car7858's Blog

Wednesday, November 12, 2008

Philosophically, I don't like bailouts. But the likelihood of one or two of the Detroit Three automakers ending operations is very real. When you look at the scope of the domestic auto industry problems and the complicity of the federal government's role in them, Washington needs to do something to help the Detroit Three.

To permit any of the domestic automakers -- Chrysler, Ford Motor Co. or General Motors Corp. -- to collapse would scar the U.S. economy further when it can ill afford another blow. At stake are millions of jobs and tens of billions of dollars in lost tax revenues. Federal officials must decide: Is an ounce of prevention worth a pound of cure?

The popular complaint is that the domestic auto industry got itself into this mess, and it should suffer the consequences. But the reality is the Detroit Three wouldn't have cash flow problems if the federal government hadn't caused the financial crisis, in part, by ensuring that Americans who couldn't afford a home suddenly could buy one. The resulting subprime mortgage crisis helped lead to the credit crunch, which has caused a dramatic decline in auto sales.

The federal government also contributed to the auto industry's problems with its lack of a realistic energy policy. The price of this hit home this summer, when the price of gasoline spiked to $4 a gallon and caused a massive shift in the types of vehicles consumers would buy. Now that the price of gas is below $2 in some areas of the country, there will be far less demand in the short run for the fuel-efficient vehicles that the government wants the automakers to sell in greater quantities.

So the government's complicity in the subprime mortgage mess and energy policy have brought the industry to the edge of the cliff. The cost of keeping the Detroit Three automakers in the automotive game will be dramatically lower than the cost of letting the industry go down.

If GM, Ford and Chrysler had to shut their doors, according to our center's calculations, the economy would lose nearly 3 million jobs in the first year. That is because the auto industry has the highest jobs spinoff of any manufacturing enterprise. For example, for every auto assembly factory job, there are another eight to 10 jobs outside of the plant.

Those job losses would translate into a first-year loss of more than $150 billion in personal income, about $25 billion in loss personal income tax revenue and another $21 billion in Social Security receipts.

If one of the automakers went down, it still would result in the loss of nearly 2.5 million jobs. That's because the closing of an automaker would have a ripple effect on its tightly knit supplier base. Severely fragile parts makers would be pushed into bankruptcy, causing an interruption in the supply of components to the remaining carmakers. The job losses would be less in the following two years, but the damage would have been done.

It still would result in the loss of $125 billion in personal income in one year and $276 billion over three years along with tens of billions of dollars in lost tax revenue.

Clearly, the price of helping the Detroit Three with a $25 billion bailout would be far less than paying the unemployment benefits of auto workers and suffering the lost revenues from the shutdown of an automaker and suppliers.

Critics have said it would be better to let the automakers file for bankruptcy and get their financial houses in order. The problem with this approach is that industry experts know that consumers won't buy expensive products from a bankrupt company. That still leads to serious decline in sales and to 2 million lost jobs very quickly.

Keeping GM, Ford and Chrysler in the automotive game potentially could have a big payoff. The domestic carmakers have negotiated signficiant cost reductions in their labor contracts with the United Auto Workers. The savings alone for GM is $1,000 a vehicle.

In addition, the very low level of current sales and surprisingly low inventory of vehicles are creating a pent-up demand for new vehicles once the credit crunch subsides and the economy improves. The market promises to shift from the buyers' market of the past decade to a sellers' market where fewer financial incentives or discounts will be needed to sell a vehicle with the industry's reduced manufacturing capacity.

GM currently spends $3,500 to $4,000 a vehicle on incentives. If that number were cut to $2,000, it would translate into an immediate $10 billion improvement on the bottom line. Couple that with the fact that the automakers have improved the quality of their products, and the industry is poised for a significant recovery.

But the government needs to give the Detroit Three a bridge to this brighter future. A bridge loan now would be far less expensive than letting one or more of the domestic automakers fail.

David E. Cole is chairman of the Center for Automotive Research in Ann Arbor.  

Tuesday, November 11, 2008

There should be no question left that the federal government must step in to provide the domestic automakers with the cash they need to survive this economic downturn. Last week's dismal third quarter reports make it clear that General Motors Corp. and Ford Motor Co. are moving steadily toward bankruptcy. Privately held Chrysler is believed to be posting losses just as severe.

Congress has already approved $25 billion in loans to help the automakers meet federally mandated fuel economy standards. That money should be released immediately by the Bush administration.

But it won't be enough. An additional $25 billion loan package is proposed, is supported by President-elect Barack Obama and the congressional leadership and should be moved through Congress in the upcoming lame-duck session.

