"In contrast to the vitriolic rants you'll find on some political blogging sites, Palmer gives in-depth analysis and commentary." --Dan Cook, The Free Times


The Big 3: Ideology and Reality

Former Massachusetts governor and Republican presidential candidate Mitt Romney penned a column in the New York Times this week entitled Let Detroit Go Bankrupt. This column was written in response to the financial difficulties General Motors, Ford, and Chrysler are experiencing. Their stock values are sinking, their plants are closing, and they are losing market share to Japanese, Korean, and European automakers. Romney argues that providing economic assistance to these struggling companies would only prevent these companies from making the changes they need in order to become more competitive:

"Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course--the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check."
Romney's argument is a classic argument of economic conservatives. Badly managed companies should not have their bad executives be the recipients of billions of taxpayer dollars. A tough love approach that holds these executives accountable by forcing them to survive without government assistance keeps government out of the way and saves taxpayer money.

But these automakers do not operate in a vacuum. And this is where the argument for economic conservatism fails. If GM fails, for example, it may satisfy free market capitalists who believe its executives don't deserve any "bailout money." After all, why should these companies be rewarded with taxpayer money for their own bad business decisions? Why should taxpayers be forced to subsidize this irresponsible behavior?

Because GM, Ford, and Chrysler aren't just about incompetent and wasteful executives. They're about millions of jobs that impact millions of other jobs. The assembly line worker barely keeping his head above water as is may find himself without a job if Ford fails. What will happen to this worker's family? What will happen to his mortgage? What will happen to his health care? This worker had nothing to do with the unwise business decisions that were made in corporate boardrooms by incompetent managers. This worker should not reasonably be expected to be an expert with the stock market and their competitors' market share. That's why this worker was on the assembly line and not in a budget analyst's office.

If a plant closes in Traverse City, Michigan, for example, where will these workers go? In addition to putting hundreds or thousands of people out of work, what will happen to the workers whose livelihoods depend on them?

The diners across the street from the plant that made the bulk of their revenue when the auto plant workers stopped there for lunch may not survive. What will happen to these small businesses?

Anyone involved in the distribution of these vehicles or their components will be impacted. What will happen to the truckers? The porters? The forklift operators?

If fewer cars are produced, dealerships will be threatened. What will happen to the car salesmen? The office secretaries? The mechanics?

If GM fails, plants close, and jobs are lost, the cities in which these plants are located will also be threatened. What will happen to the property values in Traverse City if the laid off workers can't pay their mortgages? What will happen to the public school systems that are funded by property taxes? What will happen to social services and local government jobs that rely on this tax revenue? What will happen to the Traverse City police force? Its area hospitals? Its fire department?

Many of these plant workers receive their health insurance coverage directly from their employer. If they get laid off, if their plant closes, or if the company ceases to exist, how will these workers pay for their health care? And what will happen to their pensions?

Conservatives like Romney advocate that bankruptcy may be the best remedy for these troubled companies. In addition to not "bailing out" bad managers and saving taxpayer money, filing for Chapter 11 bankruptcy protection would allow the companies to renegotiate their contracts to cut costs. But who is to say that declaring bankruptcy will allow these struggling companies to get back on their feet?

Who wants to buy a car from a bankrupt company? As the owner of a car from a company that has since gone bankrupt, I can speak firsthand about the unease consumers experience when either considering buying a car from a troubled company or buying one from a company that later disappears. Will my warranty be honored? Where can I get replacement parts? What will happen to my car's resale value? How will my insurance company classify my car and how will that affect my premiums? Are this company's cars safe to drive, or did they compromise safety and build quality to cut costs? Will my dealership even be around in six months?

In other words, if GM's sales are sluggish now, imagine how much more sluggish they will be if everyone knows GM has declared bankruptcy. Chapter 11 bankruptcy (the ability to renegotiate contracts) now may only lead to Chapter 7 bankruptcy (the total liquidation of assets) later.

And what about the psychological impact of knowing that GM, Ford, or Chrysler no longer exists? What would happen to the NFL if the Dallas Cowboys and Washington Redskins no longer existed? What would the world of fast food be like without the Big Mac and the Whopper? Could the United States really concede all of these manufacturing jobs to the Germans, the Japanese, and the Koreans? What will this do to Americans' sense of pride? Given Republicans' chants of "USA! USA!" at their campaign events, it seems strange for Republican politicians (e.g., economic conservatives) to not show more pride in their own country's manufacturing base.

