Nationalizing Detroit? It's a Good Idea 29 comments
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A recent FT article discussing a study by the NY Federal Reserve that estimated that each job within NYC's financial industry was responsible for generating 2.5 additional jobs within the city, got me thinking about the number of jobs that are dependant on the American auto industry. I started to do some research on the subject and wasn’t to find anything tremendously concrete, I found numbers as low as two for specific communities and recall a range of 7-9 being thrown out during a NPR story a few year's back but wasn’t able to find it to confirm.
Still while a specific Wall St. job may carry a higher salary, it's quite possible that auto industry jobs may have a larger economic impact due to the large number of actors involved in producing, selling and maintaining a car, the fact auto industry layoffs occur in large bunches, and are indicative of economic problems (e.g. eroding demand) impacting the industry as a whole.
You don't need to be an economist to realize that a single automotive plan probably has more support staff and ancillary industries dependent on it, than your typical banking office, not to mention the fact that Wall St. layoffs aren't usually the result of the closing down an entire operation the way auto industry plant closings are.
Just think about it:
Eroding demand hurts sales at various dealerships around the country who are then forced to cut back on sales staff, repair staff, etc, less demand means less need for a particular plant, and closing that plant hurts parts manufacturers, the shipping companies that deliver parts, food services, grounds keeping, etc, etc.
You could very well have a situation where a specific community loses two jobs per job lost at the local plant, multiple jobs are lost elsewhere and the whole thing is reflective of job losses (say from dealership closings, demand erosion) that occurred prior to the plant needing to be closed in the first place.
It's also worth noting that the loss of a single job at a company like GM very likely has an adverse effect on people who may not lose their jobs, but may suffer a negative economic consequence just the same.
So maybe nine (albeit an unconfirmed anecdotal data point) isn't so ridiculous after all.
Detroit has on aggregate (based on the most recent data* I could find) of about 581k employees, which means that the potential for job loss (if Detroit crumbles) within the larger economy is anywhere from 1.1 million to as many as 4.5 million, in addition to the jobs lost at the actual automaker. As a result the baseline "job risk" is about 1.7 to 5+ million, and that doesn't take into account the people who would keep their jobs but suffer negative consequences, the jobs dependent on the additional jobs lost, etc, etc.
The job loss issue isn't one to be taken lightly, because at the end of the day these are some of the only people who are actually making money within the American auto industry.
I don't know about you but considering the magnitude of the risk (job loss), on top of the jobs, businesses, etc, that have already been lost (or stand to be lost in the future), I think the Government has to be looking at Detroit as a crisis on part with AIG, the Mortgage GSEs, etc. So while I hate to even write these words out, I think that at this point the Government has no choice but to step in and Nationalize Detroit.
When GM's only solution to their problems is desperate ploy to try and merge with Chrysler just to have access to their cash and credit lines, even though it will only exacerbate their medium to long-term problems of too many brands, too much debt, a bloated infrastructure, etc, etc, then you know the end is nigh for Detroit, especially when GM has to beg the Government for money to even pull the deal off in the first place.
The only solution is some combination of bankruptcy and nationalization that allows Detroit to get out from under its debts, continue to operate (and not cause massive damage to the American economy), while they find a way to cut down the bloat, produce better products and refashion themselves as competitive companies.
I would love it if there was another solution but at this point I just don't see one, the Government either has to step in and guarantee that these companies continue to operate for the good of the economy, or allow them to keep mucking around and delaying their inevitable doom.
I think that on an emotional level no one wants to suffer the Black eye to the American business psyche that would occur if Detroit was nationalized, I think that our national pride wants us to believe that Detroit will find a way.
But here is the thing: we simply cannot continue to allow these companies to crumble before our eyes based on hope and nationalism because the risks are just too great, especially in light of the current economic crisis.
Sources:
Employee Count Data from Yahoo Finance & Google Finance as of 10/29/2008.
The Financial Times: "Wall St faces up to 78,000 job losses" -- Daniel Pimlott, October 23, 2008.
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This article has 29 comments:
Otherwise, get out a dodge!
Can I have a bailout because I make trash that people don't want to buy!?
