Thoughtbasket

Auto Company Bailout: Make it Hurt

November 18, 2008 · 7 Comments

Politicians in Washington are debating whether the government should bail out the Big 3 American automakers: Chrysler, Ford and GM. In addition to the $25 billion in low cost loans the government has already committed to Detroit, the Democrats, including President-elect Obama, are pushing for more aid. I have long been fascinated by the utter incompetence of American car companies, and came out against the $25 billion in loans, so of course I have some thoughts on this push for additional help.

I’m going to ignore ideology (eg. in a free market we should let companies fail) and focus on practical issues. But practically speaking, giving money to the car companies would be rewarding failure. For 30 years the Big 3 have been getting spanked by Japanese, German and now Korean car companies. They have relied on trucks and SUVs to generate profit and have proven themselves completely unable to produce an appealing small car. They have also demonstrated a fantastic inability to retool their processes to compete with the imports.

NYU business professor David Yermack calculates that GM and Ford alone have invested $465 billion in capital since 1998 and have seen their combined market capitalizations drop from $117 billion to $6 billion today. These are not companies that spend money well, so why should the taxpayers give them any more? And let’s not forget that GM CEO Rick Wagoner made $3.3 million last year while Ford CFO Lewis Boothe made $3.1 million (I’m letting Ford’s CEO off the hook for his $9 million because he’s new and they had to pay up to recruit him from Boeing). Why should our money go to support multi-million dollar salaries for guys who are screwing up?

Conservative commentators (hello Wall Street Journal) blame much of Detroit’s problems on expensive union contracts and hefty benefits paid to retirees. The usual estimate is that retiree legacy payments add $1,500 to the cost of each vehicle. But even if you could take $1,500 of the price of American cars, they would still lose market share because the cars suck. A comparable Toyota is worth $1,500 more because it is better made and will last forever. Also, I should note that it was the executives of the car companies who signed those rich union contracts. That being said, the UAW is way out of line with the overall labor market. Gold-plated health benefits, ridiculous work rules and no-layoff clauses are no way to help your company beat the competition.

So the main argument against bailing out the Big 3 is that it would be throwing good money (OUR money) after bad. What are the reasons to support a bailout? It turns out that there are 3 million of them; that’s the number of jobs that analysts have tied to the auto industry. And the theory is that if we let the Big 3 fail, all those jobs will go away. The car companies are saying that nobody will buy cars from a bankrupt company. I don’t totally believe that - I think that Americans have flown enough airlines that were in bankruptcy to understand that a bankrupt GM doesn’t really go away - but nor do I agree with Yermack that Toyota and Honda can just take up the slack. Realistically, it will take years for the foreign car companies to ramp up production to take over for a failed Detroit company. There is also the argument that the auto industry drives America’s sophisticated manufacturing industry, which is essential for both national security and future economic growth. I don’t know enough about that to comment intelligently, but it makes some sense on its face. Finally, there are all those retirees with health insurance and pensions. If the Big 3 fail, the obligations to support all those people will fall on taxpayers anyway.

So maybe, on balance, some sort of bailout is a good idea. If even 500,000 jobs were lost and the Big 3 pensions put onto the taxpayers, that would not be good for the economy. But good idea or bad idea, the bailout is still going to happen; the Democratic leaders (Nancy Pelosi and Harry Reid) are pushing for it, and Barack Obama owes the unions big time for getting out the vote. And if it’s going to happen anyway, let’s at least push for it to be done the right way.

Any federal bailout of the Detroit automakers needs to A) be onerous to shareholders and executives, and B) force restructuring on the industry to make it competitive. Paul Ingrassia, who won a Pulitzer Prize for his Wall Street Journal coverage of the auto industry, argued for removing current management, wiping out shareholders and restructuring contracts. He is absolutely right. And wiping out shareholders has to include the Ford family, who continue to dominate Ford Motor Company. Michael Levine, a lecturer at NYU School of Law, adds that the dealer networks have to be restructured. It has long been known that the Big 3 have far too many brands and dealers relative to the cars they sell (GM has 7,000 dealers while Toyota has 1,500) but state laws protect dealers from being closed. These state laws exist because dealers are big players in local economies; unfortunately, they are not big players at the national scale, and these state laws need to be trumped by national concerns.