Again, the executives of the Big Three automakers certainly don't deserve a "bailout" or a "bridge loan" or whatever the proper nomenclature is. They couldn't even be bothered to ditch their private jets when they flew to Washington for this week's congressional hearings. However, politicians and economists should remember that the Big Three isn't just about boneheaded and undisciplined executives. It's about the millions and millions of regular people who had nothing to do with running these companies into the ditch who stand to have their own survival threatened. And if Washington can find the money to bail out the investment bankers at AIG, why can't they find the money to bail out the working class people at the Big Three?

How many lives are free market capitalists willing to ruin in order to stay true to conservative economic principles? This disconnect is a good illustration of why Republicans have fallen out of favor with the broader electorate. Regular people are not looking for political dogma and ideological purity. They're looking for meaningful solutions (even if they come from the government) that can help protect their families and communities.

19 comment(s):

Tiomthy said...

I enjoyed reading your article, but I feel you do not understand the concept of bankruptcy and what in effect happens when a company goes bankrupt. You paint a doom and gloom picture by saying millions of jobs will be risked which is absolutely false. To first understand the problem you must understand bankruptcy.

Remember after 9/11 and almost every airline went "Bankrupt"? As Americans we still flew. What happens with bankruptcy is the company will consolidate, restructure, and other companies or investors will come in and buy a chunk of that company. Some jobs will be lost in the short term, but in the long run with a more competitive strategy more jobs can be created. You also must remember, these autoworkers have some of the heftiest compensation packages for unskilled labor and many actually get paid full benefits when they are laid off. This is one of the biggest reasons the Big Three are having so much trouble today. They have given in whenever Unions have threatened a strike or file a lawsuit and now it is coming to bite them. The Big Three cannot maintain the current pension programs and huge compensation packages to their employees. They must restructure so they can compete with Toyota, Honda, BMW, and others which all have plants in the USA.

A common argument is executive's will just take away benefits and take advantage of employees. This may have been the case long ago, but with the increase in globalization comes the increase in competition. Japanese companies tend to treat employees differently (more compassionate, understanding, quality pay) and this treatment will put pressure on the Big Three to treat their employees the same way or employees will just go to a Toyota or Honda plant.

So you need to understand where Governor Romney is coming from. This is a man that his whole life he has devoted to fixing, restructuring, and saving companies from failure. He knows what he is talking about when he says to let them bankrupt, pick themselves up, produce better cars, and be more competitive. I would take the ideas of Governor Romney over a political analyst. Romney understands the economics of all of this and he has seen it before. What we currently see with this whole financial mess is a move toward government intervention. Companies keep sending lobbyist to Washington and are looking for a piece of the handout, the days of economic freedom and responsibility may be leaving unless we stop it. We cannot lose sight of the days when companies took risks and if those risks went bad they learned from them and tried something new without government stepping in.

You will probably find this very interesting and this came from my very liberal economics professor from Europe. We talked about the bailout of the Big Three the other day and he said that this is very reminiscent of Britain when he lived there. The government ended up bailing out their auto industry and continued for years and years. They ended up spending billions of dollars to improve the industry with no results. As soon as they stopped subsidizing companies moved in and Britain's auto industry has been better ever since. He warned us that we could go down the road Britain took years ago and it is very costly. I thought you may find the comparison interesting.

Tim H. Plungis
Vice President
UConn College Republicans

Tim said...

I also wanted to tell you I found your blog through a scholarship site that had said you had won for the best blog, so congratulations on winning that. The site is every well set up. Thanks for doing your part, speaking your mind and political opinion is very important for our political landscape. Thanks again.


Khaki Elephant said...

Here's where I become a bit of a hypocrite . . . perhaps because the auto industry feeds my kids, but I think something needs to be done by the government (I know, Anthony, between this and wanting regulations for the Phizers of the world I'm starting to sound like a liberal). Of course, in this case financial supports has to be tethered to serious restructuring for the companies. If you throw $25 billion at the big three at the rate their bleeding funds the money will disappear with out a trace in 4 months.

But something needs to be done to level the playing field. And remember, it's not just the CEOs that are draining the companies. The average card-carrying UAW member costs around $30 more an hour that their counterparts at Toyota, Honda and Nissan. To survive the unions need to take serious cuts.

