Protectionism and the Detroit Bailout

Like my friend P.S., I am watching the Detroit Bailout hearings on CNBC.  It is interesing how openly the politicians are talking about bailing out their pet causes.  Right now a representative is urging the Detroit Bailout be used to expand affirmative action programs.

The bailout isn’t just about coddling labor unions and pushing race-based preferences, however.  It’s also about protectionism.

The bailout that people are talking about — the second $25 billion bailout for Detroit just this year — is obviously a way of protecting the Big 3 automakers from foreign competition.

For instance, Rep. Barney Frank said (I apologize if the quote is imprecise, I typed it out as quick as I could):

“The upcoming cabinet will have unlimited ability to veto and investment over $25 dollars, and we expect this will be used to prevent any foreign investments.”

In other words, the 2nd Detroit Bailout would make any foreign investment by “American” auto makers subject to the whim of a politician.

Just as the bailout would help protectionism, though, letting the UAW (and the Detroit 3 along with it) go bust would help international trade.  Remember, it was the UAW and the car companies which are preventing progress on the Free Trade Agreement with South Korea:

The U.S. also has viewed its free trade deal with South Korea as a means to check China’s increasing economic influence. And it has been seen as devised to reinforce the traditional U.S.-South Korean alliance, perceived as weakened in recent years due to conflicts over North Korean policy.

It seems there is consensus regarding the KORUS FTA’s political effects, though the economic perspectives of the FTA partners may still diverge somewhat, influenced by diverse interest groups. Opposition has arisen from such U.S. groups as auto and steel workers, manufacturers and labor unions. On the other hand, Korea faces challenges mainly from agricultural and medical groups.

Impact of the U.S.-South Korea FTA – upiasia.com.

Ford is the only Detroit auto maker whose cash exceeds its debts.  I wish it well.

Otherwise, it may be best for the country for Chrysler and GM to go bankrupt.

And not just because we could use those bailout funds to get America off foreign oil.

36 thoughts on “Protectionism and the Detroit Bailout”

  1. Some things to read or watch on our request for funds to support our automotive industry:

    Bob Nardelli’s Senate/House written testimony at http://blog.chryslerllc.com/blog.do?id=537&p=entry

    Mark Phelan’s article, “6 myths about the Detroit 3,” in the Detroit Free Press at http://www.freep.com/apps/pbcs.dll/article?AID=2008811170379

    and a Chrysler video “Straight Talk About Assistance” at http://www.youtube.com/watch?v=uPODSNAbkOU

    Thanks. Patti, Chrysler

  2. You got the Frank quote right. I was stunned by it. Why does he prefer the US Taxpayer inves0ort/bailout GM/Ford?Chrysler instead of foreign investors?

    It won’t belong before tariffs and quotas are explicitly mentioned. I fear any Dem/Lefty non-CHapter11 “bailout” will introduce protectionism back to the forefront.

    The most telling part was when a congressman was asking for a number, given worst case projections, that GM would need to survive through March. He asked it several times and got only non-answers from the CEO.

    Any Business CEO who does not have a ball park number for this, when his company may be forced into Chapter7 and he is begging for a handout to survive, should be fired by his Board right away. I was agog that he wouldn’t answer (or couldn’t because he hadn’t bothered to find out).

  3. Patti:

    Four questions:

    1) How much cash does Chrysler need to survive through March 2009?

    2) Will you make the books public for this private company?

    3) Have you (or will you) considered selling Chrysler to a company like India’s Tata?

    4) Will you actually answer my first three questions, or is your comment just a drive-by low-cost PR job to gain support to suck money from the taxpayers for a private company?

    Thanks!

  4. I thank Patti from Chrysler for stopping by and chatting.

    Her points do not address the concerns mentioned in this post, or elsewhere on this blog.

    I hope Patti, if she intended to comment on this thread, will discuss what Chrysler will do to fight protectionism. For instance, will Chrysler put its weight behind the free trade agreement with South Korea?

    Alternatively, if she meant to address other concerns mentioned on this blog, such as why the bailout is better than just investing the money in renewable fuel sources [1], defending the contract with the UAW [2], or so on, I hope she does that in the appropriate threads.

    [1] http://www.tdaxp.com/archive/2008/11/15/how-much-does-the-25000000000-bailout-of-detroit-cost.html
    [2] http://www.tdaxp.com/archive/2008/11/12/gm-uaw-not-a-winning-combination.html

  5. We’ll share any pertinent information as terms/conditions of the bailout. We’ve also said we will look at all opportunities presented to us to survive and thrive as a company. We’re trying [through a variety of approaches including grassroots efforts] to make sure our side is heard.