F, GM, and Chrysler need to die natural deaths. Their management and cost structures are incompatible with success. Nationalization would only shift their hundreds of billions of dollars in value destruction to the taxpayer. Meanwhile, the last behavior we need to be encouraging with tax money is the production of Hummers, Dodge Challengers, Ford Explorers, and V8 pickup trucks for commuters.
Had the govt. allowed Chrysler to die in '79, perhaps the other two wouldn't be in the position they are in now, with obsolete products, overpriced labor contracts, and a management structure determined only to prolong their own bonuses.
It would be cheaper to give all of these workers fat welfare checks than to give it to these companies. After all, GM is bleeding a BILLION dollars per month AFTER paying their workers. By pouring free money into the companies, you encourage them to keep bleeding.
These companies are borrowing money at 15-30% just to pay dividends. Utterly irresponsible. A taxpayer infusion of money would be the real "redistribution of wealth."
I as a TAXPAYER could end up paying my own RETIREE pension.
Product is not the issue. Their business model is ancient. They need to go into bankruptcy protection to come out a new and lean company moving forward.
GM will waste any money givin to them like the 170+ billion they have burned through already.
The function of a market economy, you will recall if you think back to high school, is to employ price signals to encourage the production of things people want or need and discourage the production of things they don't. In the long run, if price signals are clean, the economy will invest more in things that are more productive and less in things that are inefficient or produce things that are not desired.
In this context, it is clear that we have too many cars, too much capacity for making more cars, and that making, maintaining, and buying cars are not productive activities. Therefore what we need is fewer cars on the roads, less capacity for making new cars, and therefore fewer people working in the automotive industry as a whole. You bemoan the loss of jobs and subsequent personal and economic pain this would cause. I instead bemoan the trillions of dollars that have been squandered on automobiles over the past 6 decades and hold out great hope that this market collapse will eventually free up that capital to be invested in something more useful, something that makes America more competitive rather than draining away its wealth for the benefit of soccer moms who want another minivan and unionized line workers who are damned good at making cars but apparently won't be able to find work for years if their employers shut down.
Enough malinvestment. Housing and automobiles aren't productive. The market has spoken; heed its call. Shut this crap down and focus the money where it can actually do good.
PENSION.
DOESN'T IT ???
So, are the Asians simply smarter than us? Reading some of the USA bashing on the web, I am almost convinced they are. The chowder head that thinks GM is paying dividends is a good example.
No, the US government has to step up, like ALL other first world governments do, and create the conditions that will make us compedetive. I am not talking about protectionism, I am talking about an even playing field.
First, start with taxes. Toyota pays a THIRD of the taxes of GM compared to revenue. We go nuts over American companies moving headquarters overseas "to avoid their fair share of taxes" but we allow others to come in here in the name of free trade and do the same.
Second, look at currency. I would have thought that the business world would have lost its mind when the Bush administration refused to act on predetory currrency policy by China. Instead they made a snide comment about it being an "escuse" for poor performance.
Third, look at the protectionist policies of our "trading partners". I read a lot of ranting about Chevys made in Mexico, but there are a LOT of American made vehicles down there. How are we comming on getting ANY durable goods exports to japan, korea or China?
Yeah, call this guy a communist, but wealth is not generated by people selling stocks to each other. Wealth is generated by manufacturing goods. An auto bailout is just the price we have to pay for decades of lousy federal policies.
I don't care if you work in a Kia dealership in LA, the destruction of the Big 3 will make you poorer.
But if they do,
THEY PAY.
1.1 million (550,000 from Detroits car industry and 550,000 as result of those jobs going) to 4.5 million is your range. Thats HUGE. I understand its hard to get a bead on how badly this may affect unemployment in the U.S. but the upper range seems a little sensationalized. I don't think we need to stir up that kind of frenzy to get the point your are making.
Still even with the supposed bailout for GM right now ($5 billion in loans thats really for the Energy Dept for energy efficiency improvements), a merger with Chrysler (why I dunno), the creation of GMAC as a bank holding company (thus access to the $700 billion in govt credit crisis moolah) and a slow economic turn around (if that is the best case scenario) I think BEST CASE scenario Chrysler is done. If it merges, its brands will be fazed out. If it doesn't I don't see how they will survive Then GM and Ford still have a lot to do to make their businesses competitive. Thing is Toyota and Honda don't answer to the UAW unions the same way Detroit has. Their cost structure has allowed them to gain market share and be more competitive. The union, its pension, and its guarantees are a big part of why the Big 3 are no more. So maybe those job losses are going where they ought to... (ok thats a bit much- GM, Chrysler and Ford also blundered their way thru managing the companies but still if unionized car companies can't stay competitive maybe we should let the non-Detroit co's make cars...)
