Manufacturing Monday: The so-called Big Three, and the taxpayers' money

Greetings folks, the start of new week and thus we kick off another episode of Manufacturing Monday! Never a dull moment when it comes to covering stuff that either goes into the products you buy, or the impact that that consumption leads to. Now originally, I had these other items on bio-fuels, hydrogen cars, China and oil, and a few other things. But I see now that my section on the bailout of the US automakers is so big, that the whole thing is too long. So, if it is OK with you, I will post those items tomorrow.

A road often driven by these three

By now, most of you had read about either through the news or through various blog sites like here or Daily Kos, that America's automakers are looking for a new handout. Essentially, the whole group, if the Wall Street Journal article is correct, is looking for around $40-50 billion dollars. This is more than just a payday loan folks, this is the auto industry saying that they are at death's door.

Even the low end of the request is a lot of money, that's got to be the equivalent of 3 months in Iraq! This is not the first time one or more automakers has been at the edge of oblivion. Indeed, America has a history of automakers disappearing, simply go to Wikipedia and you'll see a list of at least a hundred! In modern history, the last "big" domestic auto company to shut its doors was American Motors Corporation, in 1987. Many of AMC's brands, like Jeep, went on to live a new life with the surviving automobile companies. But, should things pan out the way the pessimists both in the industry and the media (and internet) say it does, then this time around there won't be any brands to live on.

The automakers, one could say, have this economic calamity coming. Sadly, and this is why I'm in favor of an "investment," this could mean the lost of jobs by folks who never were members of the board or management who made all those bad decisions. Michigan's economy, not to mention that of Ohio and other states (not to mention our friends to the North, Ontario would take a big hit) would face even more dire economic consequences. But should we simply bail them out?

The WSJ piece points out that what they want is Uncle Sam to be a banker. A banker, I may add, with very little strings attached. Essentially, the tax payer is being asked for a loan but with nothing really in return. Keep in mind, they've already been approved for a $25 billion dollar goodie in the last energy bill last year.

Various reports have suggested the domestic auto industry now seeks between $40 billion and $50 billion. The auto maker's would like to have a funded plan in place by the end of 2008.

Unlike the federal Chrylser bailout of 1979, under which the government backed $1.5 billion in loan guarantees so the auto maker would avoid skidding into bankruptcy, the current initiative is positioned as a way to make the Big Three more competitive in a global technology race in which they could otherwise be unable to effectively participate in. The companies are struggling financially and hope to use the loans to accelerate the development of new technologies and vehicles.

"This is not really a bailout," David Cole, president of the Center of Automotive Research in Ann Arbor, Mich. said. "This is actually more like the government acting like a banker as it begins to look at the major consequences of a major failure in the auto industry," he said.

- excerpt from " Big Three Auto Makers Seek More Help From Washington", WSJ, 2008.

Do they really deserve it??

I've spoken to some libertarians who believe that it isn't the role of government to bail out a corporation. Some environmentalists have told me that instead of a bailout, that because of past lack of effort in maintaining a green product, that they should simply die off. Both, incidentally, told me that in no due time they would be replaced by more dynamic companies. Perhaps, but I suspect not to the same degree.

I do have to agree though on one issue both raised, bad management should not be rewarded. And, as Robert Oak here on Economic Populist (and Daily Kos) noted, companies like GM are still up to their old games. They still are building polluting gas guzzlers, and on top of that the manufacturing on this ultra-cheap car is being done in China!

Why this is really a big indictment on the supposed free market

Yet, in light of the many negatives blanketing the automakers, I still believe that the tax payer should get involved. The very fact that these companies (and I suspect that the auto industry won't be the first to come with hat in hand) are asking for the government to help this, should prove as an indictment on the trade system we've been involved in. That deregulated Hayek-style markets do not work, and that folks like John Kenneth Galbraith was correct in his assertions. The fact remains, in this global economic system, competition between economies has (for the lack of a better term) evolved to such a situation that help is needed.

Often, I bring up the book Bad Samaritans, by Ha-Joon Chang. The credit for the discovery of this book, though, goes to Thom Hartman. The book illustrates that while we've been playing by the rules of "free trade," our trading partners have not. Countries like Japan, Korea and Singapore have always had state involvement in the development and investment of domestic industries. The goals of these programs, investments and subsidies has always been about economic growth. When there is no domestic source of capital, the state, as in the case with Singapore with their Tamasek holding corp, literally created a new economy. The bottom line, free trade, at least that espoused in the Anglo-Saxon world and the Friedmans/Hayekists , is pretty much obsolete.

