Friday, December 5, 2008

the auto industry

Am I the only person who finds the whole demonization of the US auto industry bizarre?

I am not an advocate for either management or labor or the auto industry generally. But by some estimates the auto industry accounts, directly or indirectly, for one in ten jobs in this country. I don’t know how that is calculated, but it is not improbable. The auto industry is the largest consumer of steel, plastic, glass and electronics in this country. Then there are the tire manufacturers, the machine tool companies, the advertising agencies, the truckers and railroads that deliver the autos, the repairs shops, the … you get the idea. Auto dealers are in every community in the country. Let’s say the one-in-ten estimate is exaggerated twofold. So only one in twenty jobs in this country depends on the auto industry. (The civilian labor force in this country is around 150 million, so that represents 7.5 million jobs.) Of course, not all of those jobs would go away if one or more of the three major US auto companies went under. And some are connected to foreign auto makers. But a collapse of the US auto industry is one of the biggest “anti-stimulus” measures imaginable for the “real” economy. At a time the economy really can’t afford any major shocks. The potential job loss has been estimated at three million. When we are trying to figure out how to intelligently inject a trillion dollars or so of fiscal stimulus into the economy quickly, do we really want to risk the negative multiplier effect of an auto industry collapse?

This is serious business. Has anyone taken note of the increasing use of the term “depression” in recent months?

It was reported today that the economy
lost over 530,000 jobs in November, the 11th consecutive monthly decline and the biggest monthly decline in 34 years. The numbers of jobs lost in September and October were revised upwards by 100,000. So far this year the economy has shed $1.9 million jobs, with most of that coming in the last three months. About half of the job loss has been in manufacturing.

The unemployment rate rose to 6.7%, but that doesn’t include the 420,000 men and women who left the job market during the month (meaning, they are no longer looking for work and are therefore not counted among the unemployed). The measure of employment I prefer is the
employment-population ratio – the percentage of the population that is working. It has now fallen to 61.4%. (It peaked at 64.7% in April 2000.)

Consumer confidence has decreased to the lowest level since that measure has been maintained, and retail sales in November were the weakest they have been in 35 years. Some economists are now predicting that the economy will have declined at a 5% annual rate in the fourth quarter.

There is certainly a rational discussion to be had over the fate of the US auto industry. But that doesn’t seem to be happening. Instead, there is a sort of political “piling on” taking place. The CEOs of the three major US auto makers were politically tone-deal to fly their private jets to Washington for their first appeal for help. But they have shown their contrition and have now all driven the 520 miles from Detroit to DC in hybrid vehicles. And they have all committed to working for essentially no pay in the short term. They have been subjected to ritualistic abuse in front of the TV cameras. Take
this example from the Senate hearing yesterday:

"Did you drive, or did you have a driver?" demanded Richard Shelby (R-Ala.), the ranking Republican on the Senate banking committee, which questioned the lowly threesome. "Did you drive a little and ride a little? And secondly, I guess, are you going to drive back? And, if so, if some of us wanted a ride to Detroit, could we ride with you?"

The chairman, Chris Dodd (D-Conn.), tried to ease the tension with some levity. "Where'd you stay?" he asked. "What did you eat?"

But Shelby was having none of it. "Mr. Chairman wants to make light of this, but I can tell you this," he growled. "Are you planning to drive back?"

Is this what our response to the economic crisis has been reduced to? (It seems Republicans like Shelby only exhibit this kind of anti-corporate populism when union jobs are at stake.) Does anyone really think that the problems of the auto industry would be eased by requiring that the CEOs of the Big Three drive themselves instead of flying whenever they need to travel? (Maybe flying commercial would be a nice compromise between a private jet and driving a car.)

But let’s compare the scorn being shown the auto industry with the treatment of the financial industry.

Take just two companies: AIG and Citigroup. The federal government has already put up more than $150 billion (and counting) to save AIG, because it engaged in such reckless and irresponsible behavior that its demise could bring down the entire global financial system. I’ve lost track of the cost of the Citigroup bailout. Last time I checked, US taxpayers had put up at least $250 billion. Did anyone grill their CEOs over their means of travel to DC? Of course not, because they didn’t even bother to travel to DC. The Treasury Secretary and Fed officials came to them. Have the CEOs of AIG or Citigroup or any of the other financial companies that have received a taxpayer backstop in the trillions of dollars offered to work for $1 a year? Have they been forced to present to Congress in televised hearings their plans for turning around their companies?