Best case scenario there will no longer be a Big 3 in the auto industry. It will be a Big 2- Toyota and Honda. (And if Ford and Gm can survive they will be smaller companies with smaller employment levels. No way around it)
But then again, how many jobs depend on the US having a stable currency and a capitalistic economy?
Bob,
GM and Ford are still rolling over the debt they used to pay their last dividends and most of their dividends for the last decade (shows what their priorities are). The debt hasn't gone anywhere and the interest accumulates daily. With govt. loans, expect the dividend to resume at the eventual expense of the taxpayer when the loans default.
What is the real problem? There are a few core things:
1) Our base taxation is far too high. It amounts to a much-too-high "first hurdle" for the American worker. Why do you think we go to the "stimulus package" to promote consumer spending spurts in times like this? There's *zero* leeway in middle-American budgets because of the tax load!!
2) The income tax is *unconstitutional* to begin with. It is directly related to out-of-control government spending, due to the preemptive grab it gives the government on our earnings. If *we* retained the preemptive right to our own money, and *they* got a share when *we* decided to give them some (i.e. consumptive taxes), they could not continue ramping up spending endlessly as they do. Incidentally, the Founders, especially Jefferson -- but others also, were very adamant about which forms of taxation were allowable! And they intended any taxation to be minimal -- not the 40%+ that I, who earn less than 100K/year, pay every 2 weeks for FICA, Medicare, and Fed Income taxes alone!!! It is out of hand, and it is a HUGE barrier to a healthy economy, not to mention our very liberty!!
3) Socialist entitlements: Spending is out of control, in order to placate segments of the population with entitlements. Only those who are truly physically or mentally incapacitated should receive assistance. Everyone else must EARN THEIR WAY IN THIS WORLD! There is no free lunch, nor ever has been. And the "rest of us" are not only tired of paying for those who *won't* work...we are UNABLE to do so!! Need I even mention the question of the justice of it? End the socialism -- it has never worked in the history of the world...and it is leading to conflicts of interest in large blocks of voters, and huge economic pyramid schemes that are ready to tumble.
> jack
Detroit did build small vehicles, but had no market for them as the consumer would not buy them and demanded larger products. Even the "mighty" Toyota built guzzlers to compete in the US.
Asian quality is being used as an excuse to bash domestic producers, but if you reviewed the current lineup of products from them (minus Chrysler), they are at par with Toyota and Honda and better than many European products.
We absolutely need a domestic auto industry, and cannot afford to send billions and billions of dollars to Japan, Korea and China for our transportation needs. That plus importing $700 billion dollars of oil could amount to 35 to 40 percent of our GNP. How do all the "Let Detroit die" supportes plan to pay for all that. Selling hamburgers to the world does not generate that kind of cash
Of course the oil companies have done nothing to discourage this issue. Nor has GM and Ford. Nor has our government.
I would guess that a chain reaction of fallout from the Big 3 going could easily take 7 or 8 million jobs with it considering all of the dealerships that would go down with it, the parts suppliers, the raw materials suppliers for the parts suppliers like my dad who works in the steel industry).
My point is that needle-nosed microeconomic analyses omit secondary and tertiary economic realities that politicians in a democratic society are in a position to appreciate. The evil that men do lives after them! The good is oft interred with their bones, so let it be with modern Democratic society. Screaming for more funerals is obnoxious noise.
Socialism BLOWS !!!
I would rather sit on my ass and ride the producers. WHAT A BUNCH OF CRAP !!!
Darwin's theory does have some validity and we are sowing the seeds of our own demise.
The Cure Is Worse Than The Disease.
On Nov 02 01:40 AM Kunst wrote:
> Socialism, you do not pay 40% of your 100K income on FICA, Medicare,
> and income taxes (unless you are intentionally overwithheld on the
> latter). That is propaganda, untrue.
