The wisdom of Bruce Bartlett

I think it would be a terrible mistake to simply write a check to the
auto industry without demanding major, major restructuring of its labor
contracts. Without that the money will simply go down a rat hole and
the automakers will just be back again in a year or two asking for more
money. Obama has a strong hand to play here and I hope he uses his
leverage. With bankruptcy as the only alternative to federal aid, he
can drive a very hard bargain with the auto workers. If he caves and
just writes a blank check, everyone will know he can be rolled and he
will pay a heavy political price for it. If Obama shows toughness on
this issue, I think it will pay enormous dividends for him down the
road.

Via Brad DeLong, Bruce is now blogging.  And if you want some provocation, here is Kevin Drum on the idea of a GM bailout. And Felix Salmon has some interesting ideas.

Comments

So, the wisdom of Bruce Bartlett is that contracts with labor should simply be broken? I guess I just take legal contracts more seriously than you guys.

Of course, if the alternative is bankruptcy, perhaps it is necessary, but at that point shareholders and bondholders should be zeroed out and management on the unemployment line somewhere because then the negotiation is with the workers.

I think it would be a terrible mistake to simply write a check to the auto industry without demanding major, major restructuring of its labor contracts.

Of course, we do know that the President-Elect ran ads in Michigan proclaiming that he favored an industry bailout unlike Sen. McCain. And we also know that the flight attendants union endorsed Obama for a variety of reasons, prominent among them being support of the Fly America Act and voting to ban restructuring of union contracts in Chapter 11.

Certainly I hope that the President-Elect will reconsider his previous rhetoric and votes in light of the reality that even if the bondholders and stockholders lose everything, and management were all fired or worked for free, GM and Ford still couldn't make a profit on a small car built in the US at UAW plants competing against US labor working for Toyota and Honda.

Of course, we do know that the President-Elect ran ads in Michigan proclaiming that he favored an industry bailout unlike Sen. McCain

I can't speak for what went on in Michigan, as I don't live there, but McCain promised that he help the auto industry, too. Think Progress, quoting from "Good Morning America":

Well, we’ve already done that to $25 billion, and we’ve delayed getting them the money. I would do whatever I think needs to be done to help our automotive industry. We’ve got to make this transition to flex fuel, battery powered, hydrogen automobiles. And, obviously — and, also, I would provide tax credits for people who buy these new automobiles. We’ve got to keep this industry alive. There’s no doubt about that.

Of course, there's no telling whether this was a legitimate sentiment of McCain's or something he would take a strong opinion on one day and then abandon the next.

Note the bonus pool for this year alone will probably be greater than $25B, after the U.S. public has given several hundred billion to the financial industry, more than the cost of the auto bailout.

It might be best if we just absorbed the legacy costs, and had the U.S. auto industry move on.

It was a bad business model, but at the time it seemed wise to create what would become legacy costs. The U.S. should just absorb this stuff and let the car companies get on with making cars.

"If he caves and just writes a blank check, everyone will know he can be rolled and he will pay a heavy political price for it."

Unlike the heavy political price he'd pay if he appeared to be, say, taking a hardline position against the unions that helped him get elected. Bartlett can make any argument he wants on theoretical grounds, but he can't possible believe that the primary objective of a government bailout will be particularly extreme labor contract renegotiations. The fact that he tries to make this argument on *practical* grounds suggests some intellectual dishonesty at best.

On a related note, there are a ton of problems with the automakers, of which their legacy costs are just one facet. I don't envy them.

Ditto what ross said. You can't just break valid contracts, and you certainly can't demand that the big 3 try something like that. If they want to break a contract, they can do it through bankruptcy like everyone else.

Franky, I'm appalled all the favoritism that's being showed toward dinosaur car companies that had *decades* to take care of the legacy cost problem (and the crappy car problem, and the lack of innovation problem, and the dependency on lobbying/marketing problem...). They exist solely because the market believes they can continue to rook Congress into helping them out at the expense of competent foreign companies.

More importantly, can someone please explain to me why we're considering spending $20+ billion to rescue an industry that's only worth $6 billion, and most of that is only because of the expectation of being propped up further? Geez, if you want to help, buy them out, give them to the unions, and let them stew in their own filth.

Btw, no foreign car company will buy their factories. They have standards, you know. Most likely, they'll go to some Silicon Valley upstarts that want to build the next green car.

I'm skeptical of any bailout. Should I be more or less skeptical when the government conditions the receipt or use of the money on restructuring part of the industry's business model? Such conditions almost look more like government taking over and running an industry (at which gov't is inherently worse). Of course some conditions can be wise, but any that give the government a stake in ownership or management strike me as likely worse than a pure handout.

Since Bartlett wants the government to decide how GM deals with its employers and its structuring, why doesn't he just outright advocate for state ownership. Soon enough, we can have the government running all of finance and industry. That would be nice.

The answer is not bail-outs with strings; the answer is no bail-outs whatsoever.

Let the market decide what's what. If the companies are worth it, they don't need bail-outs and will prosper on their own. If they are not worth it, there is absolutely no amount of money, political influence and cajoling that will make them profitable.

Government making it clear that it will always be there for these companies whenever they next fail is the reason they keep coming back for more and more candy and bail-outs, and the reason they continue to fail.

