Inequality, bailouts, and what to do about the auto industry

[Edited 11/20 8:30 pm to add link to Economist's View]

The Reagan era ushered in a new "supply-side/trickle down" approach to US economic and tax policy--one that depended on deregulation, privatization, military buildup and lowering of income tax rates on the wealthiest Americans.  Over the four decades when that approach has held sway, income inequality has increased dramatically, so that as we enter the worst recession in decades we are also at the greatest income inequality in decades.  For some dramatic graphs on this, see this posting (somewhat dated, with 2005 data) on inequality.org.  It's clear that ordinary Americans have found themselves struggling just to stay even, while the top few percent has enjoyed the ride of a lifetime with huge increases in after-tax income and corresponding increases in wealth.  (Some of that has been lost in the recent slide of the stock market--the resulting likely decrease in wealth inequality being one of the few bright sides to an otherwise very depressing cloud.) Similarly, personal savings began a long slide starting in the Reagan years.  See The End of Savings, on Sustainable Middle Class.com.

The current recession with its increasing numbers of layoffs, firings and pension busts is an extraordinarily difficult time for large numbers of American workers and retirees.  Unemployment is way up.  See, e.g., Department of Labor reports showing increase of unemployment rate to 6.5% in October.  The Bush Administration pushed a bailout bill for big banks through Congress with the claim that this was necessary to save the financial system from collapse and that it would ultimatley be good for ordinary Americans as a way to staunch the bleeding from the foreclosure crisis. Congress passed the bill with too few strings attached--banks can give dividends, use the money for acquisitions, and pay bonuses to lousy managers that already got rich off their banks' speculation with risky products.  Treasury has acted without transparency and with apparent favoritism to Goldman peers, letting banks pay dividends, letting banks acquire other banks with the taxpayer funds, all the while claiming this is a good use of taxpayer monies.  And it has changed the tax rules in favor of big banks, letting Wells Fargo purchase Wachovia with a huge gift from the federal government beyond the bailout monies, in the form of a tax savings that outweighs the cost of the purchase.  See earlier A Taxing Matter postings here and here.

In the  middle of all this, it has become apparent that neither Congress nor the Treasury is going to lift a finger to come to the aid of the automotive manufacturing industry in this country.  See, e.g., Bill Vlasic & David Herszenhorn, Auto Chiefs Fail to Get Bailout Aid, New york Times, Nov. 20, 2008.   Congress must not think the auto industry is "too big to fail."  But the stock market seems to.  See, e.g., Healy, Shares Near 6-year Low, with More Losses Feared, NY Times, Nov. 20, 2008.

What's up?  Is no auto bailout the right answer?

Mitt Romney says yes. See Mitt Romney, Let Detroit Go Bankrupt, New York Times, Nov. 18, 2008.  Let them go to bankruptcy, he says.  At heart, this is a "blame the worker" strategy.   Those who most resist coming to the aid of the auto industry are carrying out the corporatist agenda that wants to see the labor unions destroyed, once and for all. 

Are the labor unions to blame?  NO. The workers get decent wages--that's what unions should do for workers.  If labor throughout the country had not been debilitated by decades of anti-union legislation, we might have a worker-oriented economy that disdained the ridiculous bonuses and salaries of top executives and paid workers decent wages and honored pension promises. Of course, most reporting of the "wages" includes the pension costs, and there is no guarantee that those pension benefits will actually materialize for the workers.   As it is, companies too often make pension promises and fund the pension plans inadequately, even though workers gave up salary increases in part for the pension promise.  Now, two years after passing legislation that required companies to fund their promises more fully as they went along, companies are claiming that the recession justifies their keeping their money for their own purposes rather than funding pension plans.  See, e.g, Walsh, After Losses, Pensions Ask for a Change, NYTimes, Nov. 20, 2008 (noting that both Ford and Chrysler signed the letter from companies requesting action).  And Congress, led by Democratic Senator Max Baucus, appears to be ready to go along, as they are now considering a bill that will permit just what the companies are asking for on pension funding, as well as further extending the ridiculous section 179 expensing and additional depreciation.  Download BaucusBill.112008.pdf  These tax breaks for businesses are not what the economy needs.  We need assistance for homeowners--ability to modify mortgage loans in bankruptcy--and assistance for workers--unemployment compensation. 

Where is the fault if not the fact that the auto unions pay decent wages to workers?  It lies in two places.  First, fault for the auto industries' demise lies with the Congress for being captive to Big Insurance and failing to pass universal health protection for all Americans.  Health care is about $1500 of the price of each auto.  The United States lags most of the western world  in continuing to rely on employer-provided health insurance and private insurance companies whose goal is to make huge profits and deny benefits whenever possible rather than providing universal health coverage through a government system like Medicare.  Medicare works better at a cheaper cost that does not impact so clearly the competitiveness of the particular industries that do provide decent health care coverage for their workers, such as the auto industry. That is, the auto industry is failing in part because of one of the things that it has done right.  We should immediately enact expansion of health care in ways that can move us towards a universal health care system like Medicare for all. 

