Category Archives: Economics

No Bail Out

Here’s a fellow Flintite (Flintian) explaining why her former employer shouldn’t be bailed out:

The strength of the union and the weakness of management made it impossible to conduct business properly at any level. For instance, I had an employee who punched in his time card and then disappeared. The rules were such that I had to spend hours documenting that this man was not in his three foot by three foot work area. I needed witnesses, timed reports, calls over the intercom and a plant wide search all documented in detail. After this absurdity I decided to go my own route; I called the corner bar and paged him and he came to the phone. I gave him a 30 day unpaid disciplinary lay off because he was a “repeat offender”. When he returned he thanked me for the PAID vacation. I scoffed, until he explained: (1) He had tried to get the lay off because it was fishing season; (2) The UAW negotiated with GM Labor Relations Department to give him the time WITH PAY.

I supervised a loading dock and 21 UAW workers who worked approximately five hours per day for eight hours pay. They could easily load one third more rail cars and still maintain their union negotiated break times, but when I tried to make them increase production ever so slightly they sabotaged my ability to make even the current production levels by hiding stock, calling in sick, feigning equipment problems, and even once, as a show of force, used a fork lift truck and pallets and racks to create a car part prison where they trapped me while I was conducting inventory. The reaction of upper management to my request to boost production was that I should “not be naïve”.

Another employee in the plant urinated on the feet of his supervisor as a protest to discipline. He was, of course, fired…that is until the union negotiated and got his job back.

Eventually I was promoted to a management position where I supervised salaried employees at HQ. As I left the plant I gave management a blunt message. I told them that I expected the union to act like the union, but I was disappointed that management didn’t act like management.

I saw a lot of this in the 1970s when I worked summer jobs in the shop, and my relatives who are still there tell me it goes on to this day. Of course, it’s hard to put all the blame on management, when the Wagner Act made it impossible for them to do much about it, because it allowed the UAW to credibly threaten their company with bankruptcy if they didn’t knuckle under. This crisis was caused by government, and bailing out the UAW will not solve it.

Also, Jim Manzi explains why we (the taxpayers) can’t just buy the three auto companies for their current market value (only seven billion) and save ourselves the many more billions that a bailout would cost. It’s kind of amazing that the stock has any value at all (GM’s in fact doesn’t). Equity in these companies currently has negative value because running them requires putting more cash into them, with no certainty, or even likelihood of return, at least with their current union contracts and cost structure. They are the proverbial white elephants.

This, by the way, is the reason that the notion of selling the Shuttle or the ISS to anyone else is a non-starter. No one could afford them, even if you gave them away.

Fishing for the Future

…Soylent green. The miracle food of high-energy plankton gathered from the oceans of the world.

Soylent Green, 1973

The New York Times predicts that “if current fishing practices continue, the world’s major commercial stocks will collapse by 2048.” Their solution: lower energy content by eating sardines instead of feeding them to farm-raised salmon.

Mistaking energy content for price is a common mistake. Chew on this: organic lettuce is more expensive than a hamburger.

Wild fish will be eclipsed by farm-raised fish just as farm-raised beef has eclipsed free-range beef. Get used to it, perhaps by preparing to pay an extreme premium for free-range fish. Don’t expect the Chinese middle class to prefer wild cod once a year to farm-raised salmon once a month. Expect the coastal waters to be fenced into fish farms just as the Great Plains was fenced in during the 19th century.

It’s time to manage the pollution and reserve the wild fish parks upcurrent. This tide isn’t going to be turned back by pondering how the old days were until we’re eaten up.

The Wrong Lessons From History

Exploding the myths of Clintonomics:

The bull market took off precisely when then-Fed Chairman Alan Greenspan took his foot off the brakes and hit the gas in 1995. It was also then that Republicans took control of Congress — further blunting the effects of the Clinton tax torpedo that had taken effect the previous year.

Clinton also benefitted from innovations long in the making, including the Pentium chip released in March 1993 and Microsoft’s Windows program released in August 1995. These together made the Internet boom possible.

As for the budget surpluses, they came as a complete surprise to Clinton economic forecasters, whose static models only predicted their tax hikes on the rich would narrow the budget gap, not get it into the black.

Their “deficit-reduction plan” didn’t create the surpluses at all. They were a direct result of a tidal wave of capital-gains revenues generated by the GOP-led stock boom.

Relieved that Washington would no longer threaten to take over 14% of the economy by socializing medicine or raise taxes even higher, the market took off like a shot at that point. And capital gains tax receipts exploded, flooding federal coffers.

Clinton’s own long-term budgets predicted no surpluses of any kind during his administration and beyond.

