I promise one of these days I'll get off the topic of this ridiculous bailout of the Detroit Three automakers, but there are so many lessons of leadership (or lack thereof) and lessons of policy (pathetic as they may be) that this situation requires some intense scrutiny. As one of the few remaining real taxpayers, I also have a personal interest in how my money is being spent.
The original title of this post was going to be something along the lines of "our wacky world" as I am very amused at how the policy positions of the major political parties have shifted during this debate. As in about 180 degrees by both sides. The "party of the people" Left is supporting a policy that gives tons of money to corporations and their highly-paid executives to stimulate the supply side, and now the "corporatist" Right is advocating giving money to the consumers to stimulate demand. What's next? Locusts?
But I won't belabor the increasingly bizarre political side in this post. Instead let's take a look at a great piece from Saturday's Wall Street Journal by David Yermack, titled Just Say No to Detroit. Mr. Yermack goes into considerable, and downright horrifying, detail on the destruction created by the Detroit Three over the past few decades.
breathtaking, on a greater scale than documented by Mr. Jensen for the
1980s. GM has invested $310 billion in its business between 1998 and
2007. The total depreciation of GM's physical plant during this period
was $128 billion, meaning that a net $182 billion of society's capital
has been pumped into GM over the past decade — a waste of about $1.5
billion per month of national savings. The story at Ford has not been
as adverse but is still disheartening, as Ford has invested $155
billion and consumed $8 billion net of depreciation since 1998.
As a society, we have very little to show for this $465 billion. At
the end of 1998, GM's market capitalization was $46 billion and Ford's
was $71 billion. Today both firms have negligible value, with share
prices in the low single digits. Both are facing imminent bankruptcy
and delisting from the major stock exchanges.
A waste of $1.5 billion per month, every month, for the past decade. Just by GM. What could have been done with that $465 billion?
One can only imagine how the $465 billion could have been used better
— for instance, GM and Ford could have closed their own facilities and
acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.
Or perhaps an itty bitty fraction of that to implement a real lean manufacturing and leadership system. They could have shut down their companies for a year or two, retained all employees, and given each of them a few thousand hours of training… then spend another year to develop and implement improvements.
Hey, but what's a few billion when we're now throwing hundreds of billions at companies, leaders, and even individuals that couldn't lead a cat to a mouse or bothered to see if they could really afford that mortgage. Who needs accountability anyway?
The implications of this story for Washington policy makers are
obvious. Investing in the major auto companies today would be throwing
good money after bad. Many are suggesting that $25 billion of public
money be immediately injected into the auto business in order to buy
time for an even larger bailout to be organized. We would do better to
set this money on fire rather than using it to keep these dying firms
on life support, setting them up for even more money-losing investments
in the future.
As Lester commented on my previous post, allowing GM, Ford, and Chrysler to go bankrupt is not necessarily a bad thing. There is still a demand that needs to be met, and some company will have to build it. Whether it's Toyota or a GM with new leadership. Mr. Yermack tackles this question as well.
Two main arguments are being raised to justify a government rescue of
the auto industry. First, large numbers of jobs may be at stake,
perhaps as many as three million if one counts all the other firms that
supply the Big Three. This greatly overstates the situation. Americans
are not going to stop driving cars, and if GM, Ford and Chrysler
disappear, other companies will expand to soak up their market share,
adding jobs in the process. If the government wants to spend $25 billion to
protect auto workers, it would do better to transfer the money to them
directly (perhaps by cutting each worker a check for $10,000) rather
than by keeping their unproductive employer in business.
I could use that check to help buy a… Toyota!
Second, it is suggested that the failures of the U.S. financial
industry, which have cost us something like $700 billion, justify
bailouts of other sectors of the economy. This makes no sense. If the
government diverts our national savings into businesses that have long
track records of destroying investment capital, eventually we'll end up
with an economy like France's — or Zimbabwe's.
Sounds like we're already doing that. If there's no accountability, and a bailout at the end of even the most pathetic leadership decisions, then why bother trying to make good decisions, let alone visionary ones, at all? But who's going to bail out the government from their own pathetic decisions on bailouts? Not too many of us left.
I wonder what the weather's like in Harare.
Lisa Nelson says
I’m sending this to my Congressman. This madness must stop. Thanks for putting it in terms even an idiot (aka the Congressman) could understand.
In the case of the auto-makers’ bailout, it’s a relief to have a national issue that is so straightforward: American cars tend to break down and fall apart therefore people have stopped buying them. If GM and Ford don’t want to go out of business, they should start making decent cars. To bail them out would be to reward their terrible manufacturing standards.
Dan Markovitz says
The sad thing about your points (and the WSJ’s as well) is that all the economic logic in the world is insignificant compared to the political weight thrown around by the Detroit Three, their employees, and their congressional representatives. Sigh.
Frankly, I like the idea of just giving $10,000 checks to each worker.
Stan Heard says
Someone (F.A. Hayek) once said that subsidizing the fluctuations of one industry only transfers the cost of the fluctuation to other industries. If that means what I think it does, then the job losses will still occur but not in the companies that deserve it (the big 3 auto makers). It will be spread over the rest of the economy so that the people who suffer will be people working in companies that are more successfully led than GM, Ford and Chrysler.
Mike Blankenship says
Two comments on bail outs
1. Look at Harley Davidson, the government did not bail them out of their financial crisis several years ago. Now look at them. They make a beautiful and dependable bike as good as any rice burner. Until recently, you had to be put on a waiting list to purchase many models. All was accomplished with incorporating Lean and TPM in their manufacturing.
2. The $700 billion given to our great banks was exactly the wrong way to address our forclosure crisis. When the Fed lowered the prime rate, did the lending institutions lower the balloon payments? Of course not! They continued to increase payments until people in marginal situations were forced to lose their homes and small businesses. Our law makers should have forced those institutions to lower the interest to 3% above prime so that everyone could survive.