This is a good article and summarizes the current situation. The biggest problem is that unlike Japan, Europe, and even Korea, health care and retirement pensions are the responsibity of the company. In the home country of every US 3 manufacturer, government programs cover pensions and health care, especially for retirees. While this also raises taxes, it distributes the cost across the economy. Additionally, US laws force companies to meet ever changing minimum funding requirements for their pension plans. This means that the government will likely force GM to take cash it needs to run its business into its pension plan and retiree health plan because of the huge drop in the market. Ironically this will drive the companies into bankruptcy, chapter 7 not 11, faster which will shift the liability for these penisions to the government. I have seen estimates that for just GM & Chrysler, this will cost the government over $20B.
The UAW contract negotatied last year will make the Detroit 3 cost competitive with Toyota/Honda/etc (that is what GM held out for in the negotiations) once the VEBA to manage retiree health care is established and these liabilities come off the books. Both GM and Chrysler must put $7B in cash into their VEBAs in 2009. If the government provided this funding it would take these liabilities off the books, which would give the companies the cash they need to move into 2010 and help offset the competitive disadvantage policies around health car in this country have created.
Also, GM and Ford would likely go into bankruptcy like Delphi did, which was to only declare bankruptcy for their US operations. Their international operations, which have been very healthy and competitive would continue. Chrysler cannot do this because they are US based.
So the natural selection people describe will be GM or Ford or both shutting down operations in the US and moving to Europe, most likely Germany, to resume as smaller companies. They could even import cars from Europe/Asia and trucks from Mexico into their remaining dealer network.
So either the government provides some aid, preferably by providing funding to the VEBAs, or they accept over $20B in pension and healthcare liability, the loss of over 100,000 jobs, and the relocation to Europe of 1 or 2 historic US companies.
I'm glad to see you understand the dire consquences involved. Too bad most other people do not.
1) 7.65% still does not represent the whole tax burden per person for SS & Medicare! It's just hidden from the average taxpayer how much the gov is really getting per person...HR people are much more aware of this. The point is that SS & MC are pyramid-scheme entitlement programs that rely on a growing base of workers paying in, in order to be able to pay out to recipients later. As we know, we have a flaw in that theory already with the Boomer generation, who vastly outnumber their progeny. Socialism is burdensome -- we ought to phase these programs out and allow people to keep that 7.65% and save for their OWN retirements!
2) Total tax percent of total income: I don't make 6 figures, for starters. About 2/3 of the way there. I *do* pay over 33% total. As you can see from this...WI is a high tax state. I oughta think about moving elsewhere!
www.taxfoundation.org/...
One popular myth needs addressing first. To those in this column and everywhere else in the popular press who attribute this problem to bad products and bad management: give me data. Here is some to start with. For over twenty years Toyota has had a joint venture with GM (NUMMI). There is one plant in the joint venture in California. They have always produced a Toyota designed small car with Toyota management and Toyota parts. The production is split between a model badged as a Toyota and the other model has had various GM badges. There is no mechanical difference between the two cars, only upholstery and dash design and a much lower price on the GM badged car. If car buyers are rational why would the Toyota consistenly out sell the GM by a wide margin. The fact is the auto industry has become a fashion industry. Just as Levi struggles to sell jeans against Buckle, GM cannot overcome a fashion bias by Americans. This is not an isolated example. Read Lee Iacoca's book about Chrysler's struggle with the similar Mitsubishi joint venture in Illinois.
How does this impact investing? Hard to tell but one of the numbers you have forgotten is the several hundred thousand retiree's living off GM pension, health benefits, and stock dividends (more than active workers). This will definitely bankrupt the Pension Benefit Guarantee Corp when this happens. Something will have to be done quickly because when little old ladies in Saginaw start losing their homes, income and medical benefits you can bet it will make national news. Michael Moore will be first in line to tell the story. I think that this could be Obama's first opportunity to expand the Pension Guarantee program, Medicare, and Social Security all at once.
There might be some investment opportunities there, but it sure is not in the auto industry.
On Nov 05 12:33 PM Steve Funk wrote:
> I think that this
> could be Obama's first opportunity to expand the Pension Guarantee
> program, Medicare, and Social Security all at once.