Bailout? No, perhaps we should demand more than that.

Taxpayers are being asked for cash. So why can't taxpayers instead partake in the bounty? I'm tired of just seeing our money disappear and when these companies do well that we get nothing in return. Here we have a window of opportunity on not just the auto companies but others as well.

It's obvious that the board of directors and pretty much most of management at General Motors and Ford have to go. For our $40-50 billion, we the people should have special preferred shares issued that pay a dividend (with the price per share at a steep discount to normal shares). Regarding the Board of Directors, it should be expanded to include representatives of the new government investment body, other stakeholders like labor, and those in the environmental movement. Above all, these companies need to remain solvent, secure, primed for growth, and a break from their polluting past. If this will be a clean start, then let it be a real clean start!

The Japanese are already pumping out hybrids and soon zero-g automobiles. While they continue to hire Americans ( a good thing), ultimately the profits and the bulk of the engineering work is done back in their home country. If we lose our auto industry, we lose our home-grown engineering talent; actually that is something that's been happening for a long time in other industries. Since we will be guiding the company and providing the credits, loan guarantees and such, then we ought to protect our investment. I'm not talking about kicking out Toyota or Honda, but we need to give preference to what could be our "peoples cars." Tariffs to make domestically built autos more reasonable. Oh others will argue that it would hit us in other markets, to which I say simply look at China, Korea and Japan who already have these high tariffs against us. Remember, free trade, whereas we play by the rules of the free market and they don't, is obsolete. Why the hell should we continue to be Charlie Brown, and the rest of the world be Lucy with the football?

An American Tamasek

The shares should be held in some government investment portfolio that Congress cannot touch. No sense in having another source to fund another illegal war, or repeat IOU situation we see in Social Security. Indeed, this investment portfolio should be under a new government body like some sort of US sovereign wealth fund. Under this new regime, we could implement better standards for autos. Aid in the subsidization for customers to buy eco-friendly cars. Ok, I grant you, I don't have the plan entirely fleshed out.

Alan Greenspan once noted that his biggest fear in the budget surpluses we were creating in the 1990s, was the possibility of government investing in companies. Not because they may fail, but because in his eyes they distorted the free market. Given that it is now evident that no such thing exists, we should move forward with getting society a better hand in it's economic future.

We, as nation, have watched entire industries simply close up shop here and move to cheaper wage countries. Not just the low end stuff, but things higher along the value chain. Many of these things we depend on for our daily life, that are now more vulnerable to an external event that could cause us harm. For example, many of our medicines are produced in Europe and not here in the US. What if something were to happen and we could not get those drugs? Ok, picking on something less critical, what if something happens in China and they can no longer export. Store shelves would be empty in 90-120 days (15 for some Walmart stores).

It's in our best interest to foster domestic industry. Ok, I grant you, some stuff we won't be able to do. But there is so much that we can. Investment shouldn't be forced upon these companies, as not all would agree to the issuance of special preferred shares. But our American Tamasek should be on the look out for opportunity. I'm not saying we should fund any start up, that's just being risky with the tax payers' money. No, instead we need to look at industries that we need, that has especially seen domestic sources disappear, that we should invest in. Some industries will be volatile, I grant you that, but out of necessity.

The question soon becomes, do we wish to only be used as a source of bailouts without any stipulations, and thus no control over our destiny? Or do we finally want to have a say and make the right investment in our future? Globalization has given us opportunities to sell our products and services abroad, but it has also heralded us a level of competition that the financial classes didn't bother to inform us about. America, for it's own security, needs to keep a level of industry. What I'm proposing is not something new, but something that has worked in the past. So...do we bailout the automakers? No, I say we reinvest in them and do it correctly this time for the rest of us!

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Comments

Bailouts like

Fanny Mae and Fredie Mac? Bear Sterns? Exxon?

One of the few things Bill Clinton got right was his "investing in America" to counter tax and spend Democrats. MI is really tired of being a donor state with no return.

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exactly

which is why I say we need something a little more this time. By the way, your thing on the North Pole is freaky man. We can't let one country control that much land up there!

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Galbraith & Drugs

In case readers are not familiar, wikipedia, John Galbraith.

I agree damn it, this socialism for corporations and the screw you if you are a regular citizen. If we get sick, in financial trouble, cannot work, the government sure as hell doesn't come along and bail us out! It's our money, we should get a say in what happens with GM and most importantly demand they give back to America in return. The right kind of cars, jobs, plants, here in the states.

On Pharmaceutical R&D (the drugs), they are moving to China and India rapidly! I mention it in this blog post, but the entire sector, the entire pharmaceutical sector looks like this to China and India.