While backing the second lending proposal, both Obama and House Speaker Nancy Pelosi, D-Calif., have said it should come with strict "conditions" rather than in the form of straight loans the automakers could use as they see fit to save their businesses.

It is unreasonable for the automakers to expect that the government not put some restrictions on the use of the money. But if the bailout comes with too many strings attached, it could just easily strangle the companies as rescue them.

The Big Three will likely have to expect some limits on executive pay and bonuses. That's inevitable. The companies can't expect to lavishly reward executives while they are on the public dole, although the government must be mindful of the need to attract, retain and reward top talent.

Other restrictions would be more worrisome. Obama and Pelosi have both said the aid package should be conditioned on the automakers building more fuel-efficient vehicles. All three have already adopted aggressive strategies for doing that. But they are not helped in that goal by sharply falling gasoline prices. They need to sell more vehicles and quickly. Forcing them to build products not yet supported by the market will not get them through this crisis. The automakers ought to be allowed to stick to the timetable they agreed upon last fall when new fuel economy standards were adopted by Congress and not be burdened by additional mandates.

The automakers must also worry about interference by the government in production and employment decisions. The manufacturers have too much capacity and may need to shutter as many as 10 assembly plants and lay off an additional 30,000 blue-collar workers.

How will the new Democratic administration and the Democratic-controlled Congress react to federal money going to companies that lay off members of the United Auto Workers union, a major Democratic sponsor?

And yet without the flexibility to reduce capacity and work force, and perhaps even to move more of their operations out of the country, the manufacturers will remain at a competitive disadvantage.

Finally, the government may ask for preferred shares in the automakers, giving taxpayers an advantage over regular shareholders if the companies go into bankruptcy. That possibility was reflected in another sharp drop in automotive stocks Monday.

For decades, the automakers have fought to keep the government out of their business. Now, their survival seems to depend on inviting the government in as a full partner.

Untangling the relationship may be more difficult than simply paying back some federal loans.

Car7858's Note: As some may notice, I switched the wording/title of this editorial in my main post title only. It is not any intention of mine to change the editorial nor discredit the source. Thank You.

Tuesday, November 11, 2008

Gov. Jennifer Granholm has been drinking the "green jobs" Kool-aid, recently announcing that she is creating an energy department and naming an energy czar to pursue "alternative" energy and "create thousands of jobs." Yet in these times of economic distress, the governor's priorities are misplaced.

Environmental protection comes at a price -- after all, someone has to pay to keep air and water clean. However, politicians like Granholm claim that clever government policies can result in environmental protections that simultaneously grow the economy.

If something sounds too good to be true, it is. Environmental protection still comes at a price, and Granholm's green jobs initiative threatens Michigan's ailing economy.

The governor claims that "progressive policies that encourage renewable energy development" would boost Michigan's green economy. And she's partly right: Regulations that force green energy on consumers and producers would boost business for politically favored alternative energy companies, such as manufacturers of wind turbines and solar panels. Increased demand, in turn, would create jobs at these green companies.

But at the same time, businesses that supply or use large amounts of conventional energy -- such as traditional manufacturers -- would face decreased demand for their products and would therefore lose employees. Indeed, more jobs would be lost at these firms than would be "created" at the environmentally correct ones. Granholm's "progressive" energy policy might create a net gain for Michigan's green economic sector, but it would create a net loss for the economy.

Granholm promises that Michigan will "celebrate job announcements," if it "continues to provide workers with the training they need" in environmentally friendly services. Again, she is partly right: Government can create green jobs by spending taxpayer money on training people to install light bulbs and solar panels so that consumers can meet energy efficiency regulations.

What the governor really wants is for the state government to pick winners and losers in Michigan's energy market. This will not yield efficient outcomes. Taxpayer money spent on creating "green jobs" comes out of the market economy, which otherwise would have allocated those resources more efficiently to produce goods and services that consumers actually want. Government pushing "green" goods and services on consumers carries a direct cost, which can be measured in taxpayer dollars, as well as an indirect cost, in forgone economic productivity.

Finally, Granholm argues that Michigan must "expand the funding available for research and development" in environmentally friendly energy technologies in order to capitalize on the green economic revolution.

Again, she is mistaken, because government has never been good at choosing the most promising emerging technologies. Government is run by bureaucrats and regulators, not venture capitalists. That's why the federal government has wasted so much money in the past on failed energy initiatives, like hydrogen fuel cells and synfuels.

