Let’s turn the clock back to the 2008 campaign and ask the question: If Barack Obama had run for office promising to deliver one-third of the Big Three automakers to the unions and drop another one-third on the backs of taxpayers, would people have approved? Yet, remarkably, that is what is in the offing as a result of the Administration’s policies.
This is madness.
No serious observer of the situation believes that the government should own and run a U.S. auto company. The potential for political meddling in car design, vehicle pricing, employment policies, and plant locations is overwhelming. The actual meddling would be devastating to the industry. The Administration continues to claim that it does not want to run automobile companies on a day-to-day basis. The protestations notwithstanding, the White House has fired GM CEO Rick Waggoner, re-populated the Board of Directors, and rejected one plan to restructure. That sounds like day-to-day management.
This is not fair.
How can creditors negotiate a fair deal against the power of the White House? How does Ford compete when GM and Chrysler are benefiting from their political capital?
This is mystifying public policy.
What will we have gotten for the government involvement? When the feds launched their intervention last fall, one argument (not widely believed) was that the only real problem was that credit markets were not permitting customers to get auto loans and that the government loans would compensate. Shortly thereafter it was acknowledged that the companies were simply uncompetitive and would need to restructure in order to compete effectively.
The need to restructure is the fundamental reason why firms seek Chapter 11 bankruptcy protection. In this case, however, bailout advocates have sought to avoid bankruptcy, variously arguing that it would impose too much distress on auto suppliers, Michigan and surrounding states, autoworkers, or creditors.
Instead, GM has announced that it will discontinue production of the Pontiac brand and cut 21,000 factory jobs. GM said it would speed up six more factory closings that were already announced and cut more salaried jobs on top of the 3,400 eliminated in the U.S. last week. The restructuring will leave GM with 34 factories (compared with 47 at the end of 2008) and 3,605 dealers (compared with 6,246 at present). It will swap debt-for equity, offering 225 shares of common stock for every $1,000 in notes held by bondholders in order to eliminate most of the $27 billion in unsecured debt. The United Auto Workers would get stock instead of one-half of the $20 billion the company is supposed to pay into a union-run trust that pays retiree health expenses. At the end of the day, current common stockholders would own only 1 percent of the company.
This doesn’t sound very different than bankruptcy. Why not just use it and get the government out of the auto business?
This tells us a lot about the Administration’s philosophy.
The Administration’s approach puts it squarely in the position of picking winners and losers in restructuring. It permits the White House to dictate on political criteria in a way that market-based solutions would not. It is entirely consistent with using tax policy to drive income redistribution, energy policy to reward favored supplies and technologies, and infrastructure policy to support the states and localities of choice. Political connections will replace entrepreneurial spirit and risk-taking as the key ingredient for economic advancement.
13 responses so far
1 krove // Apr 30, 2009 at 4:29 am
The answer is there is no alternative. Where is all this private capital just waiting to be invested in a dead car industry.
So what is your alternative? Nope don’t see one here? Whats new. Sniping and saying NO is way easier than solutions I guess.
The President said last night if you were paying attention that he did not want to be in the car or any other business. That at present there was no other way and as soon as the economy turned round and there is private investment capital there to be used.
2 ottovbvs // Apr 30, 2009 at 6:09 am
Mr Eakins, what’s your alternative. As Paul Ingrassia in today’s WSJ acknowledges he doesn’t like it but it was inevitable. GM and Chrysler’s debts to the union trust funds are legal obligations which even bankruptcy would not eliminate. Furthermore they are obligations on which millions of car industry retirees depend for their livelihoods. And the govt. Who else can provide the capital to keep these businesses functioning. The private capital market. I don’t think so. As ever the far right fulminates about the administration’s actions with lots of vague assertions but offers no realistic alternatives for how this essential American industry is saved and restructured. Basically it’s just another reaffirmation that the Republican party is no longer a serious party of govt.
