Should Detroit receive a bailout?

[Mr Skeptic]

http://www.huffingtonpost.com/2008/12/05/government-would-order-ma_n_148652.html

"Several officials in both parties said a key breakthrough on the long-stalled bailout came when House Speaker Nancy Pelosi bowed to Bush's demand that the aid come from a fund set aside for the production of environmentally friendlier cars."

 

Is it just me, or is this bailout even more sinister than we might have imagined?

[CaptainPanic]

Your link doesn't refute my statement, which was:

 

[Originally Posted by Pangloss

in those places where we are more crowded-together, we DO have functioning and successful rail systems.]

 

Which I only mention because you actually put that forth as a direct refutation to the above statement (and continue to do so after Phi also pointed out your error). Your link doesn't look at places where we have high pop density and consistent train service. So it's not a valid refutation of the statement.

Bah. I hate to discuss statistics.

I still don't agree with you. If 50% of the Americans live in those densely populated areas, and if they would travel as much by train as for example the Dutch (also densely populated), then the average number (which is on the wikipedia site) should be half of the Dutch traveled kilometers, not less than 1/10th.

 

I think we're not understanding each other. I think you put all things on rails in the category "trains" while I agree with wikipedia that a tram and a metro is no train. It is probably true that New Yorkers take the metro all the time. We have no data about this (yet, I cannot find any), so if we want to include it, we need assumptions. Please note that the metro/tram are not counted also for the European numbers (and we do have similar infrastructures).

 

We're not saying that Americans use trains as a general rule -- you're correct in saying that they do not. What we're saying is that they don't use them because they're not convenient. If you think Obama's infrastructural improvements will have value, then it would seem that you agree with this point, so what's the problem?

There is never a problem, merely a challenge. (Sorry - crappy remark). I don't blame Americans for not taking the train. You obviously need an infrastructure first. And that was my first point:

That's also why you don't have a functioning train system in the USA.

If you leave it up to the market to build an infrastructure, there will be none. The investment is too high, and payback time too long. You will need some kind of Michael Moore plan where the state steps in, and takes initiative (and Obama will do just that, I hope). It is up to a state to build the infrastructure, and possibly even to run the trains at low costs (non profit, or even subsidized).

Once you get intercity trains running between major cities every 15-30 minutes (this is the Dutch system - cities can be >200 km apart) then it is convenient also for business. Business is often situated in downtown areas close to main railway stations. Trains allow you to actually work while you travel, and they might serve coffee on board. I call that convenient. However, it is true that you need to go to the station first. It's a matter of taste perhaps. I'm completely used to our system, and even though I have the money, I don't buy a car. I use trains all the time.

 

As far as I'm concerned, most has been said. I should apologise for hijacking the thread... but a disagreement about numbers should always be settled.

[npts2020]

When I lived right outside Washington D.C., there was a metrobus stop right in front of my house and metrorail was about a two minute bicycle ride away. During those 15 years I didn't own a car but rarely used public transportation becase most places it went, that I wanted to go, were as fast for me to ride to on my bicycle. Transfers from one train to another or train to bus is the main reason for this as it is relatively rare to use the system and not have to make at least one transfer. If there was an automated system with car sized vehicles no transfers would be necessary and you wouldn't have unoccupied vehicles going any further than needed for refueling/recharging. Rails can be efficient but they are very expensive to build and require heavy use to be worthwhile. Finally, it would probably be easier for Detroit to retool for automated vehicles than to build railcars.

[CaptainPanic]

Well... it seems like that Detroit's Big 3 need a new plan. The Bail Out has failed in the Senate (link to BBC).

 

In a opinion article in a Dutch magazine (De Ingenieur), the writer suggested that the crash of the car market was actually merely an "inflation correction". He suggested that the new cars that people buy have no added value. They essentially do the same as the old cars. Therefore, if the consumption of cars would drop, then no wealth would be lost. He also argued that therefore there are too many people working in the car industry.

 

I wish I could link, but my reference is printed on paper, and I could only find older articles online. Well... It's in Dutch anyway.

 

Another interesting remark, again in a Dutch newspaper (I should start reading English papers if I want to post here, lol) says that the car companies have "hundreds of billions of debt" (link to Dutch article). How can that be possible? How can any company of such size have a debt several times the worth of the company and the yearly production? I understand that investments can have a large pay-back time... but this seems a bit extravagant to me.