Bill Clinton never had a plan to end deficits. The Republicans and economic circumstances did it for him. But I’m sure that this myth that Bill Clinton balanced the budget will prevail in the minds of the media and Democrats, just as the false myth that Roosevelt, and not the war, got us out of the Depression continues to prevail many decades later. They have to rewrite history to justify their continued plunder. And of course, the near-term danger is that President-Elect Obama and the Congressional majority will use this mistaken history as a justification for tax hikes in a recession, which could be economically ruinous.

Failing At Milton Friedman’s Challenge

Peter Robinson explains

Item: Since my dinner with Milton Friedman, a Republican president and Republicans in Congress–I repeat, Republicans–enacted a prescription drug benefit that represents the biggest expansion of the welfare state since the Great Society. They also indulged in a massive increase in discretionary domestic spending and passed the biggest farm bill in history, a massive transfer of resources to the 2% of the population still engaged in agriculture.

Item: In the campaign that just concluded, the GOP–again, I repeat, the GOP–nominated a man whose proudest legislative achievement was a campaign finance reform, the McCain-Feingold bill, that represented a direct assault on freedom of speech.

Item: During the campaign, the Republican nominee–again, the Republican–told voters that the federal government should “give you a mortgage you can afford” while attacking businesspeople as “greedy.”

This reminds me of the story of the woman who came up to Franklin after the Constitutional Convention, and asked him what he had given us. His response: “A Republic, madame. If you can keep it.”

It would have worked just as well to say “A free-market economy, if you can keep it.” We haven’t been able to, partly because we have slowly transitioned from a Republic to a democracy, and one in which the people have figured out that they can use their votes to transfer wealth from the productive to themselves.

I’ll have more on this topic next week at PJM.

Capitalism, Corporatism, Free Markets

Some useful thoughts from Rod Long, over at Cato Unbound.

As he points out, there is a broad-based mythology that defending capitalism is equivalent to defending “big business” when, by its nature, big business abhors capitalism (at least as understood by true free marketeers). Of course, I agree with Jonah Goldberg that we latter should abjure the term “capitalism,” both because it is such a misunderstood word with a wide variance of definitions, and because it is fundamentally a Marxist concept.

A “free-market economy” (something that hasn’t existed to a large degree in this country for many decades) is what should be defended and supported, and we should continue to push to get the country to move back in that direction to find our way out of our current travails (which really started back in the Depression Era). Just as one example, there’s an interesting discussion over at Megan McArdle’s place, here and here, on GM’s straits (about which I’ve also had thoughts over the years, as someone who grew up with it). I think that, as one of the commenters over there notes, the roots of the destruction of the American auto industry lie in the Wagner Act:

GM and the UAW are a perfect illustration of bad government in action.

At some point, a collective decision was made that the unions should be given such expanded powers that they could destroy the company if they wanted (see the above post describing how a strike at a key plant could idle the whole company). What happens here? Well, naturally the union tries to extract as much as they can from the company with the tools available. The union doesn’t profit from increasing profits and building a healthy company, it profits from building an overstaffed company that exists to benefit its employees. The union would have been better served if it divvied up the right to collect a union payout from GM among the workers of the time and let them sell the claims. Then the union could simply negotiate the maximum dividend possible for the holders of these claims. This way you have a rationally run company with the benefits going to the larger voting block (the workers) than the shareholders who are all presumably evil capitalists.

What would have been much more honest and worked better would have been outright nationalization of GM when the rules were set up that the UAW could destroy the company. Instead you’ve got unclear property rights and consequent ill management.

It took a long time to kill the industry, but that doesn’t mean that it wasn’t the cause. Arsenic or mercury can kill over a long period of time as well, though death might actually occur from some other ailment that the toxin-ridden body is ill equipped to fight.

The toxin in this case may be a lot of things (perhaps even including “capitalism” by some warped fascistic definition) but it is an abomination to a free market, and it has destroyed the American auto industry.

[Update a few minutes later]

IBD says let GM go bankrupt:

Far from vanishing, many of GM’s assets would be quickly purchased by competent foreign automakers eager to expand their capacity in what is the world’s largest auto market. Happily, the list of well-run car companies, from Toyota to Nissan to Porsche, is long.

How this helps Michigan, the auto sector and smaller firms reliant on the latter’s health is pretty clear. With capable auto executives finally overseeing GM’s poorly deployed assets, the value and utility of each would rise, thus perpetuating the existence of jobs in the sector, all the while ensuring that other businesses that exist due to GM will enjoy more stable commercial relationships with competent management.

So while the cries of certain Armageddon would be ear splitting in the event of a GM failure, the U.S. auto sector would actually emerge much healthier thanks to a change in ownership that would be the certain result of GM going under.