  6. Patti,

    Thank you for your prompt reply.

    I am impressed at Chrysler’s online-outreach.

    We’ll share any pertinent information as terms/conditions of the bailout

    Does this mean that Chrysler will consider answering these questions in exchange for, or as part of, a negotiated bailout of GM, Chrysler, and Ford by the federal government?

    (I want to be sure I am not talking past you. I appreciate the time Chrysler puts into the online community.)

    Thank you.

  7. Michael,

    Thanks for the comment.

    Economist’s View [1] links to a Wall Street Journal piece about the bailout being bad for free trade.

    As to the Cohn’s piece in The New Republic

    It is a collection of defense against strawmen and apologies that one would hear in Brezhnev’s Soviet union. For instance, consider this passage:

    Those conditions would include limits on executive compensation, as in the Wall Street rescue, but also more specific requirements designed to push the Big Three toward greater innovation and fuel efficiency.

    Except for last point, this is all irrelevent [1]. Executive compensation exists to hire high-quality executives. The moral hazard here is the shareholders, who should be wiped out, and the bondholders, whose interests are protected by a bankruptcy. The shareholders elect the board, who hire the CEO.

    Likewise, what sort of company is “pushed… toward greater innovation”? The .Com craze was all about innovation, and many of those ended in bankruptcy. The Wall Street firms that are in the best shape are those who had the least exposure to the “innovation” of mortgage-backed derivatives and bond insurance.

    “Innovation” here is as empty a word as “change.” Capital should be invested in wealth-generating enterprises, not wealth-destroying ones. GM and Chrysler are certainly wealth-destroying enterprises, which have consistently undermined American competitiveness in exchange for the perceived safety of political favors.

    [1] http://economistsview.typepad.com/economistsview/2008/11/an-auto-bailout.html
    [2] http://online.wsj.com/article/SB122714450941743143.html

  8. “Executive compensation exists to hire high-quality executives.”
    Except when they don’t . . .

    Got to thinking about this subject last night and got to wondering: What’s the expected cost (statistically speaking) to the US Government if the Big Three fail? Given the current financial situation, the decision may be as easy as comparing that with the cost of a well-done (that is, lasting) bailout.

  9. Michael,

    Thanks for the comment.

    What’s the expected cost (statistically speaking) to the US Government if the Big Three fail? Given the current financial situation, the decision may be as easy as comparing that with the cost of a well-done (that is, lasting) bailout.

    I like the thinking, but be careful of confusing the tactical cost of saving these companies now with the systemic stress of allowing companies to be too big to fail.

    For instance, under that analysis, the cost of the present bailout / their de facto present bankruptcy [1,2] would need to be added to the cost of the 1978 Chrysler bailout.

    [1] http://online.wsj.com/article/SB122722835387246299.html
    [2] http://www.gmgdesign.com/go/?p=304

  10. “I like the thinking, but be careful of confusing the tactical cost of saving these companies now with the systemic stress of allowing companies to be too big to fail.”

    Point taken, but remember that the amount of that stress could depend on how the Government chooses to intervene. A blank check would certainly produce that system stress–and be opposed by everyone outside of Michigan. A purchase of voting stock in the Big 3 companies- or an out-and-out purchase of the companies with legal obligation to sell them off as soon as practical- would send the message that “too big to fail means too big to be left alone”.

  11. Michael,

    A purchase of voting stock in the Big 3 companies- or an out-and-out purchase of the companies with legal obligation to sell them off as soon as practical- would send the message that “too big to fail means too big to be left alone”.

    Of course, though the same is true of a blank check, as well.

    Remember that laissez-faire means “leave alone.” [1]

    The Detroit 3 do not want that. They would rather rely on politics to save them, than the market. Detroit has consistently sought to use unionr. contracts, political patronage, and the rest to protect them from market competition, and place them in the arena of political competition, where their position is naturally stronger. [2]

    These ‘no blank checks; just a few twenty-five billion dollar ones’ play right into that. They distort the market, encourage protectionism, and divert capital to very efficient destroyers of wealth.

    Recall as well that the ‘successful’ Chrysler bailout was paid back early — and sent the message to Detroit that too big to fail means too big to be left alone.

    That turned out well.

    [1] http://en.wikipedia.org/wiki/Laissez-faire
    [2] http://en.wikipedia.org/wiki/The_New_Industrial_State

  12. Absolutely agreed.

    It’s hard to acknowledge how irresponsibly big government and the Bush Administration are acting.