 

Regarding the near future: Place your bets. Will one of the Big 3 actually go bankrupt soon?

Edited December 12, 2008 by CaptainPanic

[Pangloss]

That was some odd last-minute posturing and deal-making last night (and interesting to follow). The K Street aspect of it was disconcerting (lawmakers calling union officials to see if the deal would be okay, "Pretty please with sugar on top?", and the union officials responding "Not if you want to get re-elected, fewl").

 

But it's complicated. I've been doing a little digging on the salary issue and it's just not all that clear exactly what the two sides would have actually agreed to. Last week I think I posted that it's something like $78/hr (w/benefits) for big-3 union workers, and $44 for the profitable non-union shops. But I've since read other articles talking about new plants starting employees under $15/hr and that many GM workers don't make anything like that larger figure.

 

The point being not that 15 bucks an hour is inappropriate for an auto-worker (they should be paid based on whether a worker can be trained and employed to do that job for that amount -- what's the problem? fuggin unions), but rather the simple fact that the bill may have not been clear enough to support a deal. If all parties don't understand what they're voting on, then they have no business voting.

 

The situation is a mess, but there are bright spots here and there. It's just going to take more time to work our way out of this particular Iraq.

[Mr Skeptic]

Pangloss, the higher numbers you quoted include benefits; they are not the wages only.

 

I'd say this is a success for democracy and the free market. I wonder if the big three really are going under. It doesn't seem so to me, otherwise the union members should have been more willing to cooperate.

[npts2020]

I would tend to agree with that Dutch writer that nothing new is being produced by the auto industry and that its weight in the economy is far disproportionate to its value. A large portion (if not most) of what the big 3 owes in liabilities is to their worker pension and health care funds and it could easily be hundreds of billions of dollars that they owe. This debt is why investors are not lining up to buy auto manufacturers stock and lend them money. IMO Ford is the healthiest (probably more due to luck than anything) and is unlikely to undergo a lot of change. Chrysler is probably the worst off and is likely to either merge with one of the other auto companies or go belly up outright (less likely). GM is so big that it is unlikely to fail outright but that also makes it harder for them to do anything about their condition, we may live to see them become a financial institution instead of car manufacturer.

 

*I wish I had a better source but a mid-level exec from one of the big 3 was on a NPR radio talk show yesterday saying that labor was only 10% of their cost of making a car.

[ParanoiA]

In a opinion article in a Dutch magazine (De Ingenieur), the writer suggested that the crash of the car market was actually merely an "inflation correction". He suggested that the new cars that people buy have no added value. They essentially do the same as the old cars. Therefore, if the consumption of cars would drop, then no wealth would be lost. He also argued that therefore there are too many people working in the car industry.

 

This is what a few of us have been saying for 11 pages of this thread now. It's called "bad investment". It's not a disparagement as much as a clinical conclusion of reality. It's an expected, natural consequence that requires correction.

 

Maybe this is a bad example, and I'm sure someone will tell me if it is, but I think of it similar to the necessity of natural selection. Maybe you think you're doing nature a favor when you save poor, sickly gazelles by running off the lions that try to take them down, and then nursing them back to health and then setting them free again. But what have you done to the species as a whole? You're undermining the system that perpetuates the species.

 

You've provided a relative unnatural opportunity for biologically inferior gazelles to mate and multiply and potential superior gazelles to be eaten while you were nursing the sick absent from the herd. It's a superficial delay of the dirty work that has to happen, despite our resistance to it - and the longer you "prop up" the sickly gazelles, the worse the species will likely perform as a whole. You're setting them up for a macro disaster, over the obsession with neutralizing the micro ones.

 

I don't see that we're helping the economy, as a whole, by unnaturally "propping up" bad investment, which is what you're doing when you bail them out, particularly in the face of a bad business method. We're harming the economy as a whole, delaying the dirty work for another day, another generation - we're leaving it for the "next guy". We lack the spine required to call ourselves adults by pretending as if the pain felt by the fall of these companies is "unacceptable".

 

Our dollar is in more trouble than the big 3. Why are they higher on the priority list?