The problem of course, is that this will be another Enron, in that many people will be thrown out of work, and lose pensions (I should note, for the record, that as a Michigan native, I have close family members who may be in this situation). The political pressure to maintain the status quo will be intense, and unfortunately, given the fact that despite all of the talk about “change,” the status-quo-ante types (at least when it comes to static economic circumstances) have just entrenched their power in Washington, that’s probably the way it will go. If GM is going to get federal money, it should go toward buyouts of long-term employees, and then let the market work to redeploy its assets toward more useful purposes than maintaining an expensive company-town welfare state, that makes cars on the side.

[Update mid morning]

Matt Welch says to the barricades to defend free markets. Except that he uses the confusing word “capitalism.”

I should add, that I consider George Bush’s biggest failure not the events leading up to this crisis, but his response to it, in which (as Matt points out) he capitulated to those advocating government solutions to government-caused problems. Of course, it’s on a par with “compassionate conservatism” and “comprehensive immigration reform” and “no child left behind” and “prescription drugs” and myriad other issues, large and small, on which he showed himself to be anything but a conservative (let alone a libertarian). Had he been a Democrat, the Dems would have been cheering all of his actions as the greatest thing since LBJ and the Great Society.

Speaking of compassionate conservatism (and the tone deafness of George Bush and Mike Gerson and others to how rightly offensive the phrase was to actual conservatives), imagine how well the Democrats would take to a nominee who ran on a platform of “logical liberalism.”

[Early afternoon update]

Iain Murray has more thoughts on free markets and their relationship to liberty:

…as Jonah says, markets are more than this information delivery system. Where the Chicago School has gone wrong is in focusing purely on economic efficiency. As my boss Fred Smith said way back in 1983, “The Chicago School’s case for antitrust policy . . . rests solely on economic efficiency, as if rights had nothing to do with the matter — as if business had no right in principle to dispose of its property as it sees fit, but only a conditional freedom so long as it helps maximize some social utility function. That is to say, no business is entitled to its property if that property can be redeployed so as to expand output. With ‘conservative,’ ‘pro-business’ economists taking this view, who needs social democrats.” In other words, if we value property rights, the free market is an essential consequence. And that is why market socialism never works, because it devalues property rights. Liberty demands property rights which demand free markets. We only interfere with that chain in defiance of history.

It is not a coincidence that communist nations are the most unfree on earth.

[Early evening update, particularly for Instapundit readers, who might want to look around the site]

I’ve talked in the past about the fact that my father was a GM exec, but I’ve never noted what he did there.

Here’s a little background, which may be apocryphal, because I only knew it from my mother, but they met after the war in New York (he was from Brooklyn). She was a former WAC who had served in Egypt, and had decided to see a little more of the world before heading back to her home in Flint, Michigan.

He was standing on a soapbox in the Village, haranguing the crowd on the benefits of Marxism. As an economics major, raised on Keynes, she fell in love.

They married, and finished their graduate degrees, at various places (NYU, UCLA, other, his in Psych–Industrial Psych, hers in Econ). In the fifties he tried door-to-door in Lansing after moving to Michigan with his upper Midwest bride, but when he got an offer at A.C. Spark Plug in her home town (as a result of her brother, my uncle, being an engineer there) he took it, and settled into a middle-class lifestyle, during the best years of the company, in which he raised his family.

He moved up though the white-collar world at AC, in “personnel” (these days, it would be HR, which is one of the reasons that he could get me summer jobs there during college), until he got an offer to go to work for corporate in Detroit, a job for which he commuted sixty miles a day each way from Flint, and we never had to move. I know that this is no big deal of a commute in southern Cal, but for me, it was amazing. He died at an age slightly older than me (right now, for those reading in the future) that I can count on one hand, and not half of it, from a heart attack (his second–he had had his first about a decade earlier, in his forties). That was almost three decades ago.

His job?

Head of labor relations, and negotiator (perhaps chief negotiator, though (as Doctor Evil said) I can’t vouch for that), with the UAW.

[Bumped to the top, because there’s a lot of new stuff]

Hoover, Or Reagan?

Which president will Barack Obama want to emulate? He has said that he admires Reagan, but only for his transformational qualities, not for his political beliefs. But if he persists in his apparent desire to implement some combination of Hoover and FDR policies (raising taxes on the productive, protectionism, enforcing high wages), he’ll end up making a bad situation much worse, and end up being a one-termer for sure.

Forty Bucks A Barrel?

It’s certainly plausible to me. Given how much of an overshoot there was, it wouldn’t be surprising to see it dip that low before stabilizing. As I’ve long said, over a hundred bucks was unsustainable. I would hope it won’t stay that way for long, though. It’s harder to justify shale and new drilling (and conservation) at those prices.