One thing that is rarely mentioned concerning the auto industry is it critical role in the development of technologies and national defense. We can't let that crumble.

Perhaps the silver lining is that when the goverment bailed out Chrysler the country actually made money on the deal and it could happen again if done right.

Khaki Elephant said...

And sorry for all of the typos. Rough day.

Thomas said...

We can also say the Big 3 car companies never met our needs when we asked for more fuel efficient cars. They will complain about how they won't survive without a bailout package yet they probably have more lobbyists in Washington than any other sector of the economy too.

Just a few facts that makes me disinclined to help them out.

Brett said...

You missed the point, Timothy, about bankruptcy. The point is that (unlike airlines, where few people think bankruptcy affects the quality of the aircraft) going into bankruptcy directly threatens both the companies' brand images (crucial in such a competitive market), and makes it riskier for people who might want to buy these cars, since they don't know if a company is going to be around to guarantee their warranty and so forth. Anthony went over that pretty specifically.

One other problem with Chapter 11 - in the tightening credit markets, is there any guarantee that they'll find sufficient financing? They could go into Chapter 11, get insufficient financing, then get forced into Chapter 7 - which leads us to the scenario Anthony outlined in terms of job losses, in an already-existing recession.

Don't forget other blowback, too. One of the reasons why foreign carmakers have plants in the US is because of tax incentives and particularly to dampen any protectionism that might arise from political pressure by the domestic car industry - even though they've more or less admitted it would be more efficient to make them in their home countries. If that political pressure lets up in the form of the death of the heart of domestic auto industry, how long do you think those foreign companies will ignore the economic pressure to pull out?

Ultimately, we do need to let companies fail, and new ones arise. That's not in dispute. What is in dispute is primarily the timing - dumping possibly millions of workers on to the labor market in a recession.

On other note - about those excessive compensation packages. While some of the attributes are wrong (look up "job bank"), what's the pay, $27/hour? That's not that much (a little over $50,000 a year) - it would barely put someone in the middle class, and not even that in an expensive area.

Khaki Elephant said...

I would argue that the Big 3 were meeting consumer needs. They kept building SUVs because people kept buying them. True, they didn't have the forsight to switch over to more fuel efficient vehicles before the market changed, but that is also a result of the fact that they did not have the capital available for such a retooling on their own dime due to out of control UAW labor costs.

Khaki Elephant said...

More on the labor wages: when you include current benefits, the cost to a automotive company for the average UAW employee is around $75/hour. They have considerably more health, retirement, and paid time off benefits than most Americans. When you compare that to and hourly cost somewhere in the 40s for Toyota, Nissan and Honda, multiply that by the number of employees and you have a competitive disaster.

Anonymous said...

But the UAW has a hand over a barrel when dealing with the car companies. They demanded those wages and benefits and if they did not receive them, they would strike.

There is NO guarentee that they would survive with bailout money.

I have not heard if its 25/3 or 25 billion each, but 25 B for the big 3, they can burn that in a quarter.

Bankruptcy is a viable solution. While no consumers may buy their cars. Businesses can. Police units will still nee the Ford Crown Vic/Dodge Charger/ Chevy Impala for police cruisers. Contructions firms need pickups for work. Ford makes a lot of specialty vehicles for construction, mixers, cherry pickers, etc...

They can survive.
Ford does not need Mercury
GM does not need Hummer, Buick, Pontiac, GMC
Chrysler does not need a car based on the Hemi.

Let one or more go bankrupt, because a bailout does not guarantee survival.

Anthony Palmer said...


Thanks for dropping by. I apologize for the delay in responding to your comment. But I must disagree with your comparison of 9-11's aftermath to the current economic crisis. I don't think anyone can treat the economy as some type of sterile entity by saying companies can "consolidate and restructure." You even said "some jobs will be lost in the short term, but in the long run with a more competitive strategy more jobs can be created." The problem with that is the first five words. "Some jobs will be lost." These are people's LIVES that are impacted by these lost jobs. If you are barely able to make ends meet as is, why should you have to suffer from the poor business practices of your manager. Do you honestly expect the average person on the assembly line to know about the business strategies and marketing decisions taking place in executive boardrooms? Do you honestly expect the person at the bottom of the food chain to have the economic and business acumen of the people at the top? You take away these people's jobs and they are not going to be able to pay their mortgages, their health care bills, their car payments, and their other expenses. How many jobs are you willing to sacrifice for ideological principles?