We’ve been hearing a lot lately how much unionized workers in the auto industry make. You may have heard figures like $70/hour thrown around. But that is
wildly misleading. Average wages for workers at Chrysler, Ford, and General Motors were just $28 per hour as of 2007. That works out to a little less than $60,000 a year in gross income – hardly outrageous given the nature of the work. It’s a living wage. And that is about the same wage that foreign manufacturers pay their non-unionized workers in the US. So where does the $70/hour figure come from? If you take the cost of all employer-provided benefits for the Big Three – health insurance and pensions – and divide that by the number of hours worked by current workers, you get about $42/hour per employee. Add that to wages – $28/hour – and you get the $70 figure. But it's not as if each active worker is getting health benefits and pensions worth $42/hour. That would come to nearly twice the worker’s wages. Instead, each active worker is getting benefits equal only to a fraction of that – around $10 per hour. You only get the $70/hour figure if you include the cost of benefits for retirees. But those aren’t benefits received by current workers. Why should they be added to the calculation of the cost of those current workers? If you fire the current workers, or reduce their hours, those costs don’t go away. So they are really not part of the hourly cost of current auto workers. Of course, workers need to park their cars. Why not include the cost of the land used for parking lots as part of their hourly cost? And they need heat and electricity in the auto plants in order to work. Why not add that to the cost of the workers? The legacy costs of retirees are an obligation incurred by past management and shareholders, not today’s active workers. Again, I’m not an advocate for the UAW, but figures like this $70/hour estimate are pure propaganda.

But let’s say auto workers are overpaid. So how about this: Let’s say that no one working in any commercial bank or investment bank or insurance company or mortgage company or hedge fund or any other element of the financial industry receiving support from the federal government (in the form of equity infusions, asset purchases, loans or loan guarantees) can receive salary and bonus greater than TEN TIMES the wages of the average United Auto Workers member (and, directly or indirectly, every player in the financial industry is receiving a federal bailout – as we have come to learn, it is all interconnected). That would mean no one in the financial industry could earn more than about $600,000/year, including bonus. UAW workers are supposedly being grossly overpaid and are responsible for the problems of the US auto industry. Certainly TEN TIMES their average wage should be more than generous pay for bankers and traders who have brought the global financial system to the brink of collapse. (In keeping with the demands on the auto executives, bank CEOs would have to forego pay altogether, of course, until taxpayers are made whole).

Treasury Secretary Paulson, not the bankers, is the one who went before Congress to pitch the financial bailout. He warned us that we couldn’t impose limitations on the compensation of financial executives or even ask for equity in return for a taxpayer bailout because the banks might choose not to “participate” in the bailout. The implication was that the bankers would fly their firms and the entire financial system straight into the mountain rather than agree to such indignities. But federal regulators have the power to seize insolvent banks. If they aren’t insolvent, then why bail them out? If they are insolvent, then why is there even a negotiation over what terms they will accept as part of a bailout?

I keep
citing Kevin Phillips and his description of the “financialization” of the US economy. But it really does look like we have come to distain people who actually make things (rather than the more exalted business of moving bits representing money around on computer screens).

Sure, the US auto makers have made some dumb decisions (although I wouldn’t say they are all equal in that regard – Ford has done a better job changing and adapting than the other two). But even that has been exaggerated. They made gas guzzlers because that’s what Americans wanted. The root problem was our love of cheap oil and the policies that have worked to maintain low gas prices at the pump.

Do you know when oil reached it ALL-TIME historic low? The lowest it has EVER been in constant dollars? That would be 1998, when it averaged $11.91 for the year (around $16 in current dollars). (The average price since World War II (again, adjusted for inflation) has been around $25.) Cheap gas is the market’s way of saying, “Party on, Wayne!” Unlike Europeans, Americans have never been willing to support policies that would keep gas prices high to encourage conservation and the development of alternative fuels. (The price of gas in Europe has generally averaged three or four times the price in the US – with the difference consisting of high taxes.) The auto companies can be blamed for opposing higher fuel efficiency standards. But our love of gas guzzlers and the cheap gasoline that makes them possible is hardly their fault alone.