[npts2020]

ParanoiA; I agree that the dollar is probably in at least as much trouble as any automaker but the pain will be felt by far more than those in the auto industry. The question is what do you do with all of those people currently employed by that industry? If left to the "market", you are likely to be dooming many places to a generation or more of high unemployment and related problems. Who do you suppose will end up with that bill? It seems like everyone in the world except Americans think that nationalizing the big three is the most sensible thing to do. If there isn't a plan to weasel the money out of the TARP program by inauguration, I would bet the ranch the issue will be revisited by the end of January.

[Pangloss]

Pangloss, the higher numbers you quoted include benefits; they are not the wages only.

 

That's not enough to make up the discrepancy I was looking at. And some articles were talking about lower figures with benefits, and quoting academic studies done on the subject, so for me that particular question is unanswered for the moment. It may not matter, ultimately, and it's clearly being manipulated by various agencies for political reasons, but perhaps it will become more clear over time.

 

---------

 

On a related note, the White House is indicating today that it will provide bailout relief from the $700 billion TARP fund. Gotta preserve those high union wages, you know. Who cares about competition anyway?

[ParanoiA]

The question is what do you do with all of those people currently employed by that industry?

 

I disagree with the premise. Why is it up to anyone "to do" anything with these people? It's up to them. They will look for work, and they will find it.

 

What are we doing with the thousands and thousands of high school graduates every year?

 

What did we do for the thousands, if not millions, of americans that switched jobs and trades and careers last year?

 

Why do you think there's something for us to do? Let them look for a job just like the rest of us when we get canned. It won't be easy. So what? It will be hard. So what? It will take much effort and sacrifice on their part. So what? They may have to move, or consider other ideas besides selling their labor to businessmen. So what?

 

I'm not understanding why we're crying about the struggles of life - struggles we all have to deal with. This is the easiest country in the world to "make it". It doesn't make sense to insist that life be all cozy, simple, fluid and easy. I can't imagine that's even good for humans. It's not too much to expect individuals to struggle from time to time, and make tough decisions. That's not asking much at all. That's life.

[john5746]

Maybe this is a bad example, and I'm sure someone will tell me if it is, but I think of it similar to the necessity of natural selection. Maybe you think you're doing nature a favor when you save poor, sickly gazelles by running off the lions that try to take them down, and then nursing them back to health and then setting them free again. But what have you done to the species as a whole? You're undermining the system that perpetuates the species.

 

Not a bad analogy, but if we compare the gazelles to Americans, its more like a volcano is going to erupt in a month. Do you try and place them somewhere else or just let nature take them all down? Also, we are humans, we try to avoid catastrophe, not just let it happen.

 

I don't see that we're helping the economy, as a whole, by unnaturally "propping up" bad investment, which is what you're doing when you bail them out, particularly in the face of a bad business method. We're harming the economy as a whole, delaying the dirty work for another day, another generation - we're leaving it for the "next guy". We lack the spine required to call ourselves adults by pretending as if the pain felt by the fall of these companies is "unacceptable".

 

Our dollar is in more trouble than the big 3. Why are they higher on the priority list?

 

It is obvious that at least one of the big three or a significant portion of each needs to go, but to just allow that much manufacturing to go down while the economic situation is already terrible would be insane, IMO. There will be no other jobs to fill the void, unless maybe you tell everyone that they find an illegal and take his job. You seem to think that things will be static, that these companies can just go belly up and have no effect on everyone else. All sectors will be hit. This is not a few lions taking the sick, this is a volcano wiping out many people, which will in turn lead to serious sickness that will last a long time.

 

Maybe it will happen anyway. Maybe you are worried about sinking deeper in debt, which is a concern. I think if we let them fail, a trillion of debt won't make a difference anyway.

 

 

Sure, if we continue pouring money in a lost cause, it will make the fall worse. But, if America fails, does it matter if we still owe money to China? Nah.

[Pangloss]

The more I think about this situation, the less I like the idea of bailing them out.

[ParanoiA]

There will be no other jobs to fill the void, unless maybe you tell everyone that they find an illegal and take his job. You seem to think that things will be static, that these companies can just go belly up and have no effect on everyone else. All sectors will be hit. This is not a few lions taking the sick, this is a volcano wiping out many people, which will in turn lead to serious sickness that will last a long time.