Oklahoma land rush

China more so because India has the audacity to consider the social good on medicine. On patents, Big Pharma want an exclusive on their "extensions" of patents where they basically recreate the same damn drug when their original patent runs out just to have exclusive rights, not go to generic and charges very high prices, profit motivator.

This is a very informative post. We're getting some exceptional writing on EP, congrats to everybody, we're doing our homework!

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Nationalization

I think that your dead on. The more I look at it, I think that the US government should simply nationalize GM, Ford, and Chrysler.

And the shocking thing is that the cost associated with this move is relatively low. Consider this:

There are roughly current market price of $10.13/share, that means that a 50% +1 controlling stake in the company can be purchased for $2.87 billion.

Ford and Chrysler are probably somewhat less. So for something in the neighborhood of $8-$9 billion the government could take control of American auto manufacturing, and force the companies to produce automobiles that match America's economic interest.

Considering what we've spent in Iraq, this seems like a small price to pay to take giant leaps towards energy independece.

This is not an alien concept, the German and French government retain large financial interests in their national industry. In fact DHL is largely owned by Deutsche Post the German government-owned postal service.

Better yet, I would propose that the government announce that after a 10 year transitional period, the government will issue stock ownership in the companies to a government agency that will have proxy rights for shares disbursed equally amongst all legal American citizens. And that half of the monetary proceeds from this will be used to defray tax bills in much the way that many states use lottery money to reduce car license costs.

While the other half are rolled into an economic development fund that provides startup capital in exchange for an ownership stake in companies, and buys up stocking in vital industries that are failing.

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nice calculation!

How come the UAW doesn't just buy it. I mean they are always fighting with these executives, why not turn it into employee owned with that price?

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The UAW doesn't have access to that sort of capital.

That would be around $330,000 for each UAW member represented at GM.

More fundamentally, what role does the union have if the company is employee owned?

I agree that there needs to be a way to integrate employee owned entreprise into the labor movemement. You see a model for this in the role of hiring halls for skilled trades, but the problem is when you have large amounts of machine capital.

I've just finished After Capitalism, that deals with how you can move beyond capitalism as in finance capitalism with community capital trusts funded by a tax on capital. I think that the idea of creating something like the cajas, the Spanish banking institutions that take a controlling ownership interest in startups, providing capital, and later selling of this interest to private investors.

With Glass Steagall having been thrown out the window, what limits American credit unions from ding this?

Or even a social investment fund not associated with a bank?

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well, some new models to me are in order

I haven't read After Capitalism, if you want to recommend it I can add it to the reads list.

I agree, we need some sort of public funded, in the national interest, private equity (or public equity I guess) as a fund for these sorts of investments. I don't know how spain operates. I also don't know much about the SBA or how their investment structure works. I doubt buying out GM is something under their preview.

In terms of the unions, I feel they need to try new structures. For example, professionals are so often free agents in terms of negotiation of salary and so on plus move around and don't quite fit in terms of a traditional union plus their are areas of expertise and why they gravitate towards professional societies. Yet it's pretty obvious Professionals need some sort of organization, labor rights clout.

So, yeah an employee owned company might go against the traditional union structure.
I just did a read over at wikipedia on employee owned corporations and it appears there are structural issues in terms of making fast decisions.

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GM to invest $200 million in INDIA engine plant

For the sake of clarity, let me mention that GM is not investing in an Indian company, rather GM is building a GM plant in India.

In a way, this is hardly surprising, US auto makers have been aggressively offshoring US jobs for decades. This article does go to disprove those silly articles about the fuel crunch bringing manufacturing jobs back the USA.

This also goes to disprove the even sillier notion that government subsidies, tax breaks, bailouts, ect. actually create, or keep, jobs for US citizens. Remember what happened with the US airlines after 9/11? The government gave the airlines billions so that the airlines would not have to layoff US workers. The airlines took the money, gave the execs big bonuses, and fired the workers anyway.

So now GM wants a government bailout, and this is supposed to save jobs, or create jobs, for who exactly?

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GM wants $50B in US taxpayer $$$

While they invest billions in new manufacturing and R&D in China and India....
uh, right o.

That's the issue here, they are selling Buicks (considered very cool in China) and cars with less pollution standards than in the US in both of these nations, claiming to capture the market. The thing is, they are selling Aeros in China for $1100 USD. So, ok, now great, they lost $15.5B in a single quarter and now want to expand investment in India, China all the while demanding $50B of US taxpayer money to bail them out.