All of these objectives can be realized through a packaged bankruptcy, which was suggested by Edward Altman, a business professor at NYU (lots of NYU references in this post). Packaged Chapter 11 bankruptcies, in which the financing that takes you out of bankruptcy is pre-negotiated, are pretty common. The government would provide the financing, and that would address the concern that consumers won’t buy cars from a bankrupt manufacturer. In fact, a packaged bankruptcy is the only route I can see that achieves all important goals:

  • Management removed and compensation limits implemented
  • Current shareholders wiped out
  • Union contracts renegotiated
  • Dealer contracts renegotiated and state laws changed.

So please, politicians, I implore you: don’t give in to corporate and union lobbying and just hand the car companies money. Use this opportunity to force on the car companies the changes that they need.

An interesting side note is that this is another case of the metaphysical phenomenon of current actions sowing the seeds of one’s eventual destruction. For decades the Big 3 have fought against fuel efficiency, spending gajillions of dollars lobbying against the CAFE fuel economy standards instead of just building better cars. And now, because they can’t build a good small car, the Big 3 are begging for help. In the same way, Republicans have for years been resisting any legislative efforts to push fuel economy, and look what just happened to them. Congressman John Dingell of Detroit, although a Democrat, has been the Big 3’s biggest supporter in DC (his wife is an executive at GM), and now Henry Waxman is trying to take away Dingell’s precious chairmanship of the Energy and Commerce Committee. In all these cases, we are seeing people and groups being beaten by that against which they fought the hardest. Very Jungian, don’t you think?

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The GOP is Splitting in Two

November 7, 2008 · 2 Comments

In the wake of sweeping Republican losses on November 4, we are seeing the GOP fracture into two wings. The first wing is the traditional, intellectual wing, as personified by George Will. This is the low taxes, small government, muscular foreign policy wing. The second wing is the Main Street, rail against the elites wing, as personified by Sarah Palin. This is the social conservative, religious right, law and order wing. These two wings always had a tenuous coexistence in the party, with the intellectual wing using wedge social issues to get the Main Street wing riled up, and then screwing them economically. The intellectuals provided the money and ideas while Main Street provided the votes.

This tenuous coexistence, however, has now turned into open hostility, with each side blaming the other for McCain’s loss. And as the GOP tries to figure out what it really is, and how to avoid a third consecutive stomping in 2010, these two wings are fighting for dominance. Unfortunately for the future of the Republican Party, the two wings can’t reconcile, and neither wing can win an election on its own. After all, even with the wings combined, they just got smoked by Barack Obama’s politics of hope. On their own, they are doomed.

The intellectual wing itself has two components - the rabid neocons and tax cutters versus the more moderate Rockefeller Republicans - but they both share a commitment to lowering taxes and shrinking government. They also share a slavish devotion to President Reagan. McCain, despite his campaign rhetoric in 2008, is part of this wing. As Joe Klein from Time described him:

He believed in the unilateral exercise of American power overseas, with an emphasis on military might rather than diplomacy. He believed in trickle-down, supply-side, deregulatory economics: his tax plan benefited corporations and the wealthy, in the hopes that with fewer shackles, they would create more jobs.

But widening income disparity and the financial crisis of 2008 have fundamentally discredited that economic approach. Reaganism failed. And while the Rockefeller Republicans might be able to craft a workable economic theory, they are so marginalized in the party that they can’t ever win. Moreover, there simply aren’t enough Americans driven by desire for lower taxes to support this wing of the party. There are too many citizens who actually want their government to provide something.

The Main Street wing of the GOP is the part that believes there is a “real America,” as opposed to the liberal “fake America.” It’s anti-elite, anti-intellectual and anti-media. Which is its main problem: it’s against everything and for nothing. It is fueled purely by anger and self-pity. This is unsustainable; without new ideas, this wing will wither and die. It will be consumed by a black tumor of hate, like Lee Atwater’s brain.

Also, much like the intellectual wing, the Main Street wing isn’t large enough to win on its own. There aren’t enough voters who buy into its false dichotomy. This wing, however, has a chance. If it were to embrace a truly populist economic strategy, it might be able to peel off enough blue collar Democrats to build a winning coalition. Even the Wall Street Journal notes that “new Republican voices are popping up to argue that the importance of working-class voters means the party needs to develop economic policies more obviously directed toward the working class than the capitalist class.” But that would require a complete reworking of Republican economics: supporting unions and trade protection at the expense of corporate interests and wealthy individuals. It would require an approach that sounds strikingly similar to….the Democrats.

