The United Auto Workers union and its supporters are arguing that The Big Three, like some other economic entities, are too big to fail. Talk about the wrong end of the stick. In reality, these companies are too big to rescue. Even those who are adamantly opposed to a bailout on principle have only a dim grasp of what it will really cost.
To talk about bankruptcy and bailouts without discussing the economics of the situation is very likely to result in an Obama administration pouring billions of dollars down a financial hole in order to pay off the UAW. The bailout would be the first installment of what would amount to a policy of subsidising Detroit. Billions of dollars would be directed away from alternative investments for no other reason than to shore up an important Democrat constituency.
Of course, some of the money would then find itself going into the Democrats' coffers in the form of political donations. (Think of it as a form of financial recycling carried out at the taxpayers' expense). Then there is the possibility that a subsidy might be in breach of international trade agreements, the breaching of which might trigger retaliatory actions.
Some defenders of a bailout have been focusing on a loss of jobs and incomes if Obama does not act. There lies a fundamental fallacy at the heart of this argument. It implicitly assumes that bankruptcy means that these companies' plants and equipment would be rendered permanently idle. There are no grounds whatsoever to support this assumption. The plant and machinery would only remain idle if there was no further use for them. For this to be the case, the loss of output resulting from a shutdown would have to be made up by other producers. This is not possible. From January to June of 2007, The Big Three produced 4.9 million vehicles. Irrespective of Detroit's financial straits it is still serving a massive market.
Make no bones about it. The Big Three are already bankrupt. It wasn't competition that did the dirty deed but the UAW. It was this union's extortion racket that broke Detroit. Thanks to its destructive policy of holding these companies to ransom they jacked labour costs up to an unsustainable $73 an hour while labour costs in foreign subsidiaries average about $42. It's obvious to anyone who takes the trouble to look that all the additional costs that a politically corrupt union piled on hiring labour could be drastically slashed without touching the net wage. For example, General Motors (GM) spends over $1,600 per vehicle on the healthcare costs of employees and its retired workers while Toyota (TM) pays about $200 per vehicle.
Thanks to the union's racketeering approach to negotiations, the companies were transformed into welfare agencies. There now exists the ridiculous situation where the number of retirees greatly exceeds the number of employees. Unlike governments, The Big Three cannot print the money to rescue themselves financially.
It is axiomatic in economics that if you raise the prices of any good or service above its market clearing rate a surplus will emerge. Moreover, there is a tendency in a free market for every factor, especially labour services, to receive the full value of its marginal product (the value of the additional output from hiring one more factor). The importance of this fact can never be sufficiently stressed. If GM's $72 hourly wage rates (the total cost of hiring labour is the real wage rate) had been determined by the market then GM would have been expanding output and taking on more labour. Its competitors would have found themselves in the same position. Instead, we find GM in dire financial trouble. Further proof that you defy the market at your peril.
The Detroit situation is a clear case of a union capturing capital. This forced the companies to absorb rising labour costs until driven into bankruptcy. There is no point in trying to blame management for what happened. Where a union has de facto control over labour costs, management will be badly hampered. In the absence of any union presence bad management would have resulted in undervalued shares that would eventually invite a takeover.
Economic logic leads to the conclusion that it is because of the UAW that no one will touch The Big Three. It follows from this that any government bailout would in fact be nothing but a shameless pay off to the UAW for its support of Obama, not to mention the state Democrats, whose own economic stupidity has wrecked Michigan's economy. Moreover, the pay off would have to be one of many, unless you are naive enough to imagine that the union that thought nothing of bankrupting Detroit would stand idly by while its victims tore up its coerced 'contracts'. (According to law coerced contracts are invalid).
For those of you who think I am exaggerating the union angle, take a look at Barney Frank's lament that bankruptcy "could undo labor contracts". Even now he cannot make the link between the UAW's thoroughly destructive activities and The Big Three's financial plight. His solution is a pay off that will guarantee union power- and to hell with the taxpayers who are going to be frogmarched into paying protection money for the Democrats.
Never mind, Frank, Pelosi, Reid, Waxman and the rest of the economic clowns that make up the Democratic Party - including Rahm Emanuel, have now come up with an absolutely spiffing idea of their own. The bailout will have conditions attached to it, some of which would include instructions from these geniuses on what types of cars are to be built. Moreover, to ensure equality, and we know how big the Democrats are on equality, foreign car manufacturers who were dumb enough to invest in the US will now have to accept the UAW as a silent partner.
