Americanly Yours

General Motors declared bankruptcy yesterday morning. This move had been much anticipated and probably didnt surprise anyone.

Presidents Bush and Obama gave General Motors billions of dollars to help it avoid bankruptcy, yet the inevitable still happened. No matter what your stance on bailouts and government interventions are, you probably agree that this money was wasted.  If you support bailouts and nationalizations, then you would probably argue that the money was wasted because the government could have and should have) bailed out and taken over GM six months ago.  If you are opposed to bailouts and nationalizations, then you would be opposed to any and all government assistance for GM.  More money will be wasted on GM in the future.

According to the Washington Post:  “During the GM bankruptcy, the United States aims to raise its investment in the company to $50 billion, take a majority stake in it and name most of its directors, giving the government unprecedented control over one of the nation’s largest manufacturers.”

I dont think that you can seriously deny that the United States is no longer a Capitalist Nation.  We have now officially morphed into a socialist country.  Yesterday was another sad day for Capitalists who again were forced to watch while the government continued to destroy this once great Nation.

President Obama and other supporters of these interventions have promised that they will be temporary.  I dont believe this and neither should you.  Thomas Sowell says that “nothing is so permanent as a temporary government program.”  Historically this has proven again and again to be true.  There are still programs in effect from the Great Depression which were said to be temporary at the time.  A 3% excise tax on phone use was enacted as a temporary measure in 1898 to help pay for the Spanish-American War.  This “temporary” tax lasted 108 years until it was finally ended in 2006.

Government programs, actions, and interventions tend not to end.  It is important to oppose them as they happen, while these actions are still fresh in the minds of the public.  If the government does not sell its stake in General Motors within the next few years the vast majority of people will cease to care, opposition will subside, and the government will continue to control General Motors forever (or at least for quite a long time).

Even if our government sells its stake in General Motors within the next few years, there will still be a tendency for future administrations to use Presidents Bush and Obama’s actions as precedents for future interventions and nationalizations.

President Obama told NBC’s Brian Williams that the government would be taking a controlling stake in General Motors. He also said that he essentially had no choice but to do so.

But, President Obama did have a choice.  A liquidation bankruptcy of GM might have caused temporary stress for the economy, but this stress would have been temporary and would have smoothed out in the long run.  Under a liquidation bankruptcy, General Motors would have been broken into pieces and sold off piece by piece to the highest bidder.  Every brand name, factory, patent, and all real estate owned by GM would have been sold off.  The money recovered from these sales would have gone to pay as much of the money owed to GM bondholders–who  to the company in good faith–as possible.

The brand names would have been sold–probably to existing car companies, although they possibly would have been sold to venture capitalists who were looking to start a new car company.  The factories would have been sold to new owners (or the same venture capitalists) who would either continue to make cars in them or would refit them for some other kind of production.  GM’s patents would have fetched lucrative amounts of money at auction.  Purchasing these patents at a discounted auction price could have helped move other automakers years forward in their research and development, saving them billions of dollars.  For example, GM was years ahead of the competition in developing fuel cell cars.

The auction process might have been stressful while it was being sorted out, but it would have been an efficient way to deal with General Motors.  Instead, our government has pledged to loan GM an additional $50,000,000,000 [$50 billion].  However, GM owes creditors $172,800,000,000 [$172.8 billion], meaning that the government’s invenstment will be unlikely to stop at $50,000,000,000 [$50 billion], just as AIG’s initial $85,000,000,000 [$85 billion] bailout ended up doubling.

You can argue that government control of General Motors will save American jobs, although this argument is tenuous at best. General Motors is losing money for several reasons including: their cars are not up to par with those of Honda, Toyota, Nissan, and Ford, their union contracts force them to pay their current and former workers much more money than similar workers at Honda, Toyota, and Nissan, and they have been slower to innovate than have their Asian rivals.

Toyota, Honda, and Nissan have been continually building more and more of their cars in America, while General Motors, Chrysler, and Ford have been building less. Last November, I wrote an article detailing my opposition to all bailouts, but said that if the government had to bailout auto companies, I would rather it bailout the successful ones (ie Toyota and Honda).  At least this way money would be flowing to innovative companies who have a chance of paying back the loans, rather than to sluggish companies who refuse to adapt and will be unlikely to repay any loans.

The United States government now has a controlling stake in General Motors and a very large stake in Chrysler.  General Motors, the world’s second largest automaker, is now owned by the United States government (with a minority stake being held by the UAW).  Chrysler is now owned by the UAW (with a sizable minority stake being held by the US government).  Additionally, a significant percentage of Nissan is owned by the French government (the French government owns 15.7% of Renault which owns 44.4% of Nissan).  This is not fair to Ford, Honda, and Toyota. These three companies have to compete with three large automakers who are owned by large and powerful governments who have made it a matter of public policy to ensure that the automakers they own do not disappear.  As a Ford stockholder, I’m pretty mad that a company that I have invested in (because I believe in its products and its management) now has to compete with a powerful government which can print money to pump into Ford’s competitors as it sees fit.  Additionally, the US government also had the right to increase regulations on the auto industry which can hurt Ford and benefit its government owned competitors.

