The bailout mess; Spot the difference

Even Michelle Malkin is reporting on it, so I guess I have to say something…

As an economics major, I shouldn’t have let this issue go unanswered as I have. Both the conservatives and the far-left have jumped on this issue, trying to convince us in the middle of what we should believe, and I for one am sick of it. I think it was downright stupid of Mitt Romney to say that America should “let Detroit go bankrupt”, but there is method to this madness. The auto industry has become a “money pit” in recent years, and with all the problems it now has, many think the only way to fix it is to let it collapse and then rebuild it. The problem with this is that it will cripple the economy, an economy which is very dependent on this industry for jobs. So does that mean we bailout them out to fix the problem they are in? Not at all…

The problem is that the Democrats believe that bailouts are the answer to everything. They created many of the problems the American economy now faces, so why not throw money at the problem to make it go away? The “John Edwards” approach won’t work here, so let’s not try it. In my opinion, the auto industry is suffering for three reasons, none of which can be solved by simply giving it money…

Gas Prices – In 2006 the Democrats were elected for two reasons, to end the War in Iraq and to help bring down gas prices, both of which they didn’t do. Matter of fact, many would argue that the Democrats have done everything in their power to not only prevent the second from happening, but to make it worse. We can discuss their perverse environmental agenda another time, but I would like to say that it is their reason for doing this. Higher gas prices mean automakers must invest more into the development of “greener” automobiles which rely on alternative fuel sources, but with lower ones, the push towards “cleaner cars” slows down. Why else would CBS be complaining about it?

Instead of “hugging a tree”, maybe these people should actually worry about the average American and the average American business. While we saw high gas prices slow the economy to a crawl, no one was more hurt then the auto industry. The high prices of the last two years has hurt sales, their ability to make money for those who forgot, and helped put them in the situation they are in now. We have seen a small turn around in car sales in the last few weeks because of the drop is costs at the pump. Mark Levin talked about this on his show last week that the sale of Sport Utility Vehicles (SUVs) has gone up with the fall in gas prices, something which many in the media have refused to make mention of. With lower prices, people are willing to forgo foreign hybrid shopping and look at domestic cars, allowing the auto industry to “make a living”. These are the conditions that they should have had for the last few years, but because we didn’t, automakers suffered. With this said, how would simply giving them money help this?

A handout for the “Big Three” wouldn’t help lower gas prices, nor would it cover the costs they have incurred for the development of “green” technology. One thing which could help them is by helping maintain these low prices, but how can we do this? Pardon the cliche but “DRILL BABY DRILL!” I don’t need the National Review Online telling me that drilling will help lower oil prices. While those on the left will argue that drilling now won’t solve the problem of shortages, stating that the supply remains constant while demand increases (driving up prices… simple economics), they refuse to take into account market perception. If supply isn’t seen as constant, that even if it does take ten years for additional oil reserves to be found and harvested, the fact is that the anticipation of this, even if it is a while down the road, will have an impact now on prices. Why worry and charge more if you know that oil supply will go up in the future?

As I have said before perception is very important in economics, something so many have refused to acknowledge, let alone understand…

Heavy unionization – It is no surprise that Barney Frank let it slip that a bailout of the “Big Three” is actually a bailout of the auto unions. More than anything, this bailout would be a “back scratch” in return for union support during the election. I could discuss how this is “more of the same” and that Democrats are going back on their promise of “change”, but I will save that for a later post. What I will say now is that Barack Obama’s “bottom up” economic plan has already failed, that, on that note, heavy unionization has become a problem in the US as American companies are being forced to compete openly with non-unionized foreign firms.

Yes, unions do provide protection for workers, but that role has been overshadowed by blatant corruption at higher levels. Instead of simply existing to guarantee that their members won’t be mistreated, the larger labour unions has become a problem to struggling businesses, a “wrench thrown into the gears” of industry as it were. CNSNews released a story this week that highlighted this. As Pete Winn reported, union workers for the “Big Three” charge $73 an hour, compared to domestic workers at Japanese plants in America which cost only $43. On top of that, as Larry Elder has discussed this week, domestically owned plants employ more workers for few jobs then foreign manufacturers do. This means that every jobs has a specific worker, and that no worker is allowed to do a job that he or she isn’t specified for. This means additional “experts” are hired. Taking into account that domestically manufactured cars need to be priced at the same level, if not lower, then foreign cars, it is downright disturbing. How can General Motors, Chrysler and Ford make any money when there costs are so high? The answer is they can’t…

