Sunday, December 07, 2008

Two possible bailouts

A comment on my previous post suggested that I'm not considering the impact of throwing hundreds of thousands (maybe millions) of people out of work during a recession. Actually, I'm sympathetic to some auto industry employees, namely the ones who have no influence over retail operations. Due to accidents of geography and economics, a lot of Midwesterners got sucked into a career in an industry that has no future. But it's not necessary to save these pernicious companies (and the clowns who manage them) in order to help their employees. Consider the following two possible bailouts.

Bailout One: Give the automakers $25 $34 billion in low-interest loans and pat them on the back. This is the mainstream bailout plan that's emerging from Washington. Yesterday morning, they shook loose $15 billion from taxpayers' pockets by diverting money temporarily from a fund for environmentally friendly cars, but this won't be the end of it.

If we do this, what will we get for our money?

Well, GM has a net annual income of negative $10 billion (extrapolating optimistically based on 2008q3 performance; in fact, extrapolating from previous quarters yields a much worse figure). Giving GM, say, $20 billion means kicking this corpse of a company roughly 2 years down the road, at which point you will have to kick it again.

This is not an accident. Here is a fundamental truth about the global market for automobiles: there is currently more automobile-building capacity in the world than there is demand for automobiles. As a consequence, no combination of innovation and smart business practices can sustain all auto companies at their current size. Either (1) some automobile manufacturers somewhere in the world must go out of business or radically reduce their capacity, or (2) governments all over the world must sink money into automobile subsidies indefinitely. Notice that (2) amounts to a welfare program for auto employees, and an extremely inefficient one: some of the money that would go directly to paying for peoples' food, shelter, etc. instead goes towards building a pile of cars that nobody wants. (Meanwhile, those cars will be unloaded on the market at artificially low prices, which will lead to a greater than economically optimal level of automobile use, which leads to more traffic jams, smog, CO2 production, etc.)

So we're back to (1). If some auto companies somewhere in the world have to radically downsize or go out of business, the optimal outcome is that it be the most dysfunctional, wasteful, and stupid ones. Can anyone guess which companies those are?

Bailout Two: As of their last SEC filing, GM has 252,000 employees. For $25.2 billion, I propose cutting every employee of GM a $100,000 tax-free check and telling them to go make a new life for themselves. Meanwhile, force GM into Chapter 7 bankruptcy (i.e. liquidation, or the sale of GM's productive assets to companies that can make more productive use of those assets).

Ford employs 224,000 people, and we could offer similar terms ($100,000 to each employee) for $22.4 billion total, while sending the company into Chapter 7. Chrysler, having recently been bought from Daimler by a private investor, does not have current SEC filings, but Wikipedia claims that it employs 58,000 people, making it a comparative bargain at $5.8 billion overall.

Note that with a well-managed Chapter 7 selloff, the plants, equipment, technology, etc. will turn a profit for the buyers and continue to contribute to the economy of the region. (With an ill-managed selloff, the value disappears down a black hole; but if you assume bad management, then lending the companies money will be a disaster too.)

The total cost for bailout two, for all 3 automakers, is $53.4 billion, or $178 for every U.S. citizen. For this price, every employee of the Big Three receives a one-time tax-free bonus of roughly twice the annual median household income in the U.S. I contend that if you can't make a new life for yourself with that transition fund, then you're beyond help.

I'm not an economist, but I don't see how bailout one is obviously superior to bailout two.

Of course, bailout two is just a crazy idea of mine, and nobody who matters is considering it; nor would they if it were suggested to them. For reasons that are not entirely apparent to me, opinions on this matter have coalesced rapidly around a narrow range of alternatives, all of which involve lending massive sums of money to companies with a track record of destroying economic value instead of creating it.

I'm not saying my bailout is actually a good idea. I'm saying that it's not demonstrably true that Washington's bailout is any better, and yet it's gradually becoming more and more obvious that Washington's bailout is inevitable.

Incidentally, it's been interesting watching all the liberal blogs come around gradually, albeit begrudgingly, to a pro-bailout stance over the past few weeks, despite the absence of evidence that Congressional Democrats have the backbone to demand adequate oversight or other conditions. It's like the prelude to the Iraq War: all the Thoughtful Liberals agree that Something Must Be Done and so everyone piles onto the bus, even though the driver doesn't show any indications of being able to get it right. Maybe people think that if you're on the bus, at least you'll be heard. But that's a totally false assumption. Thomas Friedman's War was not George Bush's War; guess which one we got? Likewise, Paul Krugman's Bailout will not be Barney Frank's Bailout; guess which one we'll get.

I can't help but think that political calculus has played a role in these liberal blogs' turnaround. If you destroy the Big Three, then you cripple the UAW and anger people in Midwestern swing states at the dawn of a period of Democratic governance. It's understandable for politicians to think this way. People whose jobs do not depend on being elected, however, should advocate for what is good, rather than for what is politically expedient; because by advocating for what is good, you make it more likely that someday the good will be politically expedient.

UPDATE 5:36 PST: OK, for the record, here are two reasons why Cog's Grand $100k Giveaway wouldn't be sufficient even if you could get everyone to agree to it. (a) It does nothing for employees of the Big Three's upstream suppliers. (b) It leaves the automakers' huge pension obligations unfunded, which leaves the pensioners in the lurch. The proposal was less in the vein of "Let's do this now!" and more in the vein of "Look, this is a lot of freaking money and we haven't even begun to consider whether this is really the best way to spend it."


  1. "Actually, I'm sympathetic to some auto industry employees, namely the ones who have no influence over retail operations."

    Does your sympathy extend to UAW employees? One could argue that they've had a massive impact on the entire business due to the CB agreements. What's your take on UAW?

  2. Great post. I think part of what's going on is that people have a tendency to think in terms of stories rather than looking at the situation with any kind of analytical rigor. So everyone knows that we're about to have an economic catastrophe, and so the government needs to "do something" to avert that catastrophe. Nobody really knows what the government can do to fix the problem, but we have to "do something," and so we fixate on the most concrete and easily-understood fixes.

    Add in healthy doses of political opportunism (on the part of the automakers) and wishful thinking (on the part of the pundits) and we end up adopting a plan that almost everyone agrees will amount to pouring good money after bad. Because if you're not proposing a solution to what "everyone knows" is a problem, then you're not a serious person.

    This is precisely the same mindset that led us to the Iraq War (and for that matter the $700 billion bailout). And there's every reason to think the bailouts will work every bit as well as the war did.

  3. @splag, the UAW has a lot of leverage, and they've certainly been looking the other way while management continued running an unethical retail operation and making stupid strategic decisions. At the same time, pragmatically, you have to admit that the average plant worker has very little voice in any aspect of the business aside from assembling cars.

    This post is making the rounds and seems to sum up the situation pretty well. If labor forced management into unsustainable bargains, then management was pretty stupid for accepting that bargain.

    One could argue, perhaps, that management "had no choice" because labor would have gone on strike. Even in that case, I still think management bears most of the blame. A union's first-order incentives are aligned with the long-term survival of the business. So either management didn't realize that the bargain would lead to the long-term failure of the business, or the management knew this and failed to present the data to the union in a credible, transparent, and convincing way.