 

No, see, that's just it. I don't see it as static at all. You just demonstrated a faith in static consequences by presuming these manufacturers will fall without anything to fill the void. I have no reason to think that. History shows that other companies - other opportunists and profit motivated people - will take advantage and buy in. You really believe that no one will swoop in to grab this market? This highly profitable market of selling automobiles? Plants already built? While the rest of the auto manufacturers are rolling in profit, no one will take notice and jump when these failures finally fail?

 

No, my take is more of a trust in the dynamics. I trust that capitalists will remain as predictable as they have been in the past. The bad investment needs to be checked.

 

I simply disagree with the volcano analogy. I see no such catastrophe on the horizon. I see opportunity made possible by the corpses of fallen business. Just my opinion.

[bascule]

I heard the legislation was failing, due to Republican opposition to union wages.

 

All this to prevent them from filing for Chapter 11? I don't get it...

[john5746]

History shows that other companies - other opportunists and profit motivated people - will take advantage and buy in. You really believe that no one will swoop in to grab this market? This highly profitable market of selling automobiles? Plants already built? While the rest of the auto manufacturers are rolling in profit, no one will take notice and jump when these failures finally fail?

 

Well you will have the Japanese, Koreans, Germans, Chinese and even Indians ready to make cars and less demand from Americans - who can afford cars with no job? So yeah, capitalism will work, but the capital will flow elsewhere. I guess it has to go sometime, we can't be the rich man on the hill forever.

 

I simply disagree with the volcano analogy. I see no such catastrophe on the horizon. I see opportunity made possible by the corpses of fallen business. Just my opinion.

 

Yes, that's what makes it so hard, it is opinion. I agree with both sides of the issue - I would love to reboot them anew, then again I would hate to go through all the pain to do it. But, maybe it is necessary. Maybe we will make it worse by bailing them out. I am nervous about the pro-union democrats being in charge, no lie there.

[ParanoiA]

Well you will have the Japanese, Koreans, Germans, Chinese and even Indians ready to make cars and less demand from Americans - who can afford cars with no job? So yeah, capitalism will work, but the capital will flow elsewhere. I guess it has to go sometime, we can't be the rich man on the hill forever.

 

Well that's certainly a defensible argument. I do worry about that too. However, I'd rather a foreign country fill the void with a capitalist effort rather than keeping it american by government ownership, however partial it may be. And I agree, it's not like this is an easy decision to live with. I do see good arguments both ways.

 

I guess what I'm most concerned about is the obsession with the elimination of 'struggle'. I don't think it's called-for to presume we need to manage the economy so perfectly, precisely, to mitigate the effects of the business cycle. The effects are part of the "check" process. Any process that attempts to rid the pain undermines the necessity of that pain, which I believe is required.

 

If someone could paint me a more detailed, specific picture of the kinds of snowballs the fall of the big 3 would cause, I might be more inclined to change my position. So far, I just haven't heard anything that justifies avoiding this badly needed pain. In light of the dollar, the ridiculous national debt and the credit market meltdown, it appears we need to grin and bear it.

[Phi for All]

I guess what I'm most concerned about is the obsession with the elimination of 'struggle'.

Exactly. For at least the last 20 years or so, we've been played with a False Dilemma argument about how easy we need life to be. We can't let asphalt cure because it wouldn't be convenient. We should risk ingesting Teflon because our eggs might stick to a normal pan. And we need electric motors to adjust our side-view mirrors because it's so hard to adjust them by hand.

 

And now the auto manufacturers have gotten themselves in a pickle and they want us to think we're the ones over the barrel. They paint a picture of doom that doesn't include the upside of a failing behemoth, like restructuring and innovation due to market pressures. More False Dilemma. Let's not forget that one of the big reasons to have such huge companies is to decrease costs. Did you see any prices going down before the market tumbled? Let's also not forget that prices will never go down as long as the system stays the way it is, the system that sells you a car for $20,000 that is only worth $16,000 just 100 miles later.