The sheer brilliance of this suggestion leaves me awestruck. To make sure they receive even more money from the UAW these economic illiterates are prepared to wreck the rest of the car industry. It is to be deeply regretted that these monkeys are neither mute, blind nor deaf.
From the Iowa Hawk
Situations like this always bring out vulgar Keynesians, and David Ignatius is no exception. His solutions? Print money and socialise investment. For this he drew on Keynes' ridiculous suggestion that putting pounds in old bottles could reduce unemployment. (To tell the truth, I can never tell when Keynes is joking). (Obama should consider a national investment bank, Daily Star, 22 November 2008). Ignatius is clearly another economic illiterate who cannot grasp that the financial crisis is basically a product of Keynesian policies. It's also clear that the policy he proposes is highly inflationary.
At the moment US unemployment stands at 6.5 per cent. According to Ignatius this calls for Keynesian pump-priming. The only problem with this is that Keynes would disagree. In 1937 unemployment in the U.K. was 12.5 per cent. Nevertheless, Keynes publicly called on the British to end new public works projects, and warned it against the inflationary effects of any "general stimulus" (T. W. Hutchison, Keynes v. the 'Keynesians'...? The Institute for Economic Affairs, 1977, p. 11). Obviously our media scribblers have no idea just how much inflation concerned Keynes, even when there was heavy unemployment. The American electorate would be far better informed if ignoramuses like Ignatius refrained from giving advice on subjects of which they are undoubtedly ignorant.
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This article has 64 comments:
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krishna rao / simpleton
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2 Comments
Nov 25 07:55 AM-
BS Detector
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299 Comments
Nov 25 07:57 AMWha? You throw out a lot of unsubstantiated claims here, but this one is probably the most absurd.
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Ames Tiedeman
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784 Comments
My Website
Nov 25 08:09 AM-
Lazaris
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12 Comments
Nov 25 08:15 AMThey have been building vehicles in this country for over 100 years. Toyota and Honda don't have many retirees because they haven't been building vehicles here long enough to have retirees. Most of GM's older workers are leaving and being replaced by $14.00 hour younger replacements.with much less benefits. Ten years down the road, the tables will be just the opposite, where Toyota and Honda will start to get a bunch of US retirees and GM's workforce will be younger and lower payed with fewer retirees. I suppose you want to take the health care from the retirees that punished their bodies for 30 plus years on that assembly line you little pencil pusher?
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Byallmeans
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31 Comments
Nov 25 08:23 AMGM makes cars in china and Europe just to name 2 of 35 countries. GM is profitable in those countries. So at this point we can't blame the management. Apparently they can run a profitable auto venture.
The Foreign transplants can make cars here and make a profit using US workers so its not the U.S. workers per se.
So whats left. The UAW and legacy.
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Byallmeans
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31 Comments
Nov 25 08:27 AMactually no. The transplants drop kick their workers for dubious offenses just before they are elgiable to retire and thereby negate their entitlements. Now there havent been many retirees from transplants but there have been enough side stories to indicate that what I have said is true. Just like Honda made the OSHA dirty dozen list for working their US workers to death (literally) Just go google it (OSHA dirty dozen)
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Roy M.
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355 Comments
Nov 25 08:27 AMYou are right, TOO BIG to rescue.
It's just a giant black hole that can suck the whole USA dry.
Most workers don't have life time benefits from employers.
Or sit home and get 95% pay for doing nothing. Can't be more
rediculous than that. Now they want us poor workers to pay for their
stupid contracts with GM ? Any politician who agree will be dead-meat.
Chapter 11 is the best and only way. Just TOO BIG, and TOO ABSURD
to RESCUE. UAW is too rich to rescue anyway. They got billions.
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Byallmeans
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31 Comments
Nov 25 08:29 AMusers.rcn.com/jbarab/F...
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autoworker
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1 Comment
Nov 25 08:31 AMattack the middle class workers of North America. I would suggest
he take a history course on the role, the labour movement, has taken
to allow the author of this article his safe comfortable lifestyle.
Wages only account for 8% of the cost of a vehicle, that includes
management. Currently our production plant is under 18 man hours
per vehicle. I have already spent to much time correcting this useless
publication.
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Roy M.
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355 Comments
Nov 25 08:42 AMIt has something to do with quality too.
That's why Americans hesitate to buy
Made-in-USA sometimes.
There were reports that workers were
fooling around while working. True ?