Rather than produce a clean energy technology breakthrough, Granholm's clean energy initiative is more likely to become a pork barrel fund for Michigan legislators to have at their disposal to reward constituent schools and companies.

Tuesday night's presidential debate perpetuated the myth that not having health insurance equates to not having health care, or at least not having quality health care.

But a new study from the moderate Brookings Institute offers proof to the contrary.

Brookings looked at per-capita health care spending for all Americans and found that there is almost no difference in the amount spent on the poorest Americans and the amount spent on the richest.

For the poorest 20 percent of Americans, per-capita health care spending was $4,477 in 2003; for the richest, it was $4,451. The middle categories were in that same dollar range.

Medicaid and other programs for the poor, as well as unreimbursed care provided by hospitals and out-of-pocket spending by the poor themselves kept pace with the insurance coverage of upper income Americans.

There may be more efficient ways of providing health care to the poor, but the argument can't be made that they aren't getting care.

As the country decides how close it wants to move toward a nationalized health care system, it ought to at least deal with the facts and not the mythology fostered by political campaigns.

In terms of expenditures on health care, the poor are no worse off in America than the rich. Acknowledging that fact might lead to a more rational discussion of what health care should look like in this country.

President-elect Barack Obama has invited Michigan Gov. Jennifer Granholm to be part of his economic advisory team as he prepares for the White House.

And it seems he is already adopting her playbook.

A top Obama advisor warned today that the change Americans thought they were voting for Tuesday may not come for a long time because, in his words, President George W. Bush is leaving behind such a mess.

Granholm must be his ghost writer. She spent her entire first term blaming her predecessor, former Gov. John Engler, for her inability to come up with any answers to Michigan's economic free-fall.

When state residents wearied of that excuse, she switched in her second term to blaming Bush for her paralysis in the face of disaster.

There's much Obama can learn from Granholm about dodging responsibility for not delivering on campaign promises to make things better.

Perhaps she can convince him to lead off his innaugural address with her now famous vow, "in five years, you'll be blown away. 

 Posted by Nolan Finley, Detroit News, 11/06/2008

If you were President, what would your plan for economic recovery be? More specifically which issue would you tackle first & foremost?

Inflate tires instead of offshore drilling???

Sunday, November 2, 2008

Supreme Court Chief Justice John Marshall said it all in one sentence: "The power to tax is the power to destroy."

It is not the money that is taxed away that is destroyed. What is destroyed is the wealth that does not get produced in the first place, because high taxes make its production not worthwhile.

Those who are receptive to Barack Obama's plan to increase taxes on "the rich" seem not to understand that the issue is the nation's loss of wealth. Today, wealth can leave the country when heavy taxes threaten it-- instantly, in an age of electronic financial transfers-- and create jobs and economic growth overseas, instead of at home.

The two months between the time of a presidential election and the time when the new president takes office is an eternity in terms of how much money can be transferred out of the country electronically before any new high-tax laws can be enacted.

Like so much that is said glibly by Barack Obama, raising taxes on "the rich" has serious-- and potentially disastrous-- implications for the whole country that have been ignored amid the political euphoria.

Moreover, like so much that is proposed under the magic mantra of "change," it is something that has been tried before in many countries and failed before in many countries.

Much wealth from Third World countries flows out to richer countries like Switzerland or the United States, where it is safer from confiscation. Jack up the capital gains tax rate in the United States and more Americans can be expected to send their capital elsewhere.

That means sending jobs elsewhere, so that even people with no capital to invest lose employment opportunities.

Economists have trouble determining how many people are affected by a tax increase because those affected extend far beyond those who write the checks to pay the government.

Taxes on businesses can get passed along to consumers, in whole or in part, even though it is only the business that writes the check to the government.

Payroll taxes or government-mandated employee benefits may be paid for directly by the employer, but these costs reduce the value of an employee to the employer. If these costs add up to $10,000, for example, employers bidding for labor may bid $10,000 less in salary than they would have otherwise.

As in other cases, who writes the checks does not tell you who really pays the costs, since the worker is now $10,000 worse off. The idea that you can single out one segment of society to be taxed or mandated, for the benefit of the rest of society, is reminiscent of a San Francisco automobile dealer's sign: "We cheat the other guy and pass the savings on to you."

The economy is not a zero-sum game where someone gains what others lose. The whole economy can lose when ill-considered policies gain political popularity and stifle economic growth.

People who do not own a single share of corporate stock can still lose big time when capital gains taxes are raised-- not only because jobs can follow capital out of the country, but also because millions of working people's pension plans own corporate stock, and those people's retirement incomes will depend on the value of those stocks, which is reduced by capital gains taxes.