Second, the fault lies with the auto industry management's poor decisionmaking about the domestic industry and its disloyalty to the American economy that gave it everything it has.  American automakers are moving assets overseas (a factory is being built in Russia as we speak), investing in places with cheap labor, poor regulation, and often corrupt systems of approval.  the American auto industry has also had its eyes shut for far too long to the environmental pollution it was causing, and its refusal to do the many things it could have to address the issue.  Like the oil industry, it pushed and pushed against higher fuel efficiency and alternative transportation modalities that it could have helped develop, hoping to make more millions for its shareholders and managers without doing anything for the American people even while it was being subsidized (compared to railroads) by huge taxpayer funding of the roadways necessary to its industry.  At the same time, its executives lived high on the hog and got ridiculous pay and percs for the very stagnation and lack of vision that is crippling it today.  (And guess what--at least one experiment shows that big bonuses don't result in better performance.  See, e.g., Dan Ariely, What's the Value of a Big Bonus?, New York Times, Nov. 20, 2008.) All of these management faults are symbolized by the CEOs' use of private jets to go to DC to plead for part of the bailout--they still just don't get it.

So should Congress give aid to these faulty industries with no loyalty to the country and no great vision for what their industries could do for America in developing alternative transportation (tiny lightweight commuter autos, for example)?   I think yes, because without it Detroit and Michigan will sink extraordinary low, as will other manufacturers all across the country, resulting in millions of job losses that simply cannot be sanctioned in an already depressed economy.  But if the answer is "yes" it is most definitely also "with strings attached."  There must be strings, and they must be strong.  Here are some ideas for the kinds of strings Congress should attach to an auto bailout (and  it should consider attaching the same strings to the use of any of the bank bailout funds as well, where relevant).

• No dividends can be paid to shareholders. 
• Executives must take pay-slashing of gargantuan dimensions--no more than $500,000 a year for any employee, no bonuses, no stock, no golden parachutes, no additional pension benefits, no additional health benefits beyond what ordinary workers receive for at least 5 years.
• The companies must commit to CAFE standards double what is currently mandated by law within 5 years.
• The companies should consider ceasing production altogether of the heavy-weight sports utility vehicles (the Hummer and its compatriots) or the Congress should demand a new excise tax on production of environmentally harmful, energy inefficient vehicles.
• The companies must agree to partner with urban planners and strategic transportation intiatives to focus research and development on environmentally friendly vehicles that support and coordinate well with public transportation models for the 21st century (e.g., small cars that load on trains for long-distance trips and serve as efficient commuting vehicles within cities)
• The companies must agree that cars to be sold in the US market will continue to be manufactured in the US.
• The companies must agree to retain some reasonable percentage (90%?) of manufacturing jobs in the US for at least 5 years and work in partnership with unions to ensure that pensions are maintained as promised to workers.
• The companies must agree that no funds will be allocated from US operations (including bailout funds) to support expansion of manufacturing overseas.

 Maybe, in fact, the US auto industry should be put under a federal government receivorship, somewhat like Fannie and Freddie, with independent management for at least the next five or ten years and a mandate to produce environmentally friendly transportation alternatives that will serve the public interest.  See, e.g., a similar suggestion by long-time Detroit critic Michael Moore, Moore: Automakers never Listened to Workers, Consumers, CNN, Nov. 20, 2008.

One thing that Romney is dead-right on.  The U.S. must invest more, once again, in basic research.  Quit the excessive military spending on all the gidgets and gadgets that the military brass can think up and the even scarier Poindexter-type defense databases.  Use the savings instead (some of it, at least) for supporting basic research at research universities across the country--research on urban environments, urban transportation systems, energy efficiency, alternative energy delivery systems, and all the other basic research that could lead us into a new era of science-based improvements in quality of life and living standards, as after World War II. 

For more, see a similar discussion over at the Economist's View, discussing the Wall Street Journal commentary by Matthew Slaughter, An Auto Bailout Would be Terrible for Free Trade.

Comments

[MurrayR]

The temporary economic issues of allowing General Motors to fail is better than propping up a lost cause with public money. Its time to let GM go and allow the process of creative destruction to work freely.

http://www.contrarianprofits.com/articles/why-its-time-to-let-general-motors-gm-fail/8633

[LindaMBeale]

Murray, just what are you basing that on and what makes you think allowing GM to fail is a "process of creative destruction". Sounds rather conclusory to me, like most of the commentary that is little more than a veiled dislike of unions and worker parity. We've propped up so many lost causes with public money lately--including banks that were the direct cause of the financial system crisis--that there has to be an underlying rationale to the refusal to prop up a major manufacturing industry whose failure would have enormous repercussions throughout the economy and on millions of individuals.