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ralph gonzales
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1 Comment
Nov 25 08:51 AM-
long_on_oil
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104 Comments
Nov 25 09:11 AMI have worked on the line and in management for Chrysler so I have seen both sides of this story and the truth is somewhere in the middle. If every american were required to spend just 30 days on an assembly line their view of this situation would change. But on the other hand management caves in to stupid handcuffing demands every time a new contract is negotiated.
I have seen the Union Stewards write grievances just so they could have trading material for the next negotiation. I have seen no good for nothing fired workers brought back via this process of trading grievances for fired workers returning to work.
The biggest problem with the auto industry is the Unions have always had an "It's us vs them" attitude. With us being the Union and them being the company. The dumb asses CAN NOT get it through their thick heads that us IS them. They are the company, they are the heart and soul of the company. There is no us vs them. When a bad worker gets fired the union should cheer, not want him back.
For this whole mess to succeed the union has to become more management oriented. The Union has to correct the dumb mistakes management makes by wanting the company to succeed.
They need to form a management oversite committee made up of management and union. The oversite committee would recommend savings and expenditures that would benefit the company and the upper management would implement the suggestions. Like getting rid of corporate jets.
I have had autos made by all three auto makers including toyota and honda and I personally would hate to see GM fail. I love the Buick line of automobiles. I am sure you Ford, Dodge, and Chevy truck owners feel the same way. Please don't force me to buy a Toyota or Honda truck they are so damned ugly.,,lol
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wpdragon
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211 Comments
Nov 25 09:12 AMhey, has anyone seen my private plane... I've gotta get my stock options cashed and in a bank in the Caymans, fast?
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Insiderman
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23 Comments
Nov 25 09:14 AM-
axelrod608
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314 Comments
Nov 25 09:24 AMToo big to fail ? Yes. Too screwed up to continue as is ? Yes. As currently constituted, the American auto operations are unsustainable. Only two options exist. Restructure or keep them on neverending government assistance. Neither is a "good" option. Both would cause financial hardship. But only one - restructuring - would have a future payback. Keeping the Big 3 on permanent life support would eventually bankrupt the nation.
Send 'em to bankruptcy. It's where they belong.
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Thinking DNA
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2 Comments
Nov 25 09:31 AM-
xmplary
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43 Comments
My Website
Nov 25 09:41 AMwww.thedailyshow.com/v...
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outofchips
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11 Comments
Nov 25 09:41 AM0 Limit Congress from serving more than two terms. That is all that presidents are allowed.
0 Stop Congress from voting for their own raises. How did that ever get started?
0 Stop paying lawmakers their full salary after serving just one term, or at retirement. We need to get rid of that pension plan; they’ve let other companies get rid of theirs. You were lucky to get 40 to 50 per cent of your salary after working somewhere for 35 years, but they get 100 per cent.
0 Stop handing out aid to illegal aliens. If we did, then Medicaid and the food stamp program would have enough money to aid the aged and the poor.
0 Secure our borders.
0 Stop allowing babies born to illegal aliens in the United States automatic U.S. citizenship.
0 Have a computer program that cross checks Social Security numbers with fingerprints to stop fraud on many fronts. Use it on voter registration, too.
0 Stop bailing out mortgage companies and banks that give loans to people who can’t afford them.
Only lawmakers can make these changes, as they are the lawmakers.
----------------------...
I have some additional changes that might also help:
1. Institutions that make loans must retain responsibility for the loans. The loans and the associated risks/rewards can't be bundled and passed on to other agencies for investment purposes.
2. Lawmakers should pass laws that ensure that individuals responsible for their actions. For instance, people who borrow money should be aware they have to pay it back or there will be unpleasant consequences. Of course, people who borrow should be made to realize how the loans are structured.
3. NEVER allow solutions that are constructed at the expense of the people who are not responsible for the problem. People who faithfully make their loan payments should not be penalized for those who do not, just as people who exercise, watch their diet and weight, and take care of themselves should not be penalized for those who do not take care of themselves. Never reward the people responsible for the problem at the expense of those who were not.
4. Read ATLAS SHRUGGED.
I predict none of the above will happen.
.
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epeon
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69 Comments
Nov 25 09:57 AMOn Nov 25 08:27 AM By all Means wrote:
> lazaris
> actually no. The transplants drop kick their workers for dubious
> offenses just before they are elgiable to retire and thereby negate
> their entitlements. Now there havent been many retirees from transplants
> but there have been enough side stories to indicate that what I have
> said is true. Just like Honda made the OSHA dirty dozen list for
> working their US workers to death (literally) Just go google it (OSHA
> dirty dozen)
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LCACM
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38 Comments
Nov 25 10:04 AM-
groosome
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3 Comments
Nov 25 10:11 AMWhy did the banking industry write so many loans to people who could not ever repay them, perhaps GREED?