As I
noted previously, it was reported on Tuesday that auto sales in the US fell more than 37% last month to their lowest level in 26 years. And it wasn’t just US auto makers. Chrysler did the worst, with a 47% sales decline. But Nissan did worse than GM – declining 42% vs. GM’s 41% fall. US sales declined more at Toyota (-33.9%) and Honda (-31.6%) than they did at Ford (-30.6%). Tell me what industry in this country (especially one with high fixed costs) could sustain a sales decline of 37%?

And of all models sold in the US guess which one had the biggest sales decline in November. Check it out:



So, it’s not like making all hybrids would have spared Detroit its current ills.

The New York Times in an
editorial today said that the CEOs of the Big Three should all resign. I have not been impressed with GM’s CEO, Richard Wagoner, but I know so little about him that my impression is meaningless. I don’t know much more about Chrysler’s CEO, Robert Nardelli (although he has a reputation for being autocratic and he was drummed out of Home Depot after receiving $240 million in compensation for mediocre performance). But I do know Ford’s Alan Mulally. I had extensive dealings with him when he was president of Boeing’s Defense and Space Group and I was quite impressed with him (Boeing would have been a lot better off had they made him CEO earlier this decade instead of Phil Condit and Harry Stonecipher, both of whom in my opinion were disasters). Mulally only came to Ford in September of 2006 and he has done a pretty good job. Ford is definitely in the best shape of the Big Three. Indeed, Mulally has said Ford could probably survive without federal help, but would like a line of credit just in case. (Why, then, is Ford supporting his rivals in their bailout request? Because if they go down, so will a lot of suppliers and that could result in a chain of events that takes Ford down, too.)

So what’s the answer? Certainly bankruptcy would be a disaster. To survive bankruptcy the auto makers would need debtor-in-possession financing which isn’t available in the capital markets these days. The only place that money is coming from is the US government. If the capital markets were functioning properly, maybe bankruptcy would be an option. But it isn’t now. The companies need to be reorganized, but that should take place outside bankruptcy. If we actually had a functioning president at the moment he would appoint a special presidential representative to act as a receiver of sorts who could negotiate with all the parties (including Congress) to restructure the Big Three. The result would be essentially a pre-packaged bankruptcy but would take the form of an act of Congress. But since we are still a couple of months away from having a president, Congress must act on its own and provide the companies enough money to survive until Obama can deal with it – enough to get through the first quarter of ’09. Is there a risk some of that money will be wasted? Sure. But whatever inefficiency would be entailed in a bailout would certainly be less than the inefficiency entailed in a collapse of the US auto industry.

The three companies each have their own problems. Ford’s are probably managable – its problems are primarily the problems of the economy generally and the risk that the entire ecosystem of the auto industry collapses. Chrysler is probably toast and needs to be sold off, merged or wound down. GM is the toughest problem. Its market capitalization is currently around
$2.5 billion. At that price, the US government should probably just nationalize it for the time being. (Dan Neil of the Los Angeles Times proposes just that.) That doesn’t solve its problems. But at least it would protect the interests of taxpayers.

Republicans, in particular, seem to be reverting to a kind of neo-Hooverism – “just let them all fail – it’s the free market at work, ridding the system of inefficiencies.” But how inefficient is it to have millions of people out of work? Under current conditions can we really predict the consequences of a collapse of the auto industry? The economy doesn’t need free-market shock therapy at the moment.

5 comments:

David said...

I was a union member in ’81-’82 (MEBA – marine engineers beneficial association). we staffed boiler rooms in ocean going ships. my first job was on a delta lines freighter out of new orleans. at departure US marshals drove down the dock to the gangway and uncuffed morris montecino who had turned federal evidence in a drug case and was being “released” as part of his plea bargain. the boiler room was old school on the delta santa magdelena. to learn the water level in the boiler we looked at the level sight glass (computerized now). the temperature on the watch platform was 110 F and white machinery noise (now air conditioned, sound proofed and unmanned) made talking below a measured shout prohibitive. twice a day on four hour shifts we entered numbers in a log book by hand (again computerized). I still have a recurring dream about a log book with page after page of completely blank entries (anyone with insight to the meaning of this can follow the advice of tom and ray malliazzi of car talk and write it on a $10 dollar bill and mail it to me). Morris and I would pass the time with an occasional exchange. I learned that being gut shot felt like a swarm of stinging bees flying into one’s stomach. I don’t remember what I shared but I do remember leaning in at volume to help pass the time.