This is the problem facing GOP strategists as they figure out what to do. They want to chase the voters, but that will require moving away from their core philosophy, because that’s what the voters are doing. As Politico put it, the GOP is “a party that is overwhelmingly white, rural and aged in a country that is rapidly becoming racially mixed, suburban and dominated by a post-Baby Boomer generation.” Some strategists want to pursue growing demographics, namely black and Hispanic voters. But how do you do that when your two wings cater to wealthy WASPS and white rednecks, respectively? Both wings of the GOP have painted themselves into electoral corners, and there is no obvious way out.

Perhaps the recent election marked the generational shift that we all knew was coming. For the past 20 years government has catered to, and been run by, people of our parents’ generation - those who grew up in the 1940’s and 1950’s - often leaving those of us from later decades mystified at the decisions being made. And we kept wondering, as old fogeys (Ted Stevens!) retired or died, and young folk grew old enough to vote, when our generation would start making decisions. Nobody WE knew hated blacks, or thought that poor people should be abandoned, so why was government pursuing such crappy policies? Why was the GOP so out of touch with our generation? After all, when you belong to a generation where a third of you have tattoos, it’s hard to see how branding a black candidate as “Muslim” is going to work. And it didn’t: Obama won, while conservative congressional candidates lost.

The GOP isn’t dead; its basic message of small government and individual liberty will always resonate. But it needs to do a lot of work to retool that message into a governing philosophy that will appeal to the new generation.

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Shock & Awe – The Good Kind

November 5, 2008 · No Comments

Last night’s results created the type of shock and awe that we can all use. Not so much shock for me, since I’ve been confident of an Obama win for about a week, but definitely awe.

I was watching the results last night with about 20 friends, and we are generally a boisterous crowd. But when Obama gave his acceptance speech, we were utterly silent. That silence was not because we wanted to hear Obama’s dulcet tones; it was because we were struck speechless by the import of the moment.

America’s first black president. Think about it. We did; in mute awe my friends and I contemplated the greatness of that achievement. None of us are black, but we all recognized how important this was. Obama’s election probably won’t solve all the country’s race problems, but it sure feels like a big step. How can you not love a country where a black man named Barack Hussein Obama can rise from modest means to become president?

Yet our awed silence transcended Obama’s race, for there was a sense that his election represented a transformation of American politics. Votes for Obama were votes against divisiveness and for unity. They were votes against dishonesty and for solutions, against paralysis and for progress. They were votes that swept aside the past eight years, years of Bush and DeLay, of crony capitalism and Terri Schiavo. We were silent because Obama’s victory justified – wait for it – the audacity of our hope, our hope for change.

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Treasury Plan Turns Taxpayers into Dumb Money

November 4, 2008 · No Comments

Yesterday’s Wall Street Journal ran an article about how the Treasury’s bank buyout fund is luring “thousands of banks.” When the program was first announced, banks were afraid to apply, thinking it would make them look weak, but now they are afraid not to apply, since not having government money could make banks look like they were too weak to qualify.

But the article also noted that banks are thronging the Treasury because the Treasury capital - taxpayer capital - is so cheap. Here is the money quote:

Now institutions across the U.S. worry that if they don’t try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments.

Many years ago I worked for a venture fund that was captive to a small investment bank. All the other VCs looked at us as dumb money. “Nobody else will invest in it, call those guys…they’ll do anything to get a banking fee.” Dumb money is who you call to bail out your losers. Dumb money accepts whatever price you offer, and doesn’t ask for better terms.

The Treasury department, acting on behalf of the taxpayers, is dumb money. WE’RE dumb money. That sucks.

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Sitting at the Front of the Bus

October 31, 2008 · No Comments

No, sorry, this isn’t about Rosa Parks, nor is it a riff on the great Otis Redding song, although I listened to his greatest hits this morning. This post is about a far more quotidian subject, namely my daily commute.

