is it?
So why does Toyota do better than GM? Why doesn’t Toyota have to burn through cash like GM does? It doesn’t seem to actually be its requirements to pay workers. Mayhap the reason is something else, like say, failure to innovate…
just sayin’
Toyota has an amazing operating system that has been copied by several major corporations. Employees are empowered to make changes and Toyota is constantly looking for ways to maximize their production line.
Bancruptcy would force the Big 3 to lean out and adopt some needed changes.
Yes, it will mean the loss of probably three million jobs
That phrase gives me the same feeling that I get just as my roller coaster car hits the top of that first peak at the beginning of the ride, and I look down and see the tracks recede into the distance…
I have to agree with Julie, it was hard to read the rest after the introduction.
Jjohnsen, I think you’re commenting on the wrong thread.
@Dan: It kinda sounds like you might not have actually read the original op-ed peice. What Romney is suggesting seems quite close to your suggestions. He’s advocating a *manged bankruptcy*, as opposed to “slam the doors shut and send everyone home.” He’s calling for radical changes in management, where many of the actual problems exists.
The radical restructuring of the union relationship to bring labor costs in line with the rest of the world is long overdue, though. There’s really no disputing Mitt’s $2,000 per car labor delta. Current pay is only a tiny part of the problem. The long-term benefits and pension cost burdens are breathtaking.
As one who has been intimately involved with the auto industry for most of my working career (including personally doing production engineering at both GM and Toyota), I’ve gotta say that Mitt (or Walter Reuther, actually) is spot on here when he said that “Getting more and more pay for less and less work is a dead-end street.” The age-old animosity and adversarialism between labor and management needs to end before the US can be competitive again, and a managed banruptcy could go a long way toward getting there.
Turning companies around is Mitt’s bread and butter, of course. He has *lived* this turnaround many times already.
Whoa. Forgot the spell check there. My bad.
I thought Romney was fairly clear that the unions are not the only problem.
I also think it’s clear that the Big 3 tanking while Toyota et al are doing well is the market in action. So what will actually happen if Congress stays out of it and we let the market work (which the goverment most certainly did not do in the 1930s)?
Let’s go ahead and consider the extreme case in which all 3 Detroit automakers fail.
1. The supply of new cars will drop faster than the demand for them. Even if the 3 million (or however many) newly-unemployed people aren’t buying new cars, that’s only 1% of the US population. This, alone, will cause the price of new cars to rise relative to other consumer prices. As consumers detect this trend, it will lead many to buy now rather than later (when prices will be higher).
2. Obviously these purchases will be made from foreign automakers since they are all that’s left, thus the increased market share will amplify the effect. These two effects give the foreign automakers a large cash balance.
3. The foreign automakers will recognize the supply deficiencies and seek to increase production. One of the easiest ways to do that will be to use their cash balances to buy up Big 3 properties for cheap, retool them, and fill them with many of the former Big 3 employees who are willing to work outside of a union (this will be most of them, since in this scenario they have no other option).
4. Although the names on the paychecks may have changed, the industry survives, with a large portion of the very same people stlll working in it.
This is just one possible scenario, but it shows that even if all Big 3 workers are laid off it doesn’t automatically spell long-term doom for the economy, or even for the workers themselves. The principles of supply and demand and time-preference take care of the problems.
Taylor,
Where I disagree with Mitt is that the root of the problem is at GM’s and Ford’s and Chrysler’s organizational culture, not with its pension programs. The Big Three kept going for the bigger vehicle, the heavier vehicle, more horsepower, and more gas spent. Every time I see a commercial for a GM SUV proudly proclaiming that its vehicle can get 24 miles per gallon, I shake my head. They just don’t get it. And while it is true that Toyota also has an SUV that gets only 24 miles per gallon, they haven’t made that SUV its bread and butter. When you think GM, the truck is the thing. It is who they are.
While GM’s pension is a heavy burden for the company, it is not the root problem.
