I had collected three articles in a folder to write a piece on the auto bailout in November, but travel, business and holidays got in the way. Since then I discovered that Lynne Kiesling, of Northwestern University and the Knowlege Problem.com, had posted with the very same links. Ms. Kiesling happens to be on the short list of brilliant and hot-looking brainy women I admire, a list that includes also the 6′3″ economist, Megan McArdle. Along with Will Wilkinson, of the Cato Institute, and New Yorker, David Yermack, these four have written the best pieces I have seen on the Detroit bailout controversy. First, a word from Lynne Kiesling:
For the past 30 years the U.S. auto industry has been like your alcoholic Uncle Bob: his self-destructive habits seem beneficial to him, despite the harm they cause him and the pain they inflict on his family and friends. You want to help him, but don’t know the best way to do so, and you know that if you confront him he will deny it and become angry and violent. You know deep down that Uncle Bob is a drunk bully, but the thought of a confrontation is so painful that you stay quiet and follow a strategy of conflict avoidance. Plus you know that the only way his health will improve is if he is the one who realizes that his habits are self-destructive and that he wants to change. At some point, the issue comes to a head, and the question becomes whether or not you have the courage to tell him what he needs to hear, for his own good and for the good of those who love him.
I agree with Dr. Kiesling that this article for the Wall Street Journal is probably the best piece to date written on the industry’s problems and why it should undergo creative destruction. David Yermack wrote:
Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM’s physical plant during this period was $128 billion, meaning that a net $182 billion of society’s capital has been pumped into GM over the past decade — a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.
As a society, we have very little to show for this $465 billion. At the end of 1998, GM’s market capitalization was $46 billion and Ford’s was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies’ unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better — for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.
There is a genuine, human and personal cost to all this and lest we live up to the reputation bleeding heart money liberals have constructed for conservatives, Will Wilkinson provides a compassionate, yet poignant, view of the effect macroeconomic change can have on the lives of individual human beings.
Unlike slipping tectonic plates, adjustments in the market, even violent ones, tend to make the human world more hospitable over time. The principles that govern the earth as it works out its tensions are indifferent to our welfare. The principles that govern a well-ordered economy favor it. No eye is on the sparrow. No one is watching you. Your job and your dreams may suddenly evaporate. But mostly we find that, as if guided by an invisible hand, the scheme has made available opportunities to work, has made available opportunities to buy the things that make life comfortable, interesting, and long. We can stop the hand from pushing the mountain into the sea, but then we will never enjoy the abundance of the future island we’ve erased. We can put an eye on the sparrow, but more sparrows will fall if we try to save every rotting tree.
Finally, Megan McArdle, the prominent Atlantic writer and economist, writes of the private turmoils with a very personal viewpoint regarding the autoworkers and salaried employees of the industry:
It took me a long, long time to crawl out of that hole. I’ll never make what I expected to make as a consultant. I’ll never have the job security that I had learned to expect in the pre-9/11 world. The universe will always seem a potentially malevolent place to me, ready to unleash some unknown disaster at any moment.
I was in a better position than auto workers in many ways; I didn’t own a home in a dying area, or have children who needed to be educated. I’m not trying to claim that I managed to overcome with hard work and pluck, so why can’t they? What to do with a fifty year old who pegged his future to a failing industry is a real question.
Nor do I think it’s funny to see autoworkers who lived quite a bit better than most of America get their comeuppance. It really doesn’t matter what you make; losing everything, most especially your dreams and your sense of security, is one of the worst things that can happen to a person. Laid-off consultants don’t starve, of course, but neither will laid-off auto workers. They’ll just be forced several rungs down the economic ladder. It will be humiliating, difficult, and it will sour a number of them permanently on life, and their country. If I could stop that from happening to people, without making some other aspect of life much worse, I would.
The cost to many people will be great and very painful, but as a state and region of the country that survived and now thrives after near total economic destruction in the 1980s, we should have nothing but words of encouragement for the rank and file workers and families whose entire way of life will be disrupted. I hope they will look towards Texas for some inspiration and a vision for their future.
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15 Responses to “It Is the End of An Era, But They Won’t Admit It”Search
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BZ needs to add Atlas Shrugged to the LST book club.
That book is more true than ever!
my fear is that they will look to Texas with their hand out and want us to pay for their future.
Great article
No mention of the unions in this discussion?
#4 GriffithLea
This is a fairly broad subject and any discussion of it will inevitably include the UAW. However, unions were not what I was focusing upon when I wrote this. The perpetual mismanagement of our major auto manufacturers and the human and personal effects of the dismantling and rebuilding of a hugely important sector of our economy were my primary concerns.