I don't think these bad executives should be rewarded either, but I also think that protecting jobs is more important than punishing poor managers. Union contracts could indeed be renegotiated, but executive compensation could also be renegotiated. This money should not be given blindly--it should be given with conditions. But even though it might seem like we're rewarding poor management, the ability to protect many more innocent families makes it worth it, IMO.

By the way, one reason why the Japanese are competitive is because they don't have to worry about the unions. But Japan also has single-payer national health care.

As for the blogging contest, thanks a lot. That took place this spring. They never posted my victory speech on the page, but it was a fun experience regardless. Glad that site is up and running again.

Anthony Palmer said...


Exactly. It's not just about CEOs. It's about families--innocent people just looking for work. I don't think we can detach the human element from the financial mess these companies find themselves in. I think a lot of conservatives in particular are rethinking the role of government as it applies to this. Laissez faire capitalism sounds good in theory, but a lot of families could really use a steady hand on the wheel right now--even if it is the big bad government.



Well, I think the Big 3 was making what people wanted to buy. The problem is, they weren't making what people NEEDED to buy. But who can tell consumers what they should and should not buy? Gas is much cheaper now, but I don't think people are inclined to buy those Hummers and Ford Expeditions anymore because they simply burn too much gas and they really don't need to drive something like that to soccer practice. But like I told Timothy, I'm not prepared to send all these millions of people to the unemployment line. That would be disastrous and further decrease consumer spending because people will have less money to spend. We don't want the upcoming recession to become a full blown depression, so I'd be willing to provide assistance to these three companies even though they certainly don't deserve it. It's because we as a nation don't deserve the consequences of letting them fail.



John McCain advocated an "all of the above" approach to achieving energy independence: offshore drilling, nuclear, and green energy. Why not do the same with the Big 3? We can renegotiate UAW contracts, renegotiate executive compensation, and provide fewer benefits to retirees. I don't think labor unions alone should be scapegoated here. Money can be saved everywhere.

Thank you all for the comments.

S.W. Anderson said...

Khaki Elephant wrote: "The average card-carrying UAW member costs around $30 more an hour that their counterparts at Toyota, Honda and Nissan."

The average Big-Three hourly-wage worker makes $28/hour. And the UAW is in at least some U.S. Toyota plants. I don't know if it's in others, but suspect it is.

Labor costs are higher here than in Japan, Korea, France, Germany and Sweden. A big reason is that here we have a perverse health care financing system while the other countries provide health care or affordable health care insurance. So, their industries don't have to, and their workers don't go broke or end up bankrupt if somebody gets seriously ill or badly injured, or has a kid with terrible health problems.

Of course, people in the other countries I mentioned pay higher taxes. By and large, they seem satisfied with their health care systems. And, I haven't heard about any tax revolts in those countries.

All of that leads me to think that if they can do it and make it work, we can too — and should.

Khaki Elephant said...

Happy Thanksgiving, Anthony.
Have a great one!

Khaki Elephant said...

S.W., the dollars are refer to are the costs of labor, not the hourly wage. When I hire somebody I have to consider the cost at around 20 - 30% higher than their actual wage do to benefits. With the big 3 the costs is around 100% higher due to time off without production, insurance compensation, etc . . . not to mentioned retirement benefits that dwarf what imports provide to their labor force.

However, national health care is not the answer. Not only countries who have it hike taxes to oft-crippling rates (as I experience when I was living in Cologne under a German contract) but there is also a direct correlation between nationalized health care and it's burdens on employers and employees to unemployment rates. Even the wonder of Sweden, when their unemployment rate is measured using U.S. standards, hovers around 17%. It's like Jimmy Carter is always their president.

Anthony Palmer said...

Khaki and SWA,

I'm not sure one can compare the US and Japan in terms of their auto markets without taking the Japanese lifestyle into account. Yes, Japan's labor costs are lower than the US's, and yes, Japan has a national health care system. (You pay 30% of all costs, the government pays the other 70%, no questions asked.)

One thing to remember is that Japanese families usually do not spend a lot of money on cars because they are so expensive to own. You have to prove that you have a place to park the car, for example. And insurance and mandatory driving school are very, very expensive. (Like $3000 for driver's ed!) Thus, many Japanese simply use bicycles or ride the trains. This means they don't have to worry about gas, car repairs, and insurance. So more Japanese people are able to save more money. They might not buy a lot of American cars in Japan, but they also might not need a car at all.

