For the last month or so, the CEOs of Detroit’s big three auto makers have shamelessly prostrated themselves in various humiliating positions in front of Washington lawmakers begging for tens of billions of taxpayer’s dollars to bail them out of their self-inflicted non-competitive distress. The only thing clear at this point is that the Democrats will bail them out; the unknown is when and on what terms.
President-elect Obama, Harry Reid, and Nancy Pelosi are all committed to a fix that looks more like a bottomless rat hole. Unfortunately, George Bush appears willing to help them dig. Irrationally, the White House appears ready to do what the Senate has so far resisted. If the whole package has to come in stages, which is likely, they’ll live with that – such as the House passed $15 billion or so to get through Obama’s inauguration until the faucet at the US Treasury can be cranked all the way open when the new administration comes to town.
The Democrats have no other option. Their election victories are due in no small part to organized labor, and regardless of any appearances to the contrary, the Detroit bailout is about saving bloated labor union contracts, not about protecting shareholder investments or market share for US companies.
As is always the case when Washington spreads the wealth of the taxpayer’s dollars, Congress plans to attach some strings – no, make that chains. Pelosi is committed to a “car czar,” appointed by Congress and apparently gifted with supernatural powers. The Czar of Cars would be a master of engineering, design, marketing, and management – abilities that have eluded the Detroit-three for a couple decades. The proletariat-like Czar, directed by Congress, would thus transform a non-competitive, non-profitable Detroit-three into a sleek new model of capitalistic efficiency. Didn’t the soviets promise the same thing?
As was said by the editors of Investor’s Business Daily, “… are we supposed to believe that the same Congress responsible for next year's estimated $1 trillion deficit can profitably run a market-sensitive company like a car manufacturer? Or that the same Congress that sat on its hands as the financial meltdown unfolded and helped create the mess will know how to financially restructure America's highly complex auto business? Or that the people who just last year imposed $85 billion in new ‘efficiency’ standards on a teetering industry will be savvy enough to run them anywhere but further into the ground?”
One Democrat who does see the folly of the bailout plan is Jared Polis of Boulder. Polis won’t be sworn in until January, but will be one of the few from either party that actually has some business experience. Polis recognizes that too many members of Congress believe in their own quasi-divine power. “I know what I don't know in business,” Polis says. “While I hold my colleagues in great esteem, I doubt their abilities as turnaround artists are very much superior to mine.” Nonetheless, they are convinced that they will be able to accomplish what the private sector, boards of directors, and shareholders have failed to do. “Any pretension of a government bailout being a good deal for taxpayers should be abandoned for the insincere (or perhaps ignorant) rhetoric that it is,” Polis concludes.
Under any other circumstance, what Washington is doing – trading billions of taxpayer dollars for ownership interest and management oversight – would be called what it is; nationalizing private industry. Of course, that’s not what it is called on Capitol Hill.
And, under any other circumstance but government the perpetrators of this action would also be cited for fiscal malfeasance. Let’s walk through what’s going on.
In 2000, the Detroit-three accounted for nearly 67% of the industry, today their combined market share has fallen to 48%. In 2007 GM lost $38 billion and Ford lost $2.7 billion. Chrysler burned through $3 billion of cash in just the last quarter. During Senate hearings, Bob Corker (R-TN) calculated the combined market capitalization of the Detroit-three at about $6 billion. The “big three” if they were all rolled into one company would not even qualify as a Large Cap company by some definitions. The auto makers have tens of billions of existing debt, much of it unsecured, and can’t qualify for anymore. They are begging congress for $36 billion just to survive the coming months. Industry experts have suggested it will take more like $75 to $125 billion to remake the Detroit-three.
By anything resembling conventional wisdom, when you owe more than you are worth, you’re done, broke, insolvent. Slip into your local bank and try to persuade them to loan you 4 times more than your net worth – and then explain that you’ve been losing money and market share, lots of it, and rapidly – and that you really don’t have any idea when, how, or if that trend will change, so repayment of the loan is at best uncertain. In addition, mention that due to union contracts, you to spend $3 for labor costs to every $2 dollars the competition does, plus you have thousands of dollars of costs for each unit produced for pensions and a job bank that pays laid off workers for years – just because the unions demanded it. Not only will you not get a loan, but you will hear laughter as the door slams behind you on the way out.
The auto makers have been to the banks, and to the markets, and their sad tale of woe didn’t sell. Their stock price continues to tumble, and they can’t get loans. In addition to being poor credit risks, the big banks have already fallen victim to their own mistakes and greed. They were the first ones in line at the government’s altar of salvation.
Under more normal circumstances, bankers understand they aren’t lending their own money – they are lending their depositor’s money that has been entrusted to the bank for safe keeping to be returned to the depositor upon demand. Further, since banks are entrusted with the public’s funds, they are carefully scrutinized by government regulators to make sure they are just stewards of deposits and making prudent, safe loans minimizing the risk of significant loss.
Congress is supposed to be a good steward of the public’s money, too. Unlike a bank that must compete for voluntary deposit and loan customers, though, the government confiscates part of your wealth through taxes. Also, unlike a bank, government is essentially only accountable to other parts of government for what they do with your money. Most unlike a bank, there are no requirements to maintain reserve funds. And, when government runs out of money, they go in debt, or worse, they just print more.
The Detroit-three workforce is slightly less than 400,000. The proponents of providing life support at any cost imply that if GM-Ford-Chrysler failed all these workers would be jobless and hopeless. That is most unlikely. There are options.