I don’t necessarily agree that hordes of workers will be forced down the economic ladder. Folks move up and down a few rungs all the time. If the Big 3 file chapter 11, they won’t stop making cars. Most of those people will still have jobs. They may not have the fat pensions or the layoff protection, but who does? People all over are paying their own way. Why should UAW members be any different?
Worst case is the Big 3 shutters the doors. What happens then? Honda, Nissan, et al buy their assets and reopen under a superior management structure and start doing the job GM should have been doing when they were running it. Namely, putting out good cars that people want to buy and selling them for a good price. Someone has to make the parts for those cars and assemble them into a finished product. Those are the same jobs that everyone else has at the non-union facilities.
Everyone makes it sound like there will be a huge everlasting vacuum if the Big 3 declare bankruptcy. That is a load of bull. The market, and the jobs, will fill the void quickly.
Bankruptcy and reorganization is the only answer. You cannot start throwing “bailout” money at a problem that has been festering itself for a long period of time. That will only prolong the inevitable. The big shots and the union people have to realize the “gravy train” has pulled into the station and its time for them to get off. It is kinda hard for most people to feel sorry for overpaid people who earn more than their job descriptions dictates. You just have to be in a union and they automatically get you a raise, whether you earned or deserved it or not.
Texpat, when you’re tired and dyslexic, that came out at Hot looking hairy women. For a moment I was worried about you. Now I realize you too are a leg man.
The big danger of a Chapter 11 is what that does to the accounts receivable of their suppliers and lenders. If the payables of the Big 3 are running at 60 -90 days, that’s going to tie up that amount of money all the way down the supply chain for months while it gets settle in the courts If the suppliers are unable to borrow money to covers those receivables, they in turn will not be able to pay their suppliers and lenders. That’s where you get the domino affect. For smaller companies, it could kill them. Of course they would get paid current on sales made after the filing, but that wouldn’t ease the pain.
#8 Big
You noticed.
I think one of the best answers to problems like is something that will never happen, and that is the destruction of the national union. If unions were forced to negotiate only as locals, and if other locals were banned from striking or staging slowdowns in support of other locals, it would force the unions to deal in the real world of what value the workers at each individual plant have to the company as a whole. Right now, when the UAW negotiates, the unions isn’t setting a value on what each group of workers is worth to GM, they are negotiating what avoidance of a complete shutdown of their operations is worth to GM. If the union was unable to shutdown the entire supply chain and could only shut down individual plants one at a time, then it would be easy to illustrate the value of that individual plant by seeing how much their shut down affects the company as a whole. While GM has created a company “too big to fail”, the UAW has become a union that knows it is “too big to be told no”. The only way to save manufacturing in the American upper midwest and northeast is to either repeal closed shop laws forcing all workers to join unions, or to cut the unions down to size so that they are once again negotiating based on what each group of workers is worth, and not extorting concessions from companies by forcing them to look down the barrel of a complete shutdown.
#3 you are exactly right. The big joke during the 70s, when Houston and most of Texas was flourishing, Michigan was going down the drain, was “will the last person out of Michigan please turn off the lights”. What with our illegal alien problem Houston couldn’t absorb the Michigrants like it did in the 70s.
Obviously the problem has been around for decades so there is no sense putting off the inevitable by bailing out the Big 3. Let them sink or swim on their own.
After reading comments regarding todays bailout hearings one thing is very evident. The democrats are trying to hide in the tall weeds to keep from being blamed for corporate failures. Pelosi, Reid and Dodd wanting Bush to use part of the $700 bil bailout to help the auto industry. Since Congress authorizes the money how can Bush redirect the funds? Seems like the democrats have dug a hole for themselves. They are beholding to the unions, they take money from the Big 3 automakers and now they have to listen to the voters. It looks like the politicians are getting a first hand view of HELL.
The administration was pretty much given carte blanche on spending the funding, it’s just a matter of mutual agreement on the interpretation. The administration does not want to interpret in this particular instance the way Congress wants them to. They may have another bailout intended for the funds or the just may being obstinate, I truly don’t know.
Internally the Democrats are divided between bailout and fiscal responsibility. I think some suspect that the big 3 are bluffing. And this is just a part of the drama, Bush has nominated an overseer as Congress required, but one of the Senators has put a hold on him. These guys are playing brinksmanship to narrow the options to only one solution. Hardball politics isn’t pretty.
The Big 3 automakers made bad choices…way overcompensated executives and unions who seem to be topheavy and demanding at the expense of the consumer…everyone will have to eat what they put on their plate or go hungry is the way I see it. We should not bail them out…they did it to themselves. We cannot continue to bail anyone who mismanages greed. Let them know they can’t have their cake and eat it too.