What's wrong with this picture?

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GM to invest $200 million in INDIA engine plant

GM closing its engine plant in Massena NY, and opening a new one in Pune India

Coincidence?

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Link to news story on GM India

www.industryweek.com/ReadArticle.aspx

Notice how it says "for domestic and EXPORT"

Article says nothing about any US GM facilities being closed.

It seems the press reports domestic closures and foreign openings totally seperate - intentional to make it less easy to link it to the offshoring of jobs?

 

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Further comment on GM

I am somewhat familiar with the GM Massena operation. The state of NY gave them abatements and grants. The plant was highly automated with the latest robotics and was held up as a productivity public private model of success. By most accounts the plant was productive and profitable.

But even with abatements, automation and productivity improvements it still apears that it has succumbed to the lure of cheap third world labor and lax regulation.

This plant made the cast iron 4 and 6 cylinder engines, popular in GMs smaller cars and light trucks

The 4 cylinder appears to be similar to the one that will be produced in India

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Big 3 In Blogosphere: Never give a Sucker an Even Break!

If they co-opt what you say, you must be having an impact. Nothing we say here goes unwatched by web search agents. So when Big Three ask for subsidies, they were watching what we said. Centerist economic populism is very close to the heart of things in the national debate. The Center itself in U.S. politics is moving towards populism, but it will take time and this is difficult to show except by noting the increasing irrelevance of the 2 Parties and the decisive nature of the Independent vote.

Libertarians forget a great deal of history. Canals were built by the Washington Administration. Railroads got free land grants from the U.S. Not one dime for those subsidies. So, there is nothing wrong with an asset financed subsidy (loans, investment tax credits) tied to domestic manufacturing. Manufacturing subsidies now can be tailored to be the same as the Railroad or Canal subsidies. The Plant and Equipment assets must stay in the U.S. and to hell with any more off-shoring. Otherwise, we should oppose any help to the Big 3.

Big 3 will try to get no-strings loans, then move plants to China and India. Remember the 1986 TEFRA law. Corporate America begged and Congress gave, corporate tax rate cuts. 1986 TEFRA Committee Reports said that this will help keep technology and other jobs in the U.S. As soon as Corporate America got its rate cuts, plants were moved offshore.

Sucker! Reagan and his new foot soldier, McCain were very successful.

Roll forward to today and Phil Gramm and Carly Fiorina are spouting the same tired 1986 TEFRA argument. "Make corporate rate cuts and jobs will stay in America". We are ready this time and same big Con is not going to work twice on their mark: voters.

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Burton Leed

corporate tax cuts

I think a great blog post would be the history of corporate tax cuts and how they failed to generate and keep jobs in the United States.

Both parties right now are pushing corporate tax cuts and incentives. Knowing the details, the history would be a damn good wake up call here.

Now I believe, done right tax incentives can be used but my impression is the history US corporations take these things and then do whatever the hell they want to.

If you know the details, specifics, can cite with credible references, cause/effect, that would be a damn useful post.

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Shared Capitalism works

Over on the Economist's View is a great post overviewing some recent studies and results that employee owned businesses actually works quite well. There are a few new reports referenced.

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David Schweickart

writes on this in After Capitalism in which he makes the case for "market socialism."

Basically, the idea is to create the capital needed to run the economy through taxation on existing capital. I was directed towards Schweikart by one of my favorite profs from my master's school.

The thing that amazes me about this book is that it presents a viable alternative to the current system. And I think that even more surprising is that what Schweickart describes is similar to the system of economic development that was in place in Spain during the period in which that country developed.

Schweickart is a big fan of Mondragon, the large cooperative in the Basque country. Mondragon is Spain's 7th largest corporation, and it's entirely owned by it's members.

I think that there there is something to this, but only if you have socialized capital. The interesting question here is whether there is a possibility to implement a real alternative to neo-liberal capitalism using something like local credit unions to fund the development of industry.

Locally owned capital that is held by the local credit union on behalf of members is not going to have the same incentive to bug out that footloose finance capital has.

Further, I can see a role for politics here. A type of sewer socialism here creating a role for local governments using taxation to create local investment funds are arguably more socially efficient than the public cost of property tax abatements and investment incentives in the form of public money for private gain.

I think that there's a diary here.

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hope you write it

Sounds interesting. Anything that comparison/contrasts other nations and what they are doing in their own economic interests is good too. Since you've studied it...hopefully you can tell us about it?

Right now in the United States ....if one can get any tidbit on economy policy, getting some innovative policy suggestions and any analysis on it's effects is the dead zone.

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