One of the biggest taxes is one that is not even called a tax -- inflation. When the government spends money that it creates, it is transferring part of the value of your money to themselves. It is quiet taxation but often heavy taxation, falling on everyone, no matter how low their incomes might be.

By the end of the 20th century, a $100 bill would not buy as much as a $20 bill would buy in the middle of that century. For people who saved cash, inflation amounted to an 80 percent tax. For others, it was an 80 percent tax minus whatever cumulative interest or dividends they received on the money they invested.

Given the staggering cost of the government's financial bailouts, there is no way that Barack Obama's grandiose spending plans can be carried out without inflation.

When politicians start talking about taxing "the rich," remember the old saying: "Send not to know for whom the bell tolls. It tolls for thee."

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His column is distributed by Creators Syndicate, 5777 W. Century, Suite 700, Los Angeles, CA 90045. His column is published Thursday in the newspaper and Sunday online at detnews.com. 

Sunday, November 2, 2008

With victory in sight, Barack Obama's supporters are predicting that he will give us a new New Deal. To see what that might mean, let's look back on the original New Deal.

The purpose of New Deal legislation was not, as commonly thought, to restore economic growth but rather to freeze the economy in place at a time when it seemed locked in a downward spiral. Its central program, the National Recovery Administration (NRA), created 700 industry councils for firms and unions to set minimum prices and wages. The Agricultural Adjustment Act (AAA), the ancestor of our farm bills, limited production to hold up prices. Unionization, encouraged by NRA and the 1935 Wagner Act, was meant to keep workers in jobs that the unemployed would have taken at lower pay.

These policies did break the downward spiral. But, as Amity Shlaes points out in "The Forgotten Man," they failed to restore growth. Double-digit unemployment continued throughout the 1930s; despite population growth, the economy failed to rebound to 1920s production levels. High taxes on high earners (a Herbert Hoover as well as Franklin Roosevelt policy) financed welfare payments ("spread the wealth around") but reduced investment and growth.

The political verdict was negative. New Dealers were whalloped in the 1938 off-year elections. Polls show that Democrats would have lost the White House in 1940 if that election had been decided on domestic issues. But war loomed. France fell in June 1940, just before America's two national party conventions, and Adolf Hitler and his then-ally Joseph Stalin controlled most of the landmass of Eurasia. Republicans did not have an experienced leader in this world crisis -- Democrats did: Franklin Roosevelt, who cynically engineered his nomination for a third term and then swept to victory on foreign policy.

Roosevelt had thought that economic expansion was a thing of the past. But World War II stimulated huge growth in the American economy. New Deal welfare programs like the Civilian Conservation Corps and the Works Progress Administration (WPA) arts program were terminated. Wartime domestic policies were growth stimulators. Veterans Administration home mortgage loans, building on the FHA mortgage program, encouraged home-buying and after the war converted a nation of renters to a nation of homeowners. The G.I. Bill of Rights subsidized higher education for millions of veterans. These programs stimulated growth partly because they required real effort -- down payments, military service -- from beneficiaries before they received aid.

The postwar Republican Congress elected in 1946 dismantled some New Deal anti-growth policies. Labor unions' powers to strike were sharply restricted. Tax rates were lowered, and wage and price controls were dismantled. Many hold-the-economy-in-place policies were retained until the deregulation of the 1970s and 1980s. But the New Deal was transformed sufficiently to permit buoyant economic growth for two decades after the war.

Obama seems determined to follow policies better suited to freezing the economy in place than to promoting economic growth. Higher taxes on high earners, for one. He told Charlie Gibson he would raise capital gains taxes even if that reduced revenue: less wealth to spread around, but at least the rich wouldn't have it -- reminiscent of the Puritan sumptuary laws that prohibited the wearing of silk. Moves toward protectionism like Hoover's (Roosevelt had the good sense to promote free trade). National health insurance that threatens to lead to rationing and to stifle innovation. Promoting unionization by abolishing secret ballot union elections.

The impulse to social engineering is unmistakable. Government officials will allocate resources, redistribute income, and ration good and services. Use government stakes in banks, insurance companies and Detroit auto manufacturers to maintain the position of those already in place, at the cost of preventing the emergence of new enterprises that might have been spawned by the capital being allocated.

Social engineering of course is far easier when you are dealing with an economy that is frozen in place. It's harder when you have to deal with the creative destruction, the emergence of new firms and businesses, and the decline of old ones, which as Joseph Schumpeter taught is the inevitable consequence of economic growth.

