Tuesday, October 28, 2008

A Different Welfare For Detroit


Yesterday, The Washington Post ran an editorial titled "Welfare For Detroit."

AFTER YEARS of decline, U.S. auto companies face the double whammy of a credit crisis and a recession. Car and truck sales fell 26.6 percent in September, the first month since 1993 in which fewer than 1 million vehicles moved off the lots. General Motors, threatened with bankruptcy and burning through $1 billion in cash reserves per month, is groping for a merger with Chrysler. Ford's stock is down more than 70 percent in the past year, and investor Kirk Kerkorian is dumping his shares.

The $25 billion federal loan approved by Congress on Sept. 25 may not reach Detroit for six to 18 months because of red tape. So Detroit's allies are pushing for waivers of the usual rules and, perhaps, another $25 billion before the end of the year. And why not? Everyone else seems to be getting a bailout these days. Hundreds of thousands of people depend on Detroit for their jobs, directly or indirectly.

Well, we can think of several objections. First, there is the question of whether the U.S. government should be picking winners and losers in a business such as this. It's one thing to bail out the financial sector, whose product -- credit -- is essentially fungible and on which all other businesses depend. Automobiles, however, are not interchangeable, and Congress can't substitute its specific technological and aesthetic preferences for those of the market. What if we lend Detroit $25 billion and still nobody buys its cars?

Second, this bailout taxes the less well-off to protect the relatively privileged. The average individual General Motors production worker, whose job would be saved by the bailout, makes $56,650 per year, according to the Center for Automotive Research, and that doesn't count better-paid, white-collar types. Meanwhile, half of all households-- which typically include more than one earner -- make less than $50,000 per year. Where's the justice in that?

Congress approved $7,500 tax credits for purchasers of GM's much-touted plug-in hybrid Chevy Volt, built to run 40 miles on a single electric charge. That would knock the net cost of the four-seat Volt, due out in late 2010, down to $32,500 -- not much less than a basic Cadillac CTS costs now. Even then, it could take a decade of Volt driving to recoup the difference in purchase prices between it and the far cheaper Toyota Prius. Assuming a few well-heeled drivers take that deal, why should poorer people be taxed to enable them?

The downfall of the American auto industry is indeed a tragedy. But the automakers and the United Auto Workers have only themselves to blame for much of it. For years, they pursued protectionism against foreign competitors rather than tackle them head-on. The automakers say that they need $25 billion from Congress to offset the additional costs of tough new fuel-efficiency standards. Perhaps they wouldn't be in that situation if they had accepted such standards a long time ago and retooled to meet them, rather than persisting in the more familiar, and profitable, business of making gas guzzlers.

We would all have been better off if the federal government had enacted a higher gas tax so that the Big Three could have planned production on that basis. A stiffer gas tax, rebatable in some form to consumers, would still be the best way to guarantee a long-term shift to more economical cars. Alas, there's a limit to how much taxpayers can spend ensuring that such cars get built in Detroit.
I couldn't resist commenting:
Toyota and Honda, the largest competitors for Detroit automakers, have enjoyed a protected home territory and continue to do so. This has allowed them to develop and sell a variety of vehicles that, until the recent gas price increases, were only niche products in the U.S. In fact, because Japan was a market virtually closed to U.S. manufacturers, Toyota, Honda, and a variety of other Japanese manufacturers used the Japanese buyers to subsidize their sales in the U.S. You might note the same thing is happening with the Korean manufacturers.

In fact, Toyota spent large sums to develop full-sized trucks and SUVs to compete in the U.S. market because that was where the demand and profits were.

The U.S. companies had a variety of small vehicles that couldn't be given away... and were subsidized by the profits from the larger vehicles that were in demand by the public. It is interesting that the Ford Focus, which was one of those vehicles that couldn't be sold profitably, has become a big seller for that company... and at a profit. Does that make Ford execs geniuses for keeping a dud around for so many years?

The combination of an artificial gas price bubble [which is correcting], credit availability, and onerous government mandates for the next ten years, have turned economic "engines" for the U.S. economy into stalled scrap.

So, while the U.S. manufacturers are not blameless, you might recognize the complicity of the U.S. and foreign governments in this situation. You might also recognize the the U.S. manufacturers are both successful and profitable in most other global markets. You might also recognize that U.S. vehicle quality... particularly Ford... is virtually the same as Toyota's.
I noticed this comment received more "recommendations" than the others... except this one which received the same number.
"We would all have been better off if the federal government had enacted a higher gas tax so that the Big Three could have planned production on that basis. A stiffer gas tax, rebatable in some form to consumers, would still be the best way to guarantee a long-term shift to more economical cars."

I agree with one exception. REBATABLE. My suggestion has been that the money raised from an increasing gasoline tax go one third to repair and expansion of our infrastructure, one third to health care and one third to social security.

Is there a politician in the country with the cajones to even discuss raising the gas tax? Al Gore said we should talk about it and he got hammered. Six months ago would have been a very bad time to add a quarter or so to gas prices but the post election "new found courage period" would be perfect.

Finally all the tricky ways the politicians use to lead buyers to hybrids and electrics are ill focused. It is not the purchase of cars that consumes energy. It is the USE of the car. In the DAILY DECISION to drive the car or take the train, it is the cost of the USE of the car that is critical. This is best effected through higher FUEL cost. The taxation system is in place. No new bureaucracies are needed.
No, politicians won't do anything for which they can be blamed if they can blame the automobile manufacturers instead. As I wrote earlier this year:
Now that it is obvious to everyone that the government has no intention of letting market forces act as the agent of change, it is time for the government to quit pussy-footing around and do what is done in Europe: add taxes of $3 or more per gallon of gasoline. At that point, all other government actions... mileage and CO2 regulations, restrictions on drilling for oil, and subsidies for alternative fuels... will be moot and can be eliminated because the cost of implementing the government's policies will be borne directly by consumers without the government being able to divert attention and blame to vehicle manufacturers and oil companies.

... that would be a blow to politicians who would have to stand up to their constituents and explain why the government has to be involved at all in the marketplace. It would also create issues with regard to why many other taxes would have to remain in force [and the supporting bureaucracies]. It would also highlight issues with regard to the plethora of regulations that create additional costs for manufacturers and consumers.
I absolutely feel the economic manipulation by the government in the name of important causes is the cause of so many ridiculous problems and misguided fixes... including Detroit automakers current and future problems. So, while the second commenter's arguements are logical they are not reasonable.


An indication of how "protected the Japanese market is....

(RTTNews) - The sale of foreign auto makers cars, trucks and buses in Japan dropped 5.5 percent in August from the year before.

The Japan Automobile Importers Association says weaker sales of Volkswagen and BMW autos offset a rise in sales by Mercedes-Benz.

Sales of imported vehicles by foreign car makers totaled 14,406 in August [about 168,000 annually], down from 15,249 in the same month last year. Among the top three foreign brands by sales volume, Volkswagen saw sales drop by 1.5 percent on the year and BMW sales fell 21.3 percent. Mercedes Benz saw an increase of 3.3 percent.

Ford posted the largest drop among the top 10 foreign brands, falling 28.1 percent on the year.

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Meanwhile, Toyota and Honda, excluding other Japanese brands, sold over 240,000 vehicles... in the month of September, 2008.
So contrary to the Washington Post's assertion that U.S. manufacturers got "protection," The U.S. market is wide open.

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SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)