    Paul Krugman thinks this is a bad idea [1,2].

    The ex-CEO of AIG was on CNBC today, complaining that the government’s bailouts of AIG’s came with too-high of an interest rate. He was saying it was unfair for the company to have to pay high rates of interest, when the government’s goal should be to maximize the profit for AIG.

    Absolutely amazing.

    [1] http://calculatedrisk.blogspot.com/2008/11/krugman-on-citigroup-bailout-lousy-deal.html
    [2] http://krugman.blogs.nytimes.com/2008/11/24/citigroup/

  13. “Remember that laissez-faire means “leave alone.””

    Exactly. It would be sending the message that they can’t have it both ways. If they want to be left alone in good times they should be prepared to tough it out in bad times. If they want to be saved in the bad times, they should expect government interference to reduce the likelihood of their needing saving again in the future.

  14. Michael,

    Ah. Gotcha.

    A purchase of voting stock in the Detroit 3 would be a disaster, as we replace quickly dying corporate entities with socialized zombie corporate entities that may stay undead forever.

  15. Depends on how well the government handled it. If handled well, they can revive Detroit and get out– or at least engineer a cheaper, less traumatic death. If handled poorly, it’s Night of the Living Dead on Wall Street.

  16. Michael,

    Depends on how well the government handled it. If handled well, they can revive Detroit and get out– or at least engineer a cheaper, less traumatic death. If handled poorly, it’s Night of the Living Dead on Wall Street.

    This presents the choice between two-different forms of zombie corporations: one that hurts international trade and harms automobile innovation in the short and medium term, and one that does so as well in the long term.

    Creative destruction [1] would actually allow us to progress. Of course, this cause harm to those who bet wrong.

    [1] http://en.wikipedia.org/wiki/Creative_destruction

  17. This editorial suggests you MAY be right:

    http://online.wsj.com/article/SB122584326266699163.html

    Paradoxically, having the UAW become a major shareholder in Detroit may be the best thing that could happen, so long as they were voting shares. By becoming part of management, they would have no more excuse for not seeing the ugly reality of the situation–and more leverage to prevent genuine abuses of workers. Heck, that could be the key concession to get them to cooperate. And both this and the elimination of the two-fleet standard this guy talks about would be a heck of a lot cheaper than a bailout.

    Meh! Unless this guy is BSing something, I’m going to have to swallow pride and concede this debate:P

  18. They would rather rely on politics to save them, than the market.

    There is a joke that dates back to the 1970s that every time the government tightens emission requirements, Toyota hires another 20 engineers and GM hires another 2000 lawyers.

    I echo the sentiments of those saying that if a company is too big to be allowed to fail, it is too big and needs to be broken up by anti trust action.

  19. Michael,

    From the article you mention:

    Under the nonsensical “two fleet” rule that now applies, manufacturers meet the standards separately with their “domestically” and “nondomestically” produced fleets. What does this have to do with making sure U.S. consumers get good mileage? Nothing. It’s a naked handout to the UAW at the expense of the companies and their customers.

    For 30 years, to make and sell the large vehicles that earn their profits, the Detroit Three have been effectively required to build small cars in high-wage, UAW factories, though it means losing money on every car. (That — not some perverse desire to make bad cars — is why they skimped for decades on styling, engineering and materials in their family sedans.)

    With or without a taxpayer rescue or the ministrations of a bankruptcy court, breaking the labor monopoly is the step without which Detroit will remain the problem child of American industrial policy. And, lo, what would be politically unthinkable under any other circumstances is quite doable if styled a tweak to the fuel-economy rules. In last year’s CAFE bill, the Senate actually voted to get rid of two-fleet, though it crept back via a House-Senate conference.

    The subversion of the CAFE rules into a union handout is troublesome. The replacement of Dingell with Waxman [1,2] will hopefully be the beginning of the end of such nonsense.

    There is a joke that dates back to the 1970s that every time the government tightens emission requirements, Toyota hires another 20 engineers and GM hires another 2000 lawyers.

    Heh… though I would mind less, if the lawyers at least had made GM profitable! 🙂

    I echo the sentiments of those saying that if a company is too big to be allowed to fail, it is too big and needs to be broken up by anti trust action.

    Agreed.