Roosevelt in the 1930s had some extremely competent social engineers, like Harry Hopkins, Harold Ickes and Fiorello LaGuardia, who could enroll 750,000 people on welfare in three weeks and build an airport in less than a year. But even they could not spur the economic growth produced by utterly unknown and unconnected people, as Warren Buffett and Bill Gates were in 1970.

When financial crisis looms, there is an impulse to freeze everything in place and accept what is as the best there can ever be: Barack Obama's new New Deal. The history of the old New Deal suggests this is not a sustainable approach in the long run.

Michael Barone is a senior writer for U.S. News & World Report. His column is distributed by Creators Syndicate, 5777 W. Century,Suite 700, Los Angeles, CA 90045.

Sunday, October 26, 2008

What will an Obama administration and a Congress with increased Democratic majorities do? That's a relevant question, given the Democrats' leads in the polls. And it's a little hard to answer, given the financial crisis that has been raging and the recession that seems to be ahead.

One thing they will certainly do is raise taxes on high earners. The Bush tax cuts are scheduled to expire in 2010, and congressional Democrats will gleefully allow the top rates to rise. Left-leaning Democrats, like Barack Obama himself, want to "spread the wealth around," as the candidate told Joe the Plumber in October. Blue Dog Democrats want to reduce the budget deficit and will welcome the additional revenue that the Congressional Budget Office's static-analysis models will promise. Raising taxes when the economy is weakening is not the medicine prescribed by Keynesian economics, and it is probably not what Obama's economic advisers would prescribe if they were starting from scratch today. It is what Herbert Hoover and Congress did in the early 1930s, and it helped to produce the Great Depression. But it is baked into the pie.

So is a slide toward trade protectionism. The breakdown of the Doha Round and House Speaker Nancy Pelosi's refusal to bring the Colombia Free Trade Agreement to a vote mean that both multilateral and bilateral trade liberalism channels are clogged. Obama may or may not try to renegotiate the North American Free Trade Agreement as both Canada and Mexico have center-right governments satisfied with current arrangements. But the trend will be toward less free trade.

The prospects are cloudier for two other issues on which Obama has made big promises. Much of the next Congress's time and psychic energy will be taken up with refashioning financial regulation -- a subject of considerable difficulty. And the looming recession will make it politically risky for Democrats to push big spending programs.

This means that Congress in the next two years may not pass Obama's national health insurance plan. The weakening economy and the enraged reaction earlier this year to $4-a-gallon gasoline also make it less likely that Congress will pass carbon reduction legislation -- certainly not a carbon tax and probably not a cap-and-trade system.

Regional impact. In any case, health insurance and carbon reduction will be heavily lobbied, despite all the denunciations of lobbyists issued by Obama (and John McCain). Any one-size-fits-all healthcare bill affects various regions differently, because we have many healthcare delivery and finance systems across the country. The same goes for carbon reduction legislation, as the economies of some regions depend more heavily on coal than do others; it may be hard to convince voters there that we have to impose burdens on them today to achieve promised benefits in 2050. These disparities cut across party lines and helped defeat the Clinton healthcare proposals in 1994. They will probably come into play again if far-ranging bills are pressed forward.

Two issues pushed by Democrats in this Congress have no budgetary costs. One is the "fairness doctrine," which is intended to shut down talk radio, the one communications medium in which conservative voices are dominant. The other is the so-called card check bill, which requires employers to bargain with unions when their organizers secure signatures on cards from a majority of employees; secret-ballot unionization elections, required now, would be a thing of the past. The aim is to vastly increase union membership, pumping money into a Democratic pressure group.

What might happen in the unlikely event McCain is elected and faces a Democratic Congress? Presumably he would try to hold tax rates down, but to do so he might have to embrace the kind of bipartisan tax reform enacted in 1986, with low rates and fewer preferences. Democrats might be willing to bargain if they could get rid of the alternative minimum tax, which threatens their core constituencies. McCain's plan to end the tax preference for employer-provided health insurance could be the basis of compromise with a similar plan advanced by Democratic Sen. Ron Wyden that has bipartisan support. McCain might also seek a bipartisan carbon reduction bill.

Much depends, whoever wins, on whether Democrats elect enough senators to overcome filibusters. Even more may ride on the course of the economy and the depth of the recession, which could scotch either candidate's proposals.

Michael Barone is a senior writer for U.S. News & World Report. His column is distributed by Creators Syndicate, 5777 W. Century, Suite 700, Los Angeles, CA 90045.