[npts2020]

ParanoiA; I hate the idea of giving Detroit money as much as anyone but with no alternative opportunities on the horizon (besides the national personal transit system I like to talk about) you are likely to have 10% or more of the population unemployed for a significant period of time. The last time we just allowed everything to fold, it took nearly a generation and a large scale war to return to anything resembling a healthy state. I don't relly follow your analogy about pain being good for anyone, how much pain do you suppose Bill Gates suffered to get where he is? At any rate I don't see how unnecessary pain can be helpful to anyone. If the government is willing to leave people to struggle on their own why should those people even support the government to begin with? IMO the concept of social Darwinism (pain is good, weeds out the weak, etc.) is the fallback way of looking at things for those with a lack of enough imagination to visualize other human possibilities.

[Phi for All]

ParanoiA; I hate the idea of giving Detroit money as much as anyone but with no alternative opportunities on the horizon (besides the national personal transit system I like to talk about) you are likely to have 10% or more of the population unemployed for a significant period of time. The last time we just allowed everything to fold, it took nearly a generation and a large scale war to return to anything resembling a healthy state. I don't relly follow your analogy about pain being good for anyone, how much pain do you suppose Bill Gates suffered to get where he is? At any rate I don't see how unnecessary pain can be helpful to anyone. If the government is willing to leave people to struggle on their own why should those people even support the government to begin with? IMO the concept of social Darwinism (pain is good, weeds out the weak, etc.) is the fallback way of looking at things for those with a lack of enough imagination to visualize other human possibilities.

But isn't this just like saying that, because I object to an unjust war, I don't support the troops? If we artificially prop up the auto makers, we teach them and the unions that they don't need to be as smart as the companies who don't find themselves in this position.

 

The workers may need to realize that times have changed, and that making vehicles that people want and can afford is the balance to their gainful employment. The managers may need to realize that people are waking up and deciding that all they really want is to buy a car, not go in debt for the next 6 years in order to support 2 million industry-related workers.

[ParanoiA]

I don't relly follow your analogy about pain being good for anyone, how much pain do you suppose Bill Gates suffered to get where he is? At any rate I don't see how unnecessary pain can be helpful to anyone. If the government is willing to leave people to struggle on their own why should those people even support the government to begin with? IMO the concept of social Darwinism (pain is good, weeds out the weak, etc.) is the fallback way of looking at things for those with a lack of enough imagination to visualize other human possibilities.

 

You said "unnecessary pain", and I'm arguing that the pain is necessary.

 

Pain keeps you from sticking your hand in the fire. How well do you think humans could take care of themselves without the benefit of physical pain? Ask a leper.

 

In the market place, when a business is performing poorly, capital is being utilized badly, inefficiently. That business needs to fold so that capital can be released and used by other businesses or someone else who perhaps can perform better. And so on. That's the "pain" I'm talking about. The business end of natural selection in the market place.

 

The big three have performed poorly. So poorly that they're about to fold. When you bail business out of bad investment, then the "pain" of failure has not happened. The proverbial hand has not hurt and does not recoil from the fire. Selection has not occured.

 

I'm saying that the checks and balances of the market only work if you allow them to play out. Bad business is supposed to fail, which relieves the capital to work for good business. Propping up the big three, artificially, punishes those auto companies that are doing well - that aren't costing you and I anything, are providing revenue to our government, jobs for our people, contributing positively to the economy. It punishes them because you are keeping badly performing business in the market place, reducing their customer base, and etc. And it makes no sense in the first place.

 

Why on earth would you reward a business that needs your tax support over a business that doesn't need it at all? Business that performs well, is business that typically grows, augmenting employment, tax revenues and etc. Business that performs poorly isn't growing, typically cuts employment and in this case will cost us revenue. It's insane.

 

Now, about the struggle. The government leaves everyone to struggle on their own because WE are the government. It's YOUR life dude, not ours. It's your responsibility to gather resources to take care of yourself. You think the government is supposed to swoop in every time you're having a "difficult time"?

 

Our government is not your nanny. We are a society that governs itself. We aren't served by a King. There is no "central" control with a mission statement to remove struggle from your life. The government's job is not to make life easy on you. The government's job is to provide a framework of law and order so humans can cooperate on equal footing, free to capitalize to their merit. Feel free to trade as shrewd as you are able, but no, it's not our job to feed you. Or to find you a job. Or to fetch you an Xbox.

 

Lucky for you, we do have an exhaustive entitlement system that breeds generation after generation of unappreciative, uneducated little twits that think it's our duty to provide for them, that they are "owed", and etc, and it's likely you were misguided by one of them.