3 sinz54 // Apr 30, 2009 at 8:19 am
krove: The “alternative” is exactly what is happening right now: *After* Chrysler goes bankrupt, it can be bought by some foreign auto company, such as Fiat, for a cheap price. And the American workers will go right on building cars–with “Chrysler-Fiat” nameplates.
Tens of thousands of American workers are building cars in America, in Honda and Toyota plants, in solid American areas like Ohio.
In fact, Toyota’s stated longer-term goal is that *all* the Toyotas sold in America should be built in America, by American workers.
So what is all the shouting about? All bankruptcy does is put the company under protection from creditors so it can reorganize, and hopefully find investors or buyers.
4 sinz54 // Apr 30, 2009 at 8:21 am
ottovbvs: There’s nothing “essential” about the auto industry or any other industry.
130 years ago, the telegraph industry was more “essential” than the auto industry today. Virtually all high-speed national and international communication was by telegraph; it was the Internet of its time. It’s virtually gone now. Yet America prospered without it.
5 barker13 // Apr 30, 2009 at 9:02 am
“No serious observer of the situation believes that the government should own and run a U.S. auto company. The potential for political meddling in car design, vehicle pricing, employment policies, and plant locations is overwhelming.”
And btw… “who” exactly is the “voice” of the government “owner?’”
I own stock. I decide how to vote.
I invest in a pension fund, hedge fund, mutual fund, whatever. Someone – perhaps responsible to the head of the Fund, perhaps responsible to a committee of the Fund – decides how to vote on issues like Board Member elections and policies… whether to accept a takeover bid or support a “poison pill defense.”
Does OBAMA hold “the government’s” vote? What about Congress? I thought they were a co-equal branch… the “money branch” in fact? What if Obama decides “our” shares should be voted one way but Pelosi and Reid disagree? Or… what if Pelosi and Reid – with the backing of an actual vote of both Houses – decide to vote “our” stock one way but Obama disagrees. Does Obama get a veto?
Heck… do the nine Members of the Supreme Court get a say…?!?! (*CHUCKLE*) After all… again… isn’t the Judiciary a “co-equal” branch of government?
Let’s say the power is given to an “Auto Czar.” Who does he or she report to… Congress or Obama? Who does he or she actually work for – take orders from?
You folks see where I’m going… right… what I’m asking. Any factual answers…???
BILL
6 barker13 // Apr 30, 2009 at 9:06 am
“The need to restructure is the fundamental reason why firms seek Chapter 11 bankruptcy protection….This doesnt sound very different than bankruptcy. Why not just use it and get the government out of the auto business?”
Yep.
This is a power grab, pure and simple.
BILL
7 barker13 // Apr 30, 2009 at 9:19 am
Re: Ottovbvs; 6:09 AM –
“Mr Eakins, what’s your alternative?”
Bankruptcy. His alternative – and mine – is and was and always has been BANKRUPTCY.
Ott old boy… are you familiar with the term “legal” vs. “extralegal?”
(*SIGH*)
“GM and Chrysler’s debts to the union trust funds are legal obligations…”
(*SNORT*) Yeah… remember when they used to say that about… oh… MORTGAGE CONTRACTS?
(*HUMORLESS CHUCKLE*)
“…obligations on which millions of car industry retirees depend for their livelihoods.”
And non-car-industry-retirees “depend” upon THEIR own incomes and savings which are being diverted and squandered out of partisan political expediency.
This is nothing more than wealth transfer. “Theft” if you want to put it in ethical terms. (*SHRUG*)
BILL
P.S. – On a possible bright note… perhaps soon leftover G-8’s will be on the market at bargain basement prices! If so… I may very well buy one to go with my “new” Charger RT that I bought back in March!
(*WINK*)
http://www.edmunds.com/pontiac/g8/2009/review.html
8 Bulldoglover100 // Apr 30, 2009 at 11:02 am
Just like the video the RNC released yesterday one feels they are dealing with children often.