    [1] http://www.google.com/hostednews/ap/article/ALeqM5gEI_lpU287YVFO79X1AEG_yBx1zAD94IUSUG0
    [2] http://www.tdaxp.com/archive/2008/11/21/do-over.html

  20. I am not sure I liked the article. The premise is that the feds have to set and regulate the market.

    If the auto industry has a market where the demand for a certain type of car cannot be predicted for more then a few years out, then any competent auto company would have changed their new product development process for a car down to a 5-7 years to 1-3 years utilizing computer technology, rapid prototyping, genetic algorithms, and modern marketing preference science. Have the Detroit 3 done this? I don’t think so.

    Have developed a a 21st century model-T urban everyman car that could be sold world wide new for $5-$7k? No. Have they tried to design one. I doubt. When asked a year ago, my relatives at Ford (in engineering and design) told me they never heard of such a thing.

    There are few things GOV could do to help:
    1) get rid of the domestic/non-domestic CAFE standards difference
    2) Mandate all vehicles must be flex-fuel in 2 years if they are to be sold in the US….and give the US carmakers a loan to help with that
    3) Bring the Detroit 3 into Chapter 11 and reorganize their labor contract, dealer contracts, drop excess brands, and consider breaking GM into 3 different car companies.

  21. There is no free market in automobiles. There is only a heavily manipulated market that free-rides on our national security infrastructure.

    The Dwight D. Eisenhower National System of Interstate and Defense Highways [1] is a nifty tool. It provides us with the logistical infrastructure we need to prevent the Soviet Union from winning a nuclear war. The highly resilient interstate highway-US highway-state highway-county road system makes it essentially impossible to severe communications links within the United States. From Sherman tanks to heavy artillery, whatever we have can be loaded onto trucks to repel a sea-borne invasion of any portion of the United States using panzer tactics, even if we lose control of the skies. And of course, in the initial hours of the nuclear exchange, any bombers we have in the sky whose airfields are destroyed in the Soviet strike might land and quickly refuel on flat stretches of the interstate, before taking off and delivering our second nuclear blow.

    We do not face that world now.

    Our world is not that scary. Russia is not that scary.

    We do not have the threat of nuclear obliteration. We face the thread to warmongering Portugals [2,3], Gap states that parasitically suck wealth from the Core and use it to harm globalization. [4]

    A national highway system with a high death tool from accidents and a high wealth toll in terms of transfers to the Gap is not in our interests. [5]

    The auto industry that grew up around it is no longer in our interest.

    Capital flows to where there is a market demand. Tapping down on the demand for gas-consuming vehicles ceases throwing capital down that sinkhole, and lets us build a transportation infrastructure in our — and the world’s — interests.

    [1] http://en.wikipedia.org/wiki/Interstate_Highway_System
    [2] http://www.tdaxp.com/archive/2008/08/22/the-price-of-the-portuguese-this-salazar-with-a-slavic-name.html
    [3] http://www.tdaxp.com/archive/2008/08/11/a-warmongering-version-of-portugal.html
    [4] http://www.tdaxp.com/archive/2008/11/05/why-foreign-hydrocarbon-prices-matter.html
    [5] http://www.tdaxp.com/archive/2005/04/01/a-modest-geogreen-gas-tax-proposal-5gal-gas.html

  22. TDAXP, you don’t see any public good out of a national highways system? Not the commerce shipping that goes over it (in smaller batches then a train load)? Not individual mobility to vistis different parts of the nation? I think I am misunderstanding your post.

  23. Dang:

    http://www.thetruthaboutcars.com/e85-boondoggle-of-the-day-government-flex-fuel-mandates-increased-fuel-consumption/

    The Washington Post notes a lesson in unintended consequences: a US government initiative to reduce gasoline consumption has been a miserable failure. The Energy Policy Act of 1992 (EPAct) mandated that government agencies purchase flex-fuel vehicles for 75 percent of light duty fleets, hoping to spur automakers into building more fuel efficient vehicles and decrease gasoline consumption. And they were built: the Ford Taurus FFV 3.0 and Ranger pickup, GM compact pickups, Chrysler minivans, among many others. For years, agencies ignored EPAct; enforcement came in 1999 after environmental groups Sierra Club and Bluewater Network sued to force compliance. Problem was, replacement flex-fuel vehicles had larger engines in their predecessors and often ran on gasoline, usually due to difficulty obtaining E85. For the 2008-2009 period, fully 61% of vehicles had exemptions to run on gasoline. The mandate resulted in flex-fuel vehicles purchased for Puerto Rico and Hawaii, where E85 pumps don’t exist as it’s quite expensive to ship large quantities of ethanol. In some locations, said pumps are nearby but don’t accept government credit cards. So, despite all good intentions, the result is an increase in government gasoline consumption. Not mentioned in the article was that the billions of dollars in purchases went almost, if not wholly to the Detroit 2.8, as import manufacturers (still) don’t offer many flex-fuel cars or trucks.

