The auto bailout discussion on TV is frustrating. Charlie Gasparino was a complete ass to his guest today. The guest couldn’t get a single word in without Charlie saying how appalled he was that the UAW and the auto companies asking for a blank check. The guest tried to point out several things (like the order of magnitude between the auto and bank bailouts), but never got the chance.
The written articles aren’t much better. Ben Stein argued against the claim that demand was disappearing by claiming that he only bought American cars, and so did thousands of other Americans. Great for you, Ben, but sales have been declining for a while now. You haven’t bought enough to make up for the falling demand elsewhere. I’m sure there were still people who wanted 8 Tracks or Betamax players after they stopped being economical to manufacture. It’s not an issue of zero demand, it’s an issue of insufficient demand.
And that’s really what is frustrating to me. It’s the fact that each side has been so full of sh*t. I want to discuss a few things in light of that.
UAW
First, there’s the misrepresentation of the UAW. They aren’t asking for a blank check. They really did offer to ramp down their wages. Granted, that’s not as immediately helpful as an immediate pay cut, it seems a reasonable concession. Remember, the UAW representative’s job is to fight for the best compensation package he can get. Blaming the union leaders for asking for a gradual reduction in pay is far less appropriate than blaming the management team that agreed to the stupid rates in the first place.
Second, there’s the misrepresentation by the UAW. When discussing wage parity, the UAW spokesperson today referred to the rate that new hires get, not the rate that existing workers get. It’s true, new workers will start at a wage much closer to Americans working in foreign factories in the US. However, it’s simply dishonest to represent the wages that new hires will receive as representative of current wages. Most workers are not new hires. Also, wages are a small part of the total compensation package. Comparing hourly wages is not the same thing as comparing total compensation. Health benefits, full pay without work, and 90% pay when layoffs occur all must be factored in to the cost equation.
Car Czar
The misrepresentation of the car czar is the fault of whoever decided to call him by that title. The car czar is not a central planner of the auto industry (though I’m sure some congress members may have wanted him to be). The car czar is an auditor, not unlike a bankruptcy judge. The automakers have pretty much guaranteed that they will be back for more funds later. They need $14 billion to survive until the new administration takes the reigns. The car czar’s job is to make sure that $14 billion isn’t pissed away while waiting for Obama to take office. The auto companies must act on their restructuring plans before they can ask for more money. If any private equity firm was providing the loans that the government offers, you could be certain that they would have even more control than the car czar (and probably more punative rates).
Now, the funny part is that the car czar will likely either be Paul Volcker or Mike Huckabee. If either one was a central planner, they’d likely do better than the current management teams of the car companies. Let’s face it, anyone could do better than the current management teams. But that’s simply not the job at this point.
Funding
The plan that was voted down in the senate would not have cost additional taxpayer dollars. The $14 billion was going to be taken from the $25 billion loan package that was already approved and intended to subsidize research in greener cars.
Jobs
One in ten jobs is linked to the auto industry? The collateral damage claimed in that number is astounding. It’s also based on some ridiculous assumptions about atomicity of jobs. Jobs do not move in lockstep with cash flow. If they did, we’d have eliminated unemployment in every bubble. Still, just because a bank does 5% of their loans as auto loans doesn’t mean that they’ll fire 5% of their workforce if the big 3 die. First, the weak reasons. For one, they may be making loans to people buying foreign cars. For another, they make make new loans for other reasons. But the stronger reason is this: the demand for loans has already shrunk, and those people projected in that excess capacity already lost their jobs. Ensuring the survival of the big 3 won’t bring those jobs back because the bank doesn’t want to make those loans any longer.
I don’t know what the true number will be, but the auto industry isn’t close to 10% of GDP, and it’s workers make above the average in nearly every category, so it’s not really conceivable that it can be responsible for 10% of the workforce. Also, it’s not clear what the delta is. How many jobs will be lost if the big 3 fail vs. if the bailout goes through. Without that kind of analysis, it’s stupid to base a bailout on it. I’d like to know who will keep their jobs if the bailout goes through that would otherwise lose their jobs. That’s much more meaningful than the number of people that will lose their jobs without a bailout. Certainly some jobs will be lost even with the money.
Summary / Opinion
There’s still plenty of room to debate the merits of an auto bailout without misrepresenting the other side.
To be honest, much of this is moot right now. The bill was voted down in the Senate. I still oppose the bailout, and would prefer a pre-packaged bankruptcy. The negotiating positions of all parties is still very different than it would be with a bankruptcy judge. Equity holders would get tossed to the dogs, and bondholders would take a haircut. Workers would likely take an immediate pay cut. Suppliers would still be getting the shaft (many are on the brink of bankruptcy due to not receiving timely payments already). Factories would close. However, the cash flow position would be immensely improved. Burning the equity holders doesn’t do much except provide room for the debt holders. Turning the debt holders into equity holders eliminates all interest (and principle) payments. That alone would be enough breathing room for everything else to work out.
Now, unless a much larger bailout happens, the suppliers are in a terrible position. They were stupid to not demand payment in advance from the big 3. Now they’re about to pay for that mistake. Had they stopped earlier, it would have been worse for the big 3, but much better for them.