the US shipping industry was dying and had been since the mid seventy’s. owners claimed that excessive regulation, safety measures, high wages, work rules, etc… had tied their hands and that they couldn’t compete with foreign flags. union leaders who had endorsed democrats since the unions founding in the 40’s flirted with reagan. the membership was so upset that they voted out the entire slate of union management and returned to the fold. the jobs still went away. foreign bottoms had crews from country’s where health care and pensions were nationalized and who’s gov’t’s were fairly efficient. they were also automated and required one quarter of the crew.

around this time the steel industry also died. US steel couldn’t compete initially with the minmill industry (and also japan, china, germany, italy, korea, india) that was more flexible and distributed and interrupted first the supply chain for raw materials and then the markets by locating near their customers. US steel eventually bought Marathon Oil from which over 90% of its revenue and all of its profit derive. (http://www.post-gazette.com/businessnews/20010225ussteel2.asp) but not before its pensions were nationalized by the federal gov’t.

the US went from a creditor to a debtor nation. Carter took office like Obama will next month and said, “the energy crises is real, its worldwide”. he turned down the thermostat in the white house and put up solar panels and appointed Dennis Hayes to run the National Renewable Energy Labs. I’d agree with Russ that energy is at the heart of the auto industry’s problems today. and energy is at the heart of the eternal current account deficit and national security. a bail out might not be so precious if our energy consumption were taxed appropriately and energy policy targeted renewables. we could have paid for the bailout with a small piece of what is spent in Iraq (national security) and the energy industry’s quarterly profits (renewable in place of deficits).

seeing what’s happening to the once proud auto industry is like watching a big birthday cake rolled in and expecting tassles and boom boom but instead getting a stern lecture on gluttony and get rid of the stupid hat because this is serious. the auto industry should have taken a page from US Steel and bought an oil company. Chevron almost went to the Chinese a few years ago. Ford would be in much better shape if they had purchased chevron and retooled it to develop electric cars, renewable fuels and distributed green house gas free energy.

so the energy company’s are going their own way. the railroads have gotten rich transporting coal from wyoming to fla. coal in the southeast costs as much as $125 per ton delivered. and the railcars never stop. so the oil company’s don’t want us to stop consuming, the railroads and coal mining and coal fired power company’s don’t want us to stop. so who is going to turn the thermostat down and rev up the national renwable energy labs. Until energy secretary generates as much press as Clinton’s nomination at state this will not change. When Reagan moved into the white house and took down the solar panels we were doomed. Reagan dismantled NREL and fired Dennis Hayes. No administration has been able to reassemble it.

Obama announced today a major infrastructure overhaul as part of a stimulus bill. barney frank indicated that historic levels of change are in order to deal with the basic infrastructure issues faced by regulators and planners. its more than a little sad that health care, national security, pensions/retirement are at the top of a list that’s 30 years old. I think of what things might be like if we operated under the European model where nine of the top ten wind and solar company’s are located and where energy is derived from wind and solar at a much higher rate than they are here. other than ge, the company’s that have the most to gain by the US expansion are all non US company’s. they have the expertise going back 25 years and the trained work force.

David said...

trained work forces for jobs of the future, pensions, health care, renewable energy. what have we been arguing about in the US for the past 30 years. its like we've picked up someone else's suitcase at the airport and all of the above are in there. i wonder who got our suitcase with out of control financial markets, archaic political discussions, out of date energy, health care and pension policy. oh well maybe we'll recognize eachother in the lobby wearing eachothers outfits and get together for a drink at the bar and exchange ideas.

Woozle said...

Lawrence Lessig has posted a "rant" which may be relevant.

The point, as I understand it, is not to "let the auto industry die", but to throw open the doors to reorganization along more efficient lines -- so that it can become a more active and vital part of our economy and help that economy recover, rather than just a means whereby we turn dollars into jobs and not-especially-good (and increasingly obsolete) goods.

I'll add that Lessig doesn't seem to be mentioning the several non-big-player auto manufacturers which have sprung up in recent years to try and fill the demand for electric and low-emissions vehicles which the Big Howevermany have been systematically neglecting. If the Big Howevermany were to downsize, that might leave a little more room for new companies to produce some possibly superior product. (Kudos to GM for at least trying with the Volt... but why did they kill the EV-1?)

Jumper said...

I'm a little disturbed that Chrysler wants the same treatment as GM and Ford. Check out their recent history since Daimler sold them.

Cato said...

I dig it.

Nice work, Russell. You've convinced me.