A competitive market means prices must also be competitive. If you charge more for the “same” product, you won’t be able to sell it. Because of this, with their lower costs, companies like Toyota are expanding, while domestic automakers are sinking, cutting back to cut costs. I can and will argue that domestic cars are just as good, if not better than most foreign cars, and that American consumers should think about supporting domestic manufacturers when buying a new vehicle, but that doesn’t seem to matter. Why don’t we see the MSM reporting this? Instead of providing something intelligent to the discussion, CNN’s John Roberts said recently that the American auto industry’s dependence on the production of pick-ups was the reason for their recent troubles, proof of his utter ignorance on this issue. I guess he hasn’t heard that the Japanese are also competing in the pick-up market because they see the money that can be made there. Never heard of a Toyota Tundra, Roberts? I guess we wouldn’t see him reporting about the high costs of labour thanks to the auto worker unions, but that is to be expected…

In any event, instead of blaming automakers for their sales numbers, why not put the negative attention where it ought to be, on these “labour monopolies”? In order to fix this, these “villains” need to be exposed, dragged into the “sunlight” for all to see. Only then can wages be brought down, as well as costs, allowing the “Big Three” to be competitive once more. All a bailout will do is put money in the hands of those who are part of the problem… Something many have overlooked…

UPDATE: Even The Atlantic’s Megan McArdle is discussing this. I do agree with her assessment on this issue, contrary to what Felix Salmon and others are arguing. Just because GM workers don’t go home with $73 an hour, doesn’t mean they aren’t costing the company that. While they are supposed to be making that kind of money, what happens is that much of the money they make is deducted through a variety of administration and unions costs. Just because these workers don’t pocket $73 an hour, doesn’t mean General Motors isn’t paying that, something Salmon and others need to understand.

Government intervention – Going back to the Democrats’ “green” agenda, it is easy to see why the government itself has been a burden on the auto industry in America. While it is good that the government has pushed companies to be more eco-friendly, there is a difference between a “push” and a “shove”. During the last election in Canada, Liberal party candidate Stephan Dion had promised to create a “carbon tax” plan which would punish polluters like the struggling auto industry. While radical, this is the path many left-leaning politicians are on. Let’s not forget Obama’s coal industry comments, something that should have gotten the attention of the “Big Three” as well. If he is going to tax one “polluter” into bankruptcy, what makes them think he won’t target them as well?

What about all these taxes on industry? It isn’t simply their war against “polluters” that has hurt automakers, the Democrats’ assault on big business has also done a lot of damage. Canada’s Federal Industry minister Jim Prentice was discussing a proposed bailout plan months ago for the auto industry, but instead of subsidies, he declared that tax breaks were the best course of action. I agree, why doesn’t the American government cut their costs but cutting their taxes? As I have said before, the government shouldn’t be hostile towards business, they should provide incentives for automakers to keep jobs in North America. Why do you think General Motors was putting so much money in the development of plants in China? They are hoping that the fast growing Chinese auto market will help fund their struggling operations in North America. The E-Commerce Times also has an article I sited before discussing this very thing. The problem is that Obama promised to increase taxes on companies like General Motors, ignoring that the high tax rate has forced the automaker to look to foreign markets to stay afloat. When tax rates aren’t “competitive”, like Prentice said, there is no way that these businesses can keep jobs in America without incurring large costs. Only by fragmenting the production process, can these companies stay competitive, something that many in Washington either can’t or simply don’t want to understand.

As Mark Levin noted the other day, this isn’t a failure of the “free market”, it is a failure of government intervention. Through what can be only referred to as “government hostility”, the economy has become a dangerous place for big business. Corporate taxes have sent American jobs overseas, including those in the auto industry, and by increasing them, it only makes matters worse.I disagree with Ed Morrissey’s claim that management AND labour are to blame, especially since much of their troubles were brought on by higher taxes and a demented “green” agenda. While I discussed the fault of the labour unions above, I don’t honestly see how the CEOs of the “Big Three” could have steered their companies through the minefield that those in Congress have laid out for them. If the government is handing out bailouts like Halloween candy, why wouldn’t General Motors, Chrysler and Ford want to partake? The problem I see with this is that any money they are given will either be taken back through taxes or given to unions. If the government would lift restraints on them, allow them to do business without paying through the nose, then maybe they could survive without outside intervention.

