Responding to Chrysler comments

As a novice blogger I have been repeatedly surprised and humbled by the thoughtful comments posted on this blog. I want to thank all of you who are contributing to a civil and thoughtful discussion.

At the risk of offending some of you, I am going to push back on some of the comments to yesterday’s Chrysler post, in the way that I would have done so had you been advisors to President Bush and I been in my old job at the White House National Economic Council. I’m putting my “honest broker” hat on, and I want to stress that this pushback is independent of my own policy views.

In yesterday’s post I listed five options. Option A was to withhold all additional taxpayer funds. This is the pure free market option, and also the most popular option among the commenters. I asked you to assume that choosing Option A would mean a 99% chance that Chrysler would liquidate by July 1st, and an additional 10-20% chance that GM would liquidate.

The first two commenters seem to have internalized that and be willing to bear these costs. FogCity wrote “Liquidation of Chrysler sets the stage for renegotiations with the UAW [in the GM talks].” DonH similarly writes, “There is too much car-making capacity in the world.”

Some of the commenters, however, want to have it both ways: choose Option A, but assume that Chrysler will not fail. I strongly support your choice of option A, as long as you accept that this choice means a few hundred thousand people will lose their jobs in the next 2-3 months, and that you will be (unfairly) blamed in public for their job loss. If you choose A, you need to assume that there will not be another buyer for Chrysler, and that the Chapter 11 process will quickly turn to liquidation, with the subsequent job loss. You’re not making a real choice if you assume that A might lead to a happy ending for Chrysler employees.

At the risk of overemphasis, I want to make it clear that I think there is a very strong case you can make for Option A, and several of the commenters are making it. But that case has to be structured as “I’m for option A because _________, even though several hundred thousand people will lose their jobs. The long-term benefits of option A are worth the short-term costs to Chrysler workers and retirees, and to the Upper Midwest region.” To refine the political side of it, ask yourself if you would be willing to defend your view on a Detroit TV station or in an interview with the Detroit Free Press.

I hope that this response will be interpreted the way it is intended: as my attempt to push you to think hard about your choices, and to force you to acknowledge that there is a real tradeoff between short-term pain for hundreds of thousands of people and the long-term benefits of allowing free markets to operate unfettered. If you are for Option A, I hope you will try to make the case that these costs are worth the benefits, rather than pretending that the costs don’t exist.

 

 

11 responses

  1. Mr Hennessey, I really appreciate the thoughtfulness of your posts on this topic.

    As some other posters (on previous articles) have noted, we have let other big companies in critical industries fail: airlines, steel, energy, and so on. The failures have had profound effects on their employees, and these effects should not be downplayed. I just don’t see how it’s anyone’s interest for the American government to become a competitor in the automobile business, which is what is now happening. It’s either bad for the companies they’re “helping,” (e.g., Chrysler and GM, who are entering into a Faustian bargain) or for the companies they’re not (e.g., Ford), depending on what the government does.

    Having the taxpayer get involved with Chrysler (and GM) does little to change the problems that got these companies where they are today, and makes the taxpayer a partner in a business that would otherwise be culled. This is especially so with Chrysler, which, as a company, has been stupid on a colossal scale for years. (The fact that Daimler wrote down their remaining Chrysler holdings to zero a few months back should say a great deal about how a traditionally successful auto company rates the product and value of its former partner/subsidiary.)

    Let Chrysler go. The valuable parts will be bought by other companies, and the good models will continue to be produced. (Jeep is certainly still going after however many ownership changes.)

    If there’s any support to be given, it should be given in the form of DIP support for GM, and tax code changes or other aids to keep the suppliers afloat. Frankly, as one who works a lot with auto suppliers, some of them are barely alive already. A bit of market consolidation would help the stronger, smarter ones by cutting out some of the less-able competitors and sending business their way. Those stronger ones will undoubtedly pick up at least some of the manufacturing capacity and people.

    Good cars can be built in America. The foreign multinationals are all demonstrating that. Kowtowing to the UAW and supporting poor business planning, under the guise of “saving jobs” might be good politics, but it’s lousy for all us non-UAW members. It’s not as though we’re helping them for the short term, but with long term benefits. Rather, we’re emboldening a group that did much to bring about the demise of their employers, both commercially and politically.

  2. Kieth,

    Running one of these comment strings is kind of like herding cats isn’t it? Having worked for the govt. at one point I know where you developed your well-honed professional patience with it. I want you to know that I appreciate the information that you present on this blog as well as that from a number of commenters that are obviously a lot smarter than I am.

    I can very much empathize with the people that would be put out of work and the effects on the region. As I was growing up, my father worked in a plant in Northern New York making brakes for train cars. I can remember as a teen-ager that with the continual union strikes, he would be out of work for 3-5 months out of every year and, finally, owing probably at least partially to the unions, and to the fact that rail was in a freefall (the interstate system was just being completed), the plant closed. At the same time nearly all manufacturing was tanking in the northeast. Finding a job was nearly impossible (and he was a highly skilled machinist). Our family split up to find work and never did get back to that old extended family atmosphere of the 40’s and 50’s. We all did find work, however, and all did reasonably well. So I understand the impact of choosing option A.
    On the other hand, In a country of something over 100 million workers, it’s hard to see how propping up 1-2 million with a feckless government program will, in the end, help any more than it did in our case. It will turn, inevitably, into a bottomless hole into which we will simply pour money for no obvious gain to the country or the economy.

    The deal is not based on business principals as far as I can see. The unions make out like bandits, Fiat gets a free ride just because they build cars that the administration likes, and the investers, “take a haircut”. This is an ideological decision as was the decision to eliminate 90,000 jobs on the F-22 lines because of an antiwar ideology.