    USGOV is one messed up operation.

  24. Heh…Tesla once bailout money too!

    http://tech.slashdot.org/article.pl?sid=08/11/30/1620200

    “The NY Times questions the $400M in low-interest federal loans requested by Tesla Motors as part of the $25B loan package for the auto industry passed by Congress last year. ‘The program is intended to encourage automakers to improve fuel efficiency, but should it be used for a purpose like this, as the 2008 Bailout of Very, Very High-Net-Worth Individuals Who Invested in Tesla Motors Act?’ Tesla says it is assembling about 15 cars a week and has delivered about 80 of its $109,000 base-price Roadsters to date, many of which have gone to the Valley’s billionaires and centimillionaires who are Tesla investors as well as early customers. We discussed the company’s financial difficulties last month.”

  25. Purpleslog,

    Thanks for the comments! I’ll address them backwards-to-front:

    On Telsa:

    Autoblog green has another take. [1] I don’t know the details myself, but start-up R&D seems like a better destination for money than saving the UAW. [2]

    On the E85 fleet:

    I think the Washington Post article misses the point. If I read it right, the article concluded the project had failed because of a 1% increase in gasoline consumption.

    The purpose was to subsidize manufacturers who put E85 in their vehicles, thus increaseing the number of vehicles that have such features, and also provide a market to E85 stations that otherwise might have problems attracting customers. The program has done exactly that.

    Big thinking takes time. The build-up of an ethanol infrastructure, which will both lower overall petro demand and give us flexibility in the case of future fuel crisis, is a remarkable example of long-term thinking by the U.S. government.

    On national highways:

    TDAXP, you don’t see any public good out of a national highways system? Not the commerce shipping that goes over it (in smaller batches then a train load)? Not individual mobility to vistis different parts of the nation? I think I am misunderstanding your post.

    The highways have a number of uses, some of which you mention.

    The highways are best used by those who are not too old, too young, disabled, or distracted by functioning in an information-rich environment.

    Considering the country’s changing demographic profile, the days when the highways were optimized to our population are behind us.

    I don’t mind roads. Just considering how our defense and demographic postures have changed, many of their benefits are now better captured through trains, etc.

    [1] http://www.autobloggreen.com/2008/12/01/new-york-times-writer-opposes-doe-loans-for-tesla/
    [2] http://www.tdaxp.com/archive/2008/11/12/gm-uaw-not-a-winning-combination.html

  26. Keep in mind, while I am okay and favor the interstate road system, I take Amtrak whenever I can for business trips or vacations. I love riding trains.

  27. Amtrak is quite nice.

    One of the nicest things about living in Beijing is the incredible subway, bus, and bus rapid transit throughout the city.

    I was disappointed by San Francisco’s Bay Area Rapid Transit when I visited that city. It’s a fine system, but if you’re off the main line relatively worthless.

    I hope Obama’s epic stimulus plan [1] includes funds to expand these services.

    [1] http://www.bloomberg.com/apps/news?pid=20601087&sid=aBcPiaRqqffg&refer=worldwide

  28. Milwaukee is too small for anything more then a bus system, and that isn’t being funded very well anymore. It needs more buses (perhaps smaller buses for less traveled routes). Milwaukee has no need of light rail inside itself.

    I would be okay with light rail to Madison (west) for to Green Bay | Oshkosh | Fox River Valley (North and North West). To the South, additional Milwaukee/Chicago Amtrak runs could be added or Chicago’s Metro could be extended all the way to Milwaukee airport on the south side and/or the Train station near the downtown.

    For the most part people from Milwaukee and Wisconsin have been unwilling to fund these year after year. So, heh, if taxpayers from outside of Wisconsin want to, I say go ahead!

  29. There’s been talk for several years now about ways to improve traffic flow along the I-25 corridor here in CO. One of them was for a new freight rail running around Denver to allow trains to run faster (and with less headaches over hazardous chemical cars) and the old rail to be used for light or commuter rail. I remembered that after reading an pointing out that the Shinkansen runs roughly the same distance as the Northeast Corridor–which, I then figured out, is roughly the same length as the heavily populated portion of the Front Range.

    It’s not a slam dunk. One reason trains are slowed through Denver is the presence of at-grade crossings, which would be even less safe with high-speed passenger rail. It is something to dream about, though . . .

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