[Phi for All]

Lucky for you, we do have an exhaustive entitlement system that breeds generation after generation of unappreciative, uneducated little twits that think it's our duty to provide for them, that they are "owed", and etc, and it's likely you were misguided by one of them.

The Millionaire Next Door is a good book very close to this subject. It's full of stories about hard-working people who invested shrewdly, eschewed lavish consumerism and ended up with a million dollars plus in liquid assets. And typically, when they died and left it all to their kids (the very motivation for their shrewd money management in the first place), the kids blew through it in an appallingly short time, mostly because they felt entitled to lavish consumerism. I'm sure they all felt "bailed out" when mom and dad died.

[ParanoiA]

The Millionaire Next Door is a good book very close to this subject. It's full of stories about hard-working people who invested shrewdly, eschewed lavish consumerism and ended up with a million dollars plus in liquid assets. And typically, when they died and left it all to their kids (the very motivation for their shrewd money management in the first place), the kids blew through it in an appallingly short time, mostly because they felt entitled to lavish consumerism. I'm sure they all felt "bailed out" when mom and dad died.

 

That's interesting. My wife and I were talking about this the other day and we agreed that if we were to leave "security" behind for our kids, we'd rather it be a family business of some kind than gobs of money and assets - for precisely that reason. I suppose they could just sell it and undermine our efforts, but it would seem a better attempt at motivating self responsibility than straight up cash.

 

I might have to check out that book, sounds good. I'm still trying to squeeze in time to finish Al Gore's Assault on Reason.

[Pangloss]

You guys are covering the topic really well. I've seen a lot of discussions like this floating around the 'net about this, and talked to many friends and family about it, as I imagine you all have as well. I've had several conversations with people working in economics-related fields about this including an economics professor and an accountant, but I've also talked to people who have no expertise but just some good common sense -- I'm just getting a general impression that people are a lot smarter about this sort of thing than we normally give them credit for.

 

I think that your points (ParanoiA and Phi in the last couple pages above) clearly go beyond simple ideological pressure generated by pure-market partisans. There are really good reasons for not bailing out the auto makers. The argument is on solid ground. Unfortunately so is the opposing argument -- it isn't just politics, it has valid points as well (and I think you all generally agree with this). This strikes me as being akin to a "tough problem" in science, and perhaps there's a need here for scientific problem solving. I sure hope there are people working on it on that basis.

 

One point I raised with my economist friend yesterday is that if we had let the Big 3 collapse then we would likely have done something equally grandiose in the aftermath of that event, just because of politics. That's a very real problem with the "market" side of this argument -- getting people to go along with it, not just in initial acceptance, but all along the whole bumpy ride. It's very difficult to get people to not only accept pain, but to KEEP accepting it. That's just not how we do things in this country. You know the phrase, right? "We can put a man on the moon, but we can't do X, Y or Z?" We have a very low threshold for pain.

 

Of course, we have an almost equally low tolerance for failure, and I noticed that there were several news stories last week about how congress was already starting to ask why we've spent all this money and the economy hasn't already been fixed! My first reaction when I heard that was "you have got to be kidding me", but when I thought about it I realized that I should have expected it, perhaps even earlier.

 

But I guess there's no point in being a pessimist -- we'll either fix this or we won't, right? I still like to think that between all our hand-wringing and brainstorming we'll somehow muddle through along a path that's relatively beneficial, or at least as beneficial as was realistically possible.

[npts2020]

I completely agree with those who say that the government bailing out businesses is generally a bad idea. The problem is that we have already given ridiculous sums of money to businesses this year. In this respect we are being penny wise and pound foolish. Even compared to only the Emergency Economic Stabilization Act of 2008, what the automakers are asking for is a pittance. When you are flooding your financial sector with trillions of dollars, why is it so untenable to spend less than a tenth of that on the largest part of your manufacturing sector? What do you suppose the numbers of jobs saved per dollar spent is for either sector's bailout? You may trivialize the hardship that some people will face from the collapse of the Detroit automakers but I believe if there is no plan for the resulting mess, it will end up costing us all far more than the money they are asking for. Finally, the auto industry has a perfect record for paying the government back, can the same be said about the financial sector?