Dan,
You’re certainly right that vehicle planning departments need a major shakeup.
At the same time, until the recent run-up in gas prices, Americans (in droves) were still *buying* lots of trucks from Ford and GM… Any management folks that went to the shareholders with a plan to gut the company’s bread-and-butter highest-profit vehicles would have been shot on sight.
…hence Mitt’s call for new folks in management who are not beholden to quarterly earnings or short-term stock appreciation.
Can we at least agree that the labor/benefits/pension delta are a significant *part* of the problem? 😉
I gotta say, I still LOVE my gas-guzzling Chevy truck with its 6.0-liter engine and 10,000-pound towing capacity. Now that the price of gas is down to $1.75/gallon in Colorado, I can take it out of the garage again.
Taylor,
The problem with that argument is that there were plenty and plenty of warning signs that going down that path was not a good long term strategy, seeing that oil would become a scarcer commodity, higher priced. Your comment in jest about an executive being shot on sight for daring to raise the concern at GM is exactly the problem GM had, and, well still has. While GM and Ford were raking in the dough on large vehicles, that came at the cost of the long term. It won’t do them any good in 2009 when they are liquidated that they sold millions of trucks in 2005. I don’t know if an executive at Toyota would have been able to make a suggestion against the bread and butter, but it seems to me, based on the fact that Toyota has more ably handled this quandary, that they could, and not get shot on sight. That may be because they are based in Japan—fewer gun owners there. 😉
I do agree that the pension thing is a millstone around GM’s neck. I, personally, don’t see a way to take it off without causing significant damage to our overall economy.
From Marginal Revolution
Dan:
Isn’t the Chevy Volt, which seems pretty well thought out and forward thinking the argument against this view? It seems GM’s problem wasn’t planning for high oil or reforming but the fact the crisis got here a few years before they were ready.
Now Ford and worse yet Chrysler seem more reasonable to criticize here.
While I think the benefits for workers is a big problem there have been many reforms made there. Unfortunately once again those reforms came a bit late. Had the big 3 an other 2 years before this recession I think they’d be in a much better position.
But realistically the big problem was that they just don’t make cars people like.
Here’s one very serious problem with subsidizing the U.S. auto industry: it would be terrible for free trade.
http://online.wsj.com/article/SB122714450941743143.html
I hear China is looking to buy GM or Chrysler.
Clark,
Yes, the Volt is going in that direction. But look at how late it is. The Volt should have come out in 2002, not in 2009.
Geoff,
But what about the negative effect of the Big Three going bankrupt? Which negative is worse? Frankly, as an American, I worry more about the loss of American jobs than foreign investment.
If we were in rather normal times, letting the big three go bankrupt would make sense. But we’re in a severe recession. Right now, our economy needs money pumped IN, not more businesses failing. The more businesses that fail and go under, the worse our economy will be.
This just isn’t the time to listen to Mitt Romney.
http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/11/20/romney_takes_auto_industry_for_a_ride/
Joan Vennochi points out that Romney never mentioned back in the primaries when he competed against McCain in Michigan that bankruptcy was the way to go. In fact, he seemed to argue back then that he would protect the jobs of Michigan workers.
Once again, which Romney are we to listen to? The one jockeying himself for a 2012 run, or the one who jockeyed for a 2008 run?
Sorry for the third post, but I have to make one other point.
The current crisis began on September 15th (or 16th, I forget), when the Fed let Lehman Brothers go. Lehman Brothers had assets over $600 billion dollars. That’s bigger than the country of Argentina. Lehman Brothers filed for bankruptcy, and its pieces have been bought by Barclays. But the effect of Lehman Brothers was dramatic. The stock market tumbled about 30% or so since Lehman Brothers filed for bankruptcy. Other financial institutions were bought or merged in order not to fail themselves. Worse, Citigroup is looking very sickly right now and might collapse itself in the not to distant future.