Mr. Eakin…we are not stupid nor would you be advised to pretend when speaking to us.
IF the Big 3 crashes, so do the car lots, so do the supply stores and so do many of agencies that loan the money for them. YOU KNOW the stats on unemployment though don’t YOU..if Obama had ignored the calls for help…that BUSH had already started helping before Obama even took office..forgot to mention that one did you Mr. Eakin?
Regardless if another 10 million people wound up jobless? Our economy would crater and life as we know it? would stop and I’m not talking about the extras in life, I’m talking about education, eating and having clean water and police protection…..but people of your ilk are willing to see us in that position if it means the GOP clawing its way back to power.
No wonder our numbers are dropping and we will lose even more seats.
DEAL with the real problems and stop the blame game when it began with US and the last 8 years.
9 krove // Apr 30, 2009 at 11:58 am
Wow am I pleased that McCain lost. This guy was his main economic advisor after “Enron” Gramm. Think what a mess we would be in now with our leader still stating that the economy is fundamentally sound while the country melts down before his face.
10 sinz54 // Apr 30, 2009 at 12:26 pm
Chrysler has filed for Chapter 11 bankruptcy.
What immediate effect does this have on Chrysler’s workers? None whatsoever.
Cars are being produced on Chrysler’s assembly lines right now. Chrysler showrooms are open for business across the country, and you can buy a car there now if you want. The Obama Administration has even put the full faith and credit of the Federal Government behind Chrysler’s auto warranties.
So what was everybody so afraid of?
Chapter 11 is not the same thing as Chapter 7 (which is actual liquidation). Under Chapter 11, the factories continue to work as before; but terms of contracts and debts can be negated and renegotiated. This gives Chrysler needed leverage in renegotiating contracts with their suppliers and the unions.
The reason the Dems hate Chapter 11 is that it means that their beloved UAW union can’t hold Chrysler to the terms of their previously negotiated contract. But that’s as it should be. If American car companies are to be competitive with Japanese non-union car companies, the American unions are going to have to start being much less greedy.
11 ottovbvs // May 1, 2009 at 6:32 am
sinz54
“8:21 AMottovbvs: There’s nothing “essential” about the auto industry or any other industry.”
What industry would you like next to regard as inessential. Pharmaceuticals, construction equipment? For a $14 trillion a year economy, with an average 14 million a year car market, in one of the most technologically advanced societies in the world to be unable to sustain a domestic car manufacturing industry is ludicrous. Do you really think the Japanese, Germans or French would allow their domestic champions to fail. I wonder whether you read Eakins piece where as far as I can tell, it’s all a bit vague on details, he’s suggesting allowing Chrysler to go into liquidation.
12 sinz54 // May 1, 2009 at 6:47 am
ottovbvs: Maybe I didn’t make myself clear. Let me try again:
We could live without a pharmaceutical industry. In the 19th century, Germany, not the U.S., was the world leader in chemistry and medicine. But that didn’t stop the U.S. from economic growth, did it?
We could live without a construction industry–if there’s nothing worth constructing. But that’s never the case.
We’ve become so accustomed to the idea that America has to be first in EVERYTHING that we’ve forgotten that in a global capitalist world, that’s unnecessary.
There are NO industries that are “essential” to ANY country–as long as peaceful free trade between nations exists. What we don’t have inside America, we can buy outside America. The result of this will be the decline of the U.S. dollar to the point that it will be profitable to build industries in America again. And then we’ll build them again.
That’s how comparative advantage works.
That’s how global capitalism works.
13 sinz54 // May 1, 2009 at 6:50 am
ottovbvs: If Chrysler can’t hack it, then of course they should go into liquidation. Who needs them.
Do you know how many American auto manufacturers went out of business in the 20th century? Do names like Packard and Studebaker ring any bells with you? But somehow, we prospered anyway, didn’t we?
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