Every day I take the express bus downtown to my office. Here in San Francisco, express buses are double-length, with some seats running along the walls and other seats perpendicular to the walls. The first several seats, 10 or so, are all along the walls, and they are all meant to be given up to elderly or handicapped passengers. In fact, a big blue sticker above these seats clearly states that:

Federal law mandates that the front seats of the bus be given up for seniors and persons with disabilities. Please do not sit in those seats if a senior or person with a disability needs a seat.

The express bus is a commuter bus, so there are almost never elderly or handicapped passengers. 99% of the passengers are healthy yuppies heading to work; therefore it would be silly to leave those front seats empty, waiting for some Nana who will never board the bus.

However, I find it interesting that it is nearly always women who sit in these seats. Men will move to the back, standing if the bus is full, rather than sitting in the front seats. Women, on the other hand, often don’t even look to the back; if the front seats are open, they plop their apple-shaped derrieres right down.

I’m not sure of the reason for this disparity, but let me throw out a few possibilities:

  • Women wear high heels and want to sit down as soon as possible
  • Men are afraid of breaking the rules
  • A man knows that if a senior actually boards, he will be expected to give up his seat before a woman, and he doesn’t want to hassle with the mid-ride change
  • Women internalize that one day they will be pregnant, and these seats thus will be reserved for them

Again, nobody is actually taking seats from seniors, so there is nothing wrong with sitting in these front seats, but I find the strong gender difference to be fascinating. Any suggestions?

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Religion and Violence

October 28, 2008 · No Comments

I recently attended a lecture by James Carroll, writer of Constantine’s Sword and House of War, among other books. Carroll was ordained a Catholic priest, but left the priesthood to write, and has become critical of both religion and the military-industrial complex. He combined these issues in his lecture, which was generally about war, religion and violence.

I won’t try to summarize Carroll’s lecture, which was wide ranging and full of allusions, particularly with references to Civil War violence and its place in the American psyche, but I’ll try to reconstruct the thrust of his argument. Fundamentally, Carroll believes that religion promotes violence, partly through its inherent duality – non-believers are wrong – and partly through its emphasis on martyrdom. He posits that this religious conveyance of violence is demonstrated by what he calls “irrational escalation” of violence: when individuals or states keep attacking beyond a point where it makes any sense. The bombing campaigns of the late Vietnam War are an example for Carroll of violence which a participant – in this case the US – escalated past rationality. For Carroll, the irrationality of this violence is proof of its religious origin (I’ll ignore for the purposes of this post any counterarguments, such as the role of game theory in irrational violence).

Carroll then takes this concept of escalating violence and brings it forward into the nuclear age. For him, nuclear war is fundamentally different than conventional war. While the bombing of Vietnam generated horrific deaths, it didn’t actually threaten humankind. Nuclear war does. Thus Carroll states that irrational escalation of violence, which used to be just awful, is now unacceptable, because it could destroy the world. Add in the potential of non-state actors to acquire nuclear weapons or other WMDs, and Carroll sees that religion has a duty to actively renounce violence. There are interesting parallels here to Sam Harris’ arguments in The End of Faith.

Carroll’s talk was surprisingly moving, and he received a heartfelt ovation at the end. I think the emotionality was due not only to Carroll’s outstanding oratorical skills, but also to the tremendous import of what he was discussing. This was not your standard scholarly lecture on the nexus of religiosity and violence, but rather an impassioned call for organized religion to try to save the world. Carroll’s passion was contagious; he stood, utterly firm in his analysis and resultant convictions, and we were inspired to stand with him.

It is unclear to me whether Carroll would position himself as a fully Gandhi-style non-violenceinist (no, it’s not a word), but he is absolutely trying to move the world away from institutionalized violence, pushing religion to help with that movement. In face of a history of human savagery, Carroll still hopes to create change, viewing his hope as not a futile dream, but rather an essential political act. And for the 75 people who heard him speak, we were lucky enough to experience how we can be moved and inspired by a single man’s fierce hope.

Yet again, thanks to Septa for her input.

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End of the Tax Revolt?

October 23, 2008 · No Comments

Back in early 2007 Mark Schmitt wrote an interesting piece in Washington Monthly suggesting that America might be approaching a time when talking about tax hikes was not an automatic loser. He pointed out the financial crises that are likely to come if the government doesn’t increase revenues, and then discussed various ways that a bipartisan consensus could emerge. In the midst of the current financial crisis, with government spending suddenly increasing by a trillion dollars, Schmitt’s argument is even more powerful. Check it out here.