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bricki
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80 Comments
Nov 25 10:33 AMWhat do congressional raises have to do with anything?
Term limits throw both the good and bad out of jobs. Making the decision as to who stays in office is the job of the electorate. Codifying it in law is an abdication of the personal responsibility every American has to make sound decisions on election day.
We have already made bankruptcy laws far more punitive than they used to be. Do you know who the majority of people getting caught up in these laws are? People who cannot get medical insurance and get ill.
Institutions who make loans that cannot be repaid are made up of individuals who make these decisions. Corporate executives after a fast big bucks bonus. There needs to be a better allocation of individual responsibility here. Bonuses cannot be tied to short term performance the way they are today. There must be legislation that makes the terms of these rewards tied to longer term institutional performance.
The concept of not rescuing failed institutions died when this policy caused the Great Depression. The fact of the matter is that we know Lassiez-Faire capitalism does not work. There are a variety of solutions to the problems, they all require significant regulatory intervention. Despite the fantasies you read in Atlas Shrugged.
I hope your prediction is true.
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Duude
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105 Comments
Nov 25 10:41 AMOn Nov 25 09:11 AM long_on_oil wrote:
> Wouldn't it be great if we had just one article that was impartial
> and just started the facts regarding the so called bail out. GM
> has already renegotiated the contract and the UAW has given more
> than their share to keep GM in business. The future hourly rate
> is in line with the non union plants plus they are turning over health
> care to the union thus locking in an expense that has a "sky is the
> limit" boundary. I don't know the exact details, but I wish I did.
Yes, I wish we all had the exact details but its all bound up in a 3000 page labor contract that even the UAW president has conveniently forgotten certain important details. How's this one: Any idled plant must pay workers 95% of their pay while they channel surf at home. This makes reform very difficult to accomplish. Do foreign manufacturers offer the same benefit? No way!
The fact that the big 3 have manufactured automobiles in the U.S. much longer than the foreign auto manufacturers, is no excuse for lacking the foresight to know contracts they signed in past decades wouldn't kill the industry down the road. We have a similar problem with social security except we know our workforce will likely expand with the population while the big 3 have no reason to have believed the same was true for their industry. How stupid is that? Fortunately, they have in front of them a solution known best as a prepackaged bankruptcy complete with government loans backing up the rebuild.
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Gem Hudson
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24 Comments
Nov 25 10:43 AMWhat thy have sown. Thy shall also reap and a bountiful harvest is in the rippen fruits that gather in riches. Is that economic?
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mynine14
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6 Comments
Nov 25 10:44 AMNo bailout will translate to success for the big 3 in the long run. Bankruptcy is a shoe-in for them to restructure (this time get it right big 3!) that will improve their competitiveness. Not to say that this will not be painful in the short run, but they cannot continue to bleed and support this labor force that the UAW has essentially priced out of the market.
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panocha man
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10 Comments
Nov 25 10:51 AM-
User 306534
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1 Comment
Nov 25 10:53 AMThe Big Three's contributions to the American Dream should not be under estimated. Millions of middle class workers have been a major economic boost to this country for decades with huge tax revenues. These workers have sent their children to college, their health care benefits have built hospitals, their wages have supported whole communities. If you don't believe this then take a look at places where their plants have been shuttered.
When the Unions are crushed so too will be the wages paid by the foreign automakers. In fact, it could very well be the last pillar of the middle class.
It is my contention that the dismantling of the middle class is responsible for today's economic crisis. Wages have fallen steadily for 25 years and banks have had to lower loan qualifications to feed their bottom line. Now this guy Jackson is suggesting that bankruptcy for the Big Three is the answer. Can this economy afford another 5% added to the unemployment rate? Can we afford to assume the retirement benefits of hundreds of thousands of retirees? What about unemployment benefits or lost tax revenue? This way thinking is what got us into this mess. We need more middle class jobs not less.
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toddms
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2 Comments
Nov 25 12:01 PM-
UH2L
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24 Comments
My Website
Nov 25 12:07 PMuh2l.blogs.com/things_...
This guy has some decent points but, it's not about who's to blame; it's about what should we do now for the good of the country.
UH2L