15 reasons the US economy will get worse: Link Here

Can one of you brilliant citizen of the world types tell me what percentage of Toyota and Nissan are owned by Japanese and Japanese institutions and corporations? And what percent of Ford and GM are owned by Americans? Unlike you I prefer that profits from a major industry go to my fellow citizens. Perhaps you can indulge me

Automobile manufacture is a classic developed nation (first world) industry that an intelligent nation does not yield to foreigners. Unless it has much more profitable "industries" such as bundling sub-prime mortgages and palming them off onto Europeans and selling credit default swaps to each other

The Big 3 are one of the biggest buyers of computer chips in the country.

I can't wait until the layoffs start in California (assuming they still make computer chips).

It would be a terrible mistake to write a blank check to Ford Motor Co. -- as opposed to, say, AIG -- because, after all, Ford makes stuff.

Both Honda and Toyota opened new factories in Ontario earlier this year. I assume that the workers there are all UAW members and have the same work rules as in Michigan.

Wrong on both counts. First, the UAW isn't in Canada -- the CAW is a separate union. And second, the CAW has never managed to organize any of the Japanese transplant factories there just as the UAW has failed to organize the transplants here.

And it's easy to see why the organizing drives have all failed. The workers see that staying out of the unions has given their employers a clear competitive advantage, which means secure jobs. They understand that genuine job security doesn't derive from union contracts -- it derives from strong, healthy, profitable companies. Which is a lesson that the UAW seems completely unable to grasp even after losing 2/3 of its membership over several decades.

"I don't hear anyone saying financial analysts should be forced to take a pay cut." Probably that's because those who do say that have been drowned out by those of us who demand that the buggers be strung up.

>The workers see that staying out of the unions has given their employers a clear competitive advantage....

No. The transplants open factories in "right to work" states - where it is against the law to require membership in a union as a condition of employment.

Interesting question: Should the Treasury Dept/Fed/FDIC's spending of bailout or other money be influenced at all by the desire to keep US government investments afloat? Suppose AIG is massively exposed to GM default risk though some huge CDS holdings. (I have no idea if it is, this is an example.) Should this affect the government's decision about bailouts to Detroit?

If the end goal for the country is a healthy auto industry, then GM should be split into pieces. Would Chevy have invested in the Hummer brand if it weren't part of the same company? If the Hummer brand included the DOD contracts, it might be worth something for that matter.

Let the government finance the DIP and the sale of assets to private equity funds and get some equity upside in the resulting companies.

There needs to be a balance between the destruction, creation and recognition that there will be some kind of bailout due to political reasons.

"Robin Hanson's mantra, "Politics is not about policy," applies here"

Hey Mercutio, as well as his famous post on pulling the policy rope sideways. I'm surprised Tyler isn't trying this. Really, Hansonism is worth doing here.

"The reason GM makes junk cars is because:"

Your reasons are quite obviously false by mere observation. The same workers made their OK-quality SUVs and pickup trucks.

The reason GM makes junk cars is because they don't WANT to make cars. They want to make trucks and SUVs, and want to convince you you need one, and want to convince the Federal government to give them preferential treatment in tax and emissions and mileage law.

These SOBs created demand for SUVs out of nothing, and in the process made us less secure, more polluted, and less safe.

GM should die in a fire before they get what they want. Ford might be worth saving.

Your reasons are quite obviously false by mere observation. The same workers made their OK-quality SUVs and pickup trucks.

GM makes halfway decent SUVs and pickup trucks because it is easier to hide the UAW cost in a big ticket item without a comparable foreign product.

Since an Escalade cost a whole lot of money, and there are no Japanese or German vehicles equivalent to an Escalade, an extra $5,000 on the price tag doesn't make a difference. When GM tries to make a small, fuel efficient care to compete with a small $15,000 Japanese car, they either have to charge $20,000, or make a $10,000 quality car and charge $15,000. Duh!

If you are ideologically against the bailout, fine. But don't just make stuff up without knowing the first thing about the auto industry and use that as reasons why the bailout is bad.

The reason GM makes junk cars is because they don't WANT to make cars. They want to make trucks and SUVs, and want to convince you you need one, and want to convince the Federal government to give them preferential treatment in tax and emissions and mileage law.

Why would GM want to make SUVs as opposed to cars? See the answer above! Why does everyone assume that GM execs are twiddling their mustachios and saying "Mah ha ha ha! SUVs are big and use a lot of gas and are evil!!! How can we get more people to buy them, cause we are evil, hahahahaha!?". GM is a corporation, and they want to make profits - They don't care what they build, so long as they make money. GMs union deals mean that they can't effectively compete selling small cars, so they quite wisely chosen to focus on trucks where they compete quite well.

The point is, high wage high beneft highly unionized Germany kicks butt with it's world-class automakers

VW pays its workers far less, and gives them far less benefits, than UAW workers.

And the shorter comeback: Ford makes cars that don't suck (CR says reliability is at least middling on their whole lineup). They have the same cost structure as GM (and are only marginally better on the whole SUV thing, but at least weren't out there for years lying about hybrids in a desperate attempt to burnish their image).

"You can't just break valid contracts, and you certainly can't demand that the big 3 try something like that. If they want to break a contract, they can do it through bankruptcy like everyone else."

First, it is possible to get concessions from labor without bankruptcy. The threat of bankruptcy proved very powerful for American Airlines a few years ago. The same thing can happen with GM and Ford. The UAW has as much to fear from bankruptcy as do the executives and the shareholders.

If the citizens of the U.S. - through their elected representatives - are willing to spend $25 billion of their money to keep GM and Ford out of bankruptcy, those citizens - through their elected representatives - have every right to ask for huge concessions from shareholders, executives, and workers.

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