A structured bankruptcy appears the best option. The executives and the labor unions argue that no one will buy cars from a bankrupt company. But, we all fly on planes run by bankrupt companies, and now homes from ones, too. We buy our electronic gadgets and clothes from bankrupt companies and most customers wouldn’t have the foggiest idea – or care. Bankruptcy would allow the Detroit-three to shed themselves of obese labor contracts and start over at a truly competitive market point and at least a reasonable opportunity for long term viability. Would it cause pain? Yes. For workers and their families faced with finding new employment or working under a different compensation package. But, an industry built on a house of cards will sooner or later collapse, and a shorter fall now will be far less painful – and less expensive – than an enormous collapse later.
The need for consolidation is a given. Increasingly industry experts are promoting the idea of a Detroit-two, or some significant realignment of the existing legacy companies. Shedding non-profitable lines and models has to happen, as well.
Washington seems to be intent on making two enormous mistakes; first, direct government financial and management intervention in private industry, and secondly, to finance the perpetuation of a failed business model.
The current set of power brokers in Washington seem intent on flexing their muscles. They are taking unprecedented – at least in American history – interventionist steps into seizing control of private industry. After railing against Republicans (unfortunately, with considerable justification) for out-of-control spending, the Reid-Pelosi Congress has exploded. Recent accounts put costs of government guarantees, bailouts, and “investments” aimed at rescuing the nation from financial disaster at $6-8 trillion. And the worst part is they have just begun. Obama hasn’t even taken the oath of office yet.
Washington is continuing down the path of picking winners and losers in a formerly free market economy, but now intent on crossing the once sacred line of intervention into the private sector. Entrusting the nation’s economy to the legislative body that has managed to put the nation’s finances on a road to insolvency doesn’t make much sense. Contrary to providing stability to a convulsing economy, the political interventionists have compounded the problem. Washington Post syndicated columnist Charles Krauthammer says, “Today's extreme stock market volatility is not just a symptom of fear -- fear cannot account for days of wild market swings upward -- but a reaction to meta-economic events: political decisions that have vast economic effects.” Krauthammer believes we have transitioned from a “market economy to (a) political economy.” If as Polis suggests, this bailout is a bad deal for taxpayers, it’s a raw deal for free-market capitalists. Our once inviolate barriers between government and the freedom of the private sector (including the freedom to fail) are being shattered; replaced by political whim.
If congress is looking for a legitimate way to provide a “stimulus” to the ailing economy they have options – and less expensive ones. They could start with drilling. Even with the extremely volatile oil prices of 2008, including the recent dramatic drop, roughly half of the US Trade deficit is due to oil imports. In January, 2007 oil was less than 30% of the trade deficit. Legislative prohibitions and environmental litigation keep much of our domestic reserves off limits while the anti-oil crowd perpetrates the myth that the US doesn’t have much oil anyway. However, our own government estimates 86 billion barrels lie in the outer continental shelf, another 36 billion offshore in Alaska and in ANWR, plus around 30 billion more in various deposits in the lower 48 states. Add to that the 800 billion or more in the Green River Basin oil shale including NW Colorado, and you get a more realistic picture and new reserves are being discovered continually.
For each barrel currently produced domestically we import two barrels – much of it from places that are anti-American. The US consumes about 20.1 million barrels each day, 70% of it for transportation. A newly released ICF International study concluded expanding domestic energy production would generate 160,000 jobs and contribute $1.7 trillion in revenue to government revenue by 2030. ICF says we could replace about 20% of our oil imports and over 60% of expected natural gas imports.
Congress could approve the Free Trade Agreements buried in Nancy Pelosi’s desk. At no cost to the Treasury, jobs would be created and the economy expanded. Unfortunately, big labor objects (they always do) and Obama is apparently inclined to name Hollywood Xavier Becerra who Investor’s Business Daily says “is not only a protectionist, he would compromise U.S. moral authority.” Not a good sign.
The Democrat leadership and the President-elect could also confess to a conversion of heart and pledge to extend the Bush tax cuts, including the reduced cap-gains and dividend tax rate which would encourage capital investment, along with the reduced marginal income tax rates rather than a promised assault on the people that actually have some income to invest.
Or, they could take the suggestion of one of their own, Jared Polis, who thinks rather than billions to bail out the auto industry, government could waive capital gains tax on investment in the auto industry. That good idea would be a great idea, if Washington would eliminate capital gains completely. Talk about a true economic stimulus! The cash now on the sidelines would rush to the markets.
They could embrace Congressman Louie Gohmert’s (R-TX) suggestion to suspend for two months all payroll and income withholding taxes. That would “cost” government about $350 billion – approximately the unspent portion of the big emergency stimulus package. The big difference with Gohmert’s plan – the folks that earned the money get to keep it and use it for what they, not government, think is the best purpose. On average, Gohmert’s plan would amount to a $2,000 benefit per taxpayer.
Despite other, and better, options Congress appears intent on buying up and taking over the Detroit-three. On December 10, the House approved their version of the bill 237-170 with all four of Colorado’s Democrats voting “yes,” while Republicans Musgrave and Lamborn voted “no.” Tancredo was absent. Likely, it will not be the last industry to “require” or seek financial salvation by Washington.
Change has come to Capitol Hill and to America, alright. But, it is a change for bigger, more intrusive, more expensive government. And, regardless of how it’s packaged, it will mean an erosion of freedom for the little man who as always will get stuck with the bill for government ideas that work as well as the plethora of ones that don’t.