Having said that, I would support the renegotiation of union contracts in conjunction with renegotiating the compensation of executives. I don't think scapegoating unions or scapegoating bad executives solves the problem. In politics, you need two wings to fly a plane. I don't see why fixing the Big 3 should be any different.

And finally, Happy (belated) Thanksgiving to you too! Hope you had a great one.

Mark in Austin said...

Anthony and 7-10ers, Happy TG.

Some additional observations follow.

Ch. 11 would allow the companies to rid themselves of unwanted dealers. An 11 could slash executive compensation, close unnecessary duplicate divisions and seek new capital, while devaluing or nullifying the common stock.

However, politically, the likeliest way to use the power of the bankruptcy court to restructure an auto industry that survives is an agreed planned 11 with the Fed going in on the day of bankruptcy as the new and favored lender. BHO is exploring this. GM is balking, from what I have read.

I assume automotive suppliers also supply the heavy truck, tractor, and aviation industries. There really is a lot at stake here, and careful consideration is in order, not raw emotion.

S.W. Anderson said...

Khaki Elephant, show me the crippling. Last time I read anything of depth about it, most Europeans expressed higher satisfaction with their home life/work life than most Americans. And, most Europeans expressed satisfaction with the health care they had received, while a large percentage of Americans expressed dissatisfaction. A big part of that dissatisfaction involved dealings with insurance companies.

AP, I like your two-wings analogy. It's true.

Unfortunately, labor has been seriously devalued in our economy over the past 30 years, not just by automation, trade and globalization, but conceptually as well. People, their knowledge, talents and skills can be marginalized — and to a great extent have been — by business generally. The trend is to "design" jobs so any need for individual skills, experience, talent and judgment is minimized. That way, people can be quickly and easily laid off or terminated when doing so will save or make the company an extra dollar, and can just as easily be replaced when doing that will save or make the company an extra dollar.

Thus, job security has been made a contradiction in terms.

This cold-blooded drive to maximize profit and marginalize workers comes at a high cost, though.

The hell of it is that too often the high cost is borne in various ways, and disproportionately, by the very worker-taxpayers whose contributions have been marginalized.

Chris McNeal said...

Sorry I'm a bit late in joining the conversation but I'll chime in anyway.

The problem I have with using the bailout money for the auto companies is that the money was supposed to be used for getting the financial markets back in shape.

If the financial markets are not working, it really doesn't matter what GM does. They will not be able to produce cars and people will not be able to buy them.

I also disagree with the notion that letting people lose their jobs in the short run is about ideological principles. The conundrum is that by allowing people to artificially hold jobs in the short run, you take away even more jobs in the long run. Obviously you cannot ignore the short run, but people losing jobs just has to happen sometimes.

Anthony Palmer said...


I agree that careful consideration should not be sacrificed by raw emotion. How we solve the economy has very real consequences that affects many peoples' livelihoods. This is why I think pragmatism is more important than ideology. And thanks for the Thanksgiving wishes. Good to hear from you again.



I would support a nationalized health insurance plan even if my taxes went up in order to pay for it. The shock of losing your job is only magnified by the loss of your health insurance and other benefits. Shifting some of these benefits from company-provided to portable would make people less dependent on their employers and also decrease employers' costs.



I agree with you, but only partially, about how the financial markets not working is overshadowing GM's financial difficulties. I think the financial markets exacerbate the problem, but I do believe GM is in a unique situation. Ford is not doing as badly as GM, and the Japanese and Korean car makers are not doing that badly at all.

I understand that if you want to make an omelet, you have to break some eggs. But I know I wouldn't want to be the person that has to hand out the pink slips. And I'm sure you wouldn't wish for that to happen to your own family. What are these families supposed to do if they have to get laid off simply because "the market isn't working?" We're not talking about a small business that maybe impacts 100 people. We're talking about tens or hundreds of thousands of people. If they have to "artificially" hold their jobs in the short run while the company retools and is able to save itself, that's a risk I'd be willing to take because I wouldn't want to put all those families out in the unemployment line for jobs that may or may not come back a few months later when the market is more favorable.

Copyright 2007-2010 by Anthony Palmer. This material may not be republished or redistributed in any manner without the expressed written permission of the author, nor may this material be cited elsewhere without proper attribution. All rights reserved. The 7-10 is syndicated by Newstex.