Lehman Brothers’ collapse wasn’t a surprise. Anyone who was paying close attention knew that their demise was just a matter of time. It was still a terrible shock to the system.
GM, Ford and Chrysler’s demises are not a surprise either. Everyone knows that they are burning through their cash. It’s not a surprise. But when they actually have to file for bankruptcy, it will be a major shock to the system. Its negative impact might be even stronger than the collapse of Lehman Brothers.
What brought the United States (and the world) out of the Great Depression was the largest public works program in the history of the world—the mobilization of America in World War II. The amount of money the United States government pumped into the economy got it rolling once again.
This is what is needed right now. The United States government must pump all sorts of money into the system, far more than the $700 billion put in so far. Maybe up to $2 trillion dollars. Sadly our national debt will have to go up. But that’s what you have to do when the economy goes sour. Then when you get a surplus, that’s when you pay your debt down. That’s what Bush DIDN’T do. But that’s what you are supposed to do.
Dan: “What brought the United States (and the world) out of the Great Depression was the largest public works program in the history of the world—the mobilization of America in World War II. The amount of money the United States government pumped into the economy got it rolling once again.”
Are you conflating two separate things here?
FDR’s New Deal may have actually exacerbated the Great Depression. (See http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409.)
And America’s entry into WWII was what got the economy rolling again.
mondo,
No, FDR’s New Deal did not exacerbate the Great Depression. What exacerbated it was the shift back to trying to balance the budget. That pushed everything worse. FDR’s New Deal was a small attempt to pump money into the economy. What eventually did it was the mobilization for World War II. Name the two what you like, they are both exactly the same thing: governmental intrusion into the economy. In both cases, the government pumped money into the economy. The only problem with FDR’s New Deal was that it just wasn’t big enough. No one would have imagined that it required the amount of money that mobilized America to get the economy running again. So really, the only problem with FDR’s New Deal was that he simply wasn’t thinking big enough.
Dan, your point about Romney is a good one – although I think clearly the situation now is quite a bit different than in February. So I’m not sure it’s fair to call him out on this point.
Regarding FDR, I think a lot of people (including Krugman if I recall) argue that raising taxes was a huge mistake. (As it was for Hoover) The problem is that the New Deal efforts of pumping money were offset by tax hikes. The second complaint I believe is that some of the government work projects would have helped the economy more if it was the government hiring more companies rather than running it themselves.
But I agree the talking point by some of FDR extending the depression is more complex than it first appears. (At least from everything I’ve read – but I’m no economist)
I think the current recession changes things with the big three. On the other hand I think one has to wonder whether one is throwing good money after bad. Money without strings is probably unwise.
Clark,
I agree that strings should be attached (as it should have been with the $700 billion) to any bailout of the auto industry. I don’t think bankruptcy is the way to go for these companies. Not under the circumstances we face right now.
Dan, I have to take issue with two points you’ve made.
First, there was not “plenty of warning” that fuel prices would rise. The price of oil rose faster than anyone expected and surprisingly closed under $50/barrel just last week. Clearly there were outside forces at work that accelerated the energy crises that exacerbated the crisis.
The big three were working on producing smaller cars more gradually than expected, but even today SUV sales are up and expect to rise as fuel costs have fallen. Maybe they should have predicted the energy bubble, but these arguments about the scarcity of fuel won’t hold water for another 30-70 years.
Second the argument that Toyota pays their workers the same amount isn’t accurate because of legacy costs and completely ignores the quality issues deriving from the big 3’s inability to get rid of the least productive or lowest quality workers.
Everyone has the perception that American cars are less reliable than their Japanese competitors and design is only marginally responsible. Especially when you hear stories from GM plant workers that you should check what day of the week a car is assembled to avoid the lemon.
Oh and my history may be shaky, but my recollection is that there was little, if any, economic recovery in the 30’s and America really started to boom when we were making weapons for allies and ourselves. (Beware the industrial military complex)