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In Defense of Elitism

October 22, 2008 · No Comments

The McCain-Palin campaign, and Republicans in general, keep attacking “elites.” What’s so terrible about being elite? When the US military has a difficult assignment, who does it send? Its elite commando teams, the SEALs and the Green Berets. If you want to win a gold medal, who do you send? An elite athlete like Michael Phelps. If you have a heart problem, what doctor do you want? An elite cardiologist.

For doing difficult things, we generally want the best prepared person we can get. After all, you wouldn’t get on an airplane piloted by someone who had barely gotten through flight school. But when it comes to the presidential election, the contest for possibly the hardest job in the world, suddenly the approach gets reversed. Advanced training and cerebral approaches are eschewed in favor of plain speakin’ and gut instinct.

I’m not saying you have to go to fancy schools in order to be a good president. George W. Bush went to two of the fanciest, and he’s pretty well cheesed things up. But neither should prestigious degrees or eloquent speech preclude one from being elected. There is nothing inherently bad about being elite, nor inherently good about being average. That being said, I don’t want Joe the Plumber running this country, although I want my president to remember who Joe the Plumber is. Or as Jon Meacham put it, “Do we want leaders who are everyday folks, or do we want leaders who understand everyday folks?”

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Francis Fukayama Redeems Himself

October 20, 2008 · 1 Comment

Francis Fukayama may have restored his reputation, at least with me, by writing an article in Newsweek recently in which he was actually right. Fukayama, a professor at Johns Hopkins, is probably best known for writing The End of History, in which he claims that liberal democracy has won and is dominant. He was also an early supporter of George W. Bush’s Iraq invasion, providing intellectual justification from a non-Pentagon neocon that was essential to selling the war.

But Fukayama was so wrong on both counts that I was beginning to think that maybe he taught at Johns Hopkins preschool rather than the University. His Newsweek article, however, is possibly the best summary I’ve seen of where the US has gone wrong over the past several decades. To summarize his summary: the Reagan revolution was about A) lower taxes and less government; and B) supporting liberal democracy worldwide. We’ve gone too far on A, as demonstrated by the current financial crisis, and we’ve ruined B by doing it at gunpoint rather than through persuasion. Rather than adding more commentary, I encourage you to read his article here.

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Seth Rogan and the Mortgage Crisis

October 17, 2008 · No Comments

Professor Gary Cross, of the University of Pennsylvania, has a new book out, called Men to Boys: The Making of Modern Immaturity. In it he traces concepts of adult masculinity from Victorian gentlemen to the man in the gray suit of the 1950’s through the deconstruction of tradition in the 1960’s counter culture and culminating in the modern boy-man, exemplified by the genial slackers portrayed by Seth Rogan in virtually every movie he has ever been in.

What does that have to do with the mortgage crisis? I place Professor Cross’ cogent analysis in a broader context of evading responsibility, which has become more and more the American paradigm during the period Dr. Cross analyzes. As men have transitioned from working downtown to getting stoned while they play video games…

….so too Americans have transformed themselves from a thrifty nation of hard workers into a society of debtors who leapt at the “free money” given them by cheap mortgages and (falsely) rising house prices.


Source: Bureau of Economic Analysis

And while Mr. Rogan’s character in Knocked Up became responsible toward the end of the film, it took the crisis of Katherine Heigl’s pregnancy to force that maturation. In the same way, not until this year’s financial crisis did Americans recognize that they were living beyond their means. They would have continued to toke at the mortgage-backed bong, one hand on the joystick and the other in the Cheetos bag, had not Fannie and Freddie’s financial water suddenly broke, uncomfortably thrusting us all into mandatory adulthood.

Post Scripts

None of this should be taken as an attack on Seth Rogan himself. He is clearly way too busy to actually be a stoned slacker, and I’m sure he now has more than enough money to support several giant mortgages.

Also, lest you think Professor Gary Cross is something of a dilettante, you can download his extensive publication list from the Penn website. Full disclosure, however: he is a fellow graduate of Harvard Divinity School, so I tend to support him.

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