    I remain convinced that nothing good will come of this and we’ll all pay an exorbitant price for it.

  3. Keith, I appreciate the debate, so don’t be shy and keep it coming.

    I will answer your question, but first I must rebut the way you have constrained the question. I don’t happen to think the probabilities are that high, and as I said yesterday, the banks can put up the DIP financing, and would, if the deal makes sense. So, I think you have given us false choices.

    Now to defend Choice A – I agree with Basil and Dennis and will not repeat their arguments, but add that there are significant knock-on consequences to the other options that will have significant cost for the economy going forward. First, government bailouts discourage other companies from solving their problems another way, and second, interfering in creditor’s rights scares capital away or at least makes it more expensive. The administration is in grave danger of doing this in the residential mortgage market too, by interfering in the contracts between servicers and investors. These steps are tearing at the very fabric of the capital markets, which only makes sense if you desire to move to a socialist economy. As I said yesterday, every investor in the market is watching these cases and it will effect how money is invested. The costs to the economy could be significant.

    Politically, if the adminsistration had never started down this path, they would not find it so hard to back away now. It was a slipper slope, and now they more or less own the outcome. That was a huge mistake.

  4. I will most likely be thought unfeeling for this comment, but I would actually argue that the decision is simple, and is being made complex only by a government which thinks too highly of itself. I would invite anyone to point to the provision of the Constitution where it grants any branch of the government the power to save a specific company from bankruptcy? Lacking legal justification, then direct me to the (supralegal) moral justification of a government which picks and chooses which companies to save. I am certain there are hundreds or even thousands of companies with only twenty employees teetering as close to the edge. Where is their bailout? Where is their government-backed arbitration pounding down their creditors’ claims against them? Those 20 people, or 20,000, or 200,000, don’t matter just as much because they don’t make cars?

    The reason the decision is difficult is because, whether they use these terms (I rather imagine they don’t), the President (both previous and current) and Washington in general, have come to think of themselves as kings of unlimited authority, and every decision has become agonizing. Since they feel that they rule, they likewise feel they have a responsibility in the fate of every subject and are moved by benevolent impulses to help hurting people.

    I am not a president or a king, and therefore I have no right or ability to commit others’ funds to save Chrysler, or any other company. That is a situation most people can sympathize with, no matter how much one might like to help. What everyone seems to have forgotten is that our President (previous and current) is not a king either, and he has no right or ability to save Chrysler under our system of government. He might get away with doing it anyway; but it is not right because it is not what his position was created or empowered by our constitution to do. He is taking authority he does not have, which people are willing to accept because it appears he is acting charitably — though even that charity comes not at his expense, but at the expense of others less favored by Washington.

    I still maintain option A.

  5. Something went wrong with the html tags in my post above. The link up above will take you to Thomas Cooley’s Forbes column and (I hope) this one will take you to .

  6. OT, but I wanted to say, Mr Hennessey, that you provide some of the most interesting and informative posts (and questions) out there, which are much appreciated by all your readers. My own last few comments were rather direct, so I wanted to make sure to say publicly as well how much your work is appreciated.

  7. I’m sorry, this kind of upsets me. I have worked in the energy industry my whole life. In the ’80’s we had a real estate bust and an oil bust at the same time. Hundreds of thousands of good paying jobs disappeared in the oil patch – Texas, La., Ok., etc. No one ever cared about these workers, either wanting to give them transitional aid or save their jobs. Instead, all we ever get is vilification of this industry. Why are the UAW jobs so sacred? It appears that Detroit has cut back disproportionately on white collar jobs and benefits because they are not contractual. Why are the union jobs all that anyone cares about?

    We know that in the long run it’s a better economic choice to have the human capital associated with auto excess capacity placed in productive sectors of the economy. However, as people much smarter than I have pointed out, we as a nation seem to have lost the desire to let the “creative destruction” part of the capitalist economy run its course.

  8. We are headed for the worst of all possible worlds. Chrysler will be dead within 18 months, because they could not sell what they were making and won’t have anything new to sell, and we will have spent 15 — 20 G$ on it.

  9. Keith, first let me say that I love your blog and the insight you provide here. In addition, the comment sections have been great.

    While I did not comment on this topic previously, I would support Option A understanding there would be some short term pain but this is the least costly in the long and short term for the following reasons:

    -Other commenters have already discussed how they have received billions already and will need more to survive
    -Other commenters have already posted on the constitutional issues involved
    -Other commenters and commentators have discussed the ability and experience of the administration to run a car company
    -Other commenters and commentators have discussed the ability and experience of the UAW to act as management

    Despite all of that, even if a brain trust of true geniuses were picked to run the company, it would fail even without the unbelievably stupid idea that “green” technology is going to save that company or is in any way viable except to a small, niche consumer group.

    Congress, the EPA and other governmental entities have been enacting a 30 year slow death on that industry that virtually guarantees Chrysler and GM will either fail or become governmental pet projects a la Amtrak. Bankruptcy is a start when dealing with the labor contracts (or not as they are the favored group in Obama Motors) and dealer franchises. The CAFE standards, the dual fleet rules, the labor regulations and state franchise laws are only the most obvious structural impediments to this industry. Ford is limping along and may survive by doing the opposite of Obama-nomics, but without addressing the regulatory issues, it simply doesn’t matter who runs those companies or how “green” their cars become. Either they go away in their current form or we continue to pump billions of taxpayer dollars into them. That is the choice. Since the current administration will not allow the UAW to fail, we need to be prepared to continue to prop up these companies that regulation has hollowed out.

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