Let’s capitalism breath, don’t strangle it with socialist economic policy brought about by left-leaning politicians. Let those in business do their job, and keep those in Washington out of their way…

*****

While I stood behind the previous bailout, I can’t stand behind this one. The difference, as described above, is that with the auto industry the way it is now, any bailout that involves simply giving the “Big Three” funds to stay afloat is a waste of money. The first bailout was designed to “grease the wheels”, to get Wall Street working again after it was halted by corruption on the part of Fannie-Mae and Freddie-Mac, as well as bad government policy, most notably Carter’s Community Reinvestment Act. The $700 billion in that instance WAS to get the financial sector moving again. Yes, they should reexamine the practices of some in the business community, as well as those in Washington, but in my opinion, there is nothing fatally flawed about the system itself. The auto industry, on the other hand, is crippled by numerous factors, some of which I mentioned above. Once again, many people think it has gotten so bad that only through bankruptcy can it be fixed. In this respect, without proper reform, it will cost tax payers far to much money to fix a “broken” system.

Gas prices needs to be watched, and to protect the economy as a whole, drilling must start now. It isn’t simply the auto industry, but all markets that needs this. Unions have become too powerful, and steps have to be taken to release their grip on America’s labour supply. Going back to the CNSNews article, when these “monopolies” start setting wages and not the automakers, trouble ensues. Yes unions are good for the workers, but in a highly competitive market, they have become a burden on business struggling to stay afloat. Finally, government needs to BACK OFF! Instead of providing a “guiding hand”, Washington has its hands around the throats of many businesses, not simply the “Big Three”. “Spreading the wealth” doesn’t work, capitalism does, they need to realize this before this recession turns into a depression.

Before more money is spent, everyone needs to sit down and actually examine the issue. What are the problems and what needs to be done to fix them. Instead of throwing money at it, why not actually try to work it out? That is why these people were elected if I remember correctly…

UPDATE: Michelle Malkin is reporting on a proposed bailout for Citigroup. This reminds me of what Mark Levin was saying about Barney Frank comments, that with financial institutions like American International Group (AIG) getting a bailout, why not the the “Big Three”? The reason is because Citigroup and AIG were force to swallow the collapse of the financial market thanks to the mishandling of Fannie-Mae, Freddie-Mac and the sub-prime lending fiasco. They are in the state they are in because of the incompetence of those like Frank and Dodd. These institutions will pay back these “loans” down the road, while the American tax payer loses money if there is a bailout of the auto industry. It doesn’t have to do with “class struggle”, it has to do with getting capital flowing again… It is common sense, but I guess Frank and his colleagues can’t understand that…

UPDATE: Michelle Malkin has another report on the Citigroup bailout up right now. I do stand behind her on most issues, but this one I am going to have to say no to. I agree with her on the principle, that you can’t simple throw money at the problem and hope that solves it, but I don’t see this as negatively as she and many of her colleagues and readers do. I will say that this is a “necessary evil”, that financial institutions like Citigroup and AIG were forced into their current situations by predatory lending and the sheer incompetence of those who were supposed to prevent this economic hardship, like Barney Frank and Chris Dodd… Through the Community Reinvestment Act and political pressure from groups like ACORN, banks were forced to make bad loans, bad loans were were forced through the banks, forced through the financial sector, and now that the markets are crippled, the tax payer is being forced to help pick up the pieces… Once again, a “necessary evil”…

UPDATE: After the heat comes down, the UAW responds with a commerical. They have had a hand in bringing about this problem, and now they want us to pity them? According to the Heritage Foundation, not only are these people bringing in much more money then their counterparts in the auto industry, but their health care plans are simply unrealistic to say the least. I am not afraid to say that maybe filing for bankruptcy protection might actually be the best thing for the “Big Three” to do, especially if it means they have a chance to “dig out” this “cancer” on the industry, but it still doesn’t sit well with me. Losing investors and damaging their once respected names seems an awful price to pay to undo the damage unionization has done…