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

(9:00PM EST – promoted by Nightprowlkitty)

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 Economic Populist, 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 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!

<sup>Cross posted on

The Economic Populist –

A Community Site for Economics Freaks and Geeks</sup>