Tuesday, December 16, 2008

Dave, meet Mike

I’ve been consistently opposed to the bailout of GM, Ford, and Chrysler. Now that Ford has decided to forego Federal money, I’m simply opposed to the bailout of GM and Chrysler. There are lots of people who can explain why the bailout is bad financially and/or philosophically: I’ve listed some sources at the end of this post. I want to make a few somewhat personal points.

I was born in Alabama and lived there off and on until my late teens. For as long as I can remember the state has been poor. That’s turning around to some degree now and part of it is foreign investment. In October of 2007, the Economic Development Partnership of Alabama stated, “Currently, more than 300 foreign-based manufacturers from more than 30 nations operate in Alabama.” (If you click on the “Foreign Manufacturing Investment in Alabama by Country” hyperlink you get a cute little PDF with country names and flags and the number of projects each has in Alabama.) So when those who favor a Big Two bailout bring out GM’s Dave from Detroit to play on the heartstrings, I think about Hyundai’s Mike from Montgomery. Mike from Montgomery makes a good wage but he doesn’t make what his GM counterpart Dave makes. And Mike sure as heck won’t have the retirement benefits afforded to Dave’s dad when he retired from GM several years ago. So why is Mike from Montgomery going to have some of his Federal taxes go to help out Dave from Detroit and his dad?

If you prefer a more once-removed argument then think about competitiveness. Mike from Montgomery makes less than Dave from Detroit. That means Hyundai can sell its cars more cheaply than GM which in turn means more Hyundais sold. As Hyundai prospers so does Mike. He might get an extra shift now and then; he might get a promotion as more workers are hired and thus more line foremen are needed; he might get a bonus if there’s a really good year. Hyundai might hire his wife, Maureen. Even better, it might hire his brother, Matt, who could then stop freeloading off Mike and Maureen and get his own apartment.

But if the Federal government bails out GM it’s subsidizing Dave’s greater earnings. That means GM can sell its cars for the same as Hyundai - or even less. So fewer Hyundais sell. Matt and Maureen can forget about getting jobs and Mike might see his shifts cut back. If GM continues to outsell Hyundai by pricing its cars below what it costs to produce them, Mike might even lose his job entirely. So now Mike’s own taxes have been used to put him out of work.

As for the argument that it’s cruel to let Detroit autoworkers lose their jobs, let’s take a look at some recent Southern history. Between 1997 and 2002 Alabama lost 32,000 textile and apparel jobs. I would imagine the same sort of story is true for many Southern states which now have auto manufacturing plants. If the jobs lost weren’t in the textile and apparel industries they were in something like furniture manufacturing. I suspect that if you added up all the manufacturing job losses to those Southern states you’d probably get pretty close to the number of workers GM employs in the United States: 100,000.

Perhaps my memory is faulty but I don’t recall hearing about Federal money to help the Alabama workers or their colleagues in other Southern states hold onto their jobs. I’m pretty sure the argument then was that this is how economic systems work: jobs go where operating costs are lowest. Sure in the short run individual employees - like those Alabama apparel workers - might get hurt but in the long run the whole country benefits. After all those same Alabama apparel workers and their families are consumers, too. So it’s to their advantage - and to the advantage of the whole country - if we can all buy our clothes more cheaply when they’re made in China. I think there’s a lot of truth in that argument so let's apply it to automobiles, too: car manufacturing goes where operating costs are lower and that's better for everyone in the long run.

Finally and most personally, I retired early, before I was eligible for Medicare. I buy my own health insurance. It costs me well over $10,000 a year and I just got a notice that my premiums will go up by about 15% in January. I’ve yet to hear anyone explain to me why I should pay my health insurance premiums and the health insurance premiums for retired GM workers.

So if I’m not in favor of a bailout what am I in favor of? Chapter 11. I know the government might end up providing some financing as part of a structured bankruptcy deal, perhaps guaranteeing warranties so buyers wouldn't worry about their GMs and Chryslers being orphaned if the companies couldn't make it. I still wouldn't like that but I could live with it a lot more easily than I could live with my tax dollars - and those of Mike from Montgomery - going to prop up unsustainable labor, retiree, and dealer commitments headed up by clueless management.

Now, having said that, I must admit to a tiny, sneaking hope that GM and Chrysler do get their $15 Billion “loan”. Despite their assurance that they just need a little time and money to pull themselves together, I figure they’ll be back for more in no time at all - perhaps as soon as January 21. Maybe realizing the handouts don't help and never end will finally make us all realize it’s time to stop the bailouts.



The Detroit and Birmingham newspapers are arguing about incentives:

Alabama emerges as foe to auto aid - The Detroit News (2008)

Alabama in middle of auto bailout fracas: State’s incentives to land automakers at issue - The Birmingham News (2008)

Some random articles on locating auto plants:

Cars Fall on Alabama - Site Selection (2002)

Score one (Honda auto plant) for the Midwest - Federal Reserve Bank of Chicago (2006)

South provides global appeal for foreign auto makers - CNN (2007)

Incentives for VW plant total $577 million - Chicago Tribune (2008)

Wooing Foreign Investment Comes At A High Price For Some States - University of New Hampshire (2008). Even though this paper was written in 2008, it considers the Mercedes Benz deal in Alabama rather than the more recent Mobis deal which included state-paid education for workers.

Arguing against an auto bailout:

Megan McArdle - She has a lot of posts on this: you can simply look at her archives and scan down to find them. I’ve listed a bunch from December and late November here:
Invidious comparisons
Just desserts
The death of a bailout
Fuel efficient or market efficient
GM goes nuclear
How much is a Detroit autoworker really worth?

TigerHawk - Again a number of posts on the subject. Unlike McArdle, Tigerhawk has that nice Blogspot Search box which will return the posts if you enter “General Motors”.

The Truth About Incentives for Foreign Automakers - Stephen Spruiell at The Corner pushes back on the argument that foreign automakers are receiving incentives to locate in the United States. He also pushes back on the idea that only foreign automakers receive such incentives pointing out that US automakers get similar incentives when they build plants.

Bankruptcy Is the Perfect Remedy for Detroit - Wall Street Journal (2008)

In case you’re worried that everyone arguing against an auto bailout is an evil Republican who wants to punish unions and blue states while helping out Japanese automakers, you can read what Joseph Stiglitz has to say about it. I don’t believe he could be classified as Republican or conservative. (via Greg Mankiw)

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