As unfair as this is to Ford’s shareholders, this is extremely unfair to the taxpayers who will have to foot the bill for these bailouts.  The tens of billions of dollars in additional funding for GM are not the whole picture.  American consumers will have to pay thousands more for their cars in the future due to the inefficiencies being created by the government bailiuts.  The United States government is keeping car companies in business which have no business being in business.  It is also mandating that certain GM models now be produced in America, rather than in foreign countries.  While this may sound like a good thing in an economy that is hemorrhaging jobs, it is not.  GM has chosen to produce cars overseas becaue it is cheaper to do so.  Simply put, forcing GM to produce cars here will raise the cost of those cars and will make American consumers poorer.

Americanly Yours,

Phred Barnet

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There has been lots of talk about an auto industry bailout. Apparently GM and Chrysler are both in imminent danger of collapse, while Ford has enough money to last through 2009, and claims that it will be profitable in 2010. Quite a few members of Congress have been floating several plans to bailout the “Big 3” US automakers, including a plan that would have the government take ownership stakes in the 3 companies (which is interesting because the combined market value of the 3 companies is less than the $25 billion that the government wants to inject into the companies) and appoint a “czar” to run them.

Sure, we could bailout these 3 large, iconic American companies. The rationale behind the bailout is that it could save a lot of American jobs. Yet, with the possible exception of Ford, I see little chance that any of the 3 companies will be able to completely turn around in the future. Instead, I see continued plant closings and lay-offs in the US along with continued losses. I think that bailing out GM, Chrysler, and Ford will just prolong the bleeding. The truth is that even if the bailout is a huge success and the companies survive, the Big 3 automakers will still close down all (or nearly all) of their American plants. The proponents of the bailout argue that the bailout is necessary to save American manufacturing jobs, but in the end, this will still result in the job losses that the proponents of the bailout are seeking to avoid. True, if the bailout works these cuts will come over the next 5-10 years, rather than all at once, but nevertheless they will still come. It seems to me that this type of bailout will end up subsidizing companies for cutting American jobs, rather than creating jobs.

For the record I oppose bailouts, but if there has to be a bailout, I have a better idea. Rather than subsidize 3 large automakers who have done nothing but cut American jobs and hemorrhage money for the past decade, we could subsidize 3 profitable automakers who in the past decade have greatly expanded their employment of American workers while earning large profits. I am talking of course about Toyota, Honda and Nissan.

You can argue that these companies are not “American” companies. This is true, these companies are headquartered in Japan, yet they do employ many American workers. Ford is headquartered in America, but I often wonder if there is anything besides that which makes it an American company. For example, I drive a Ford Fusion (which I love). My car was designed by Japanese engineers and built in Mexico with Chinese parts. I don’t really know what makes it an American car. If you buy a new Toyota Camry you will find that it was built in Kentucky. Japanese automakers also increasingly use American made auto parts in their cars. From 2000 to 2006, Japanese automakers’ purchases of American parts increased 53% to over $48 billion. And while the American Big 3 has been racing to close down its plants and produce its cars outside of the US, 63% of Japanese cars purchased in the United States in 2007 were manufactured in America.

Between 2004 and 2006, Toyota, Honda, and Nissan have created 4,715 jobs, increasing their employment of American workers by over 8% to over 63,000 workers, while Ford, Chrysler, and GM’s American workforce was cut by 23,264 jobs—cutting over 12% of their American workforce. [[Note, these figures were really hard to find, and the American Big 3 cut an additional 30,000 employees in 2007, bringing the total down to just over 129,000, however I could not find any statistics for the Japanese Big 3 for 2007.]] In that same time span, Ford, Chrysler, and GM have lost billions of dollars, while Toyota, Honda, and Nissan have made billions of dollars. Simply put, the Japanese Big 3 has produced much better results. The Big 3 Japanese companies clearly have better business models, and they have created thousands of jobs while Detroit’s Big 3 has cut thousands of jobs. Loaning the bailout money to the Japanese companies rather than to the American Big 3 will create necessary jobs which will most likely be filled by the highly skilled workers who will lose their jobs when the American Big 3 collapses.

Also, which Big 3 do you think ahs a better chance of paying back a $25 billion loan, bloody Detroit, or profitable Japan? And, if the government has to take an ownership stake in 3 automakers, I would rather it take ownership stakes in Toyota, Honda, and Nissan than GM, Ford, and Chrysler.

Besides producing technological innovations, Japan’s Big 3 is also the industry leader in producing environmentally friendly cars. The Toyota Prius and the Honda Civic Hybrid are great examples of popular hybrid vehicles which Detroit just cannot produce.

It is not just American automakers who are in “need” of a bailout. European automakers have asked their governments for a $40 billion Euro ($50 billion) bailout. Even China is now in the process of bailing out their automakers. The Japanese automakers are the only automakers in the world that are not in need of a bailout. Why fight against the inevitable? The whole world knows that Japanese car companies can make cars better and more profitable than any other group of automakers on the planet. Rather than extending the miserable lives of failing car companies, we should euthanize them and embrace the success of the Japanese Big 3. When companies can efficiently produce a great product and sell it at an inexpensive price, we all win, regardless of where the companies are headquartered.

Obviously, these companies are so well run that they don’t need a bailout. The auto industry in America is still strong; it just so happens that the strong producers of cars in America happen to be Japanese. So what? America is a Nation of immigrants. Maybe giving Honda, Toyota, and Nissan low interest loans to expand American factories could convince them to immigrate to America and move their headquarters to Detroit.

We should reward innovation and punish sluggishness. Thanks to Honda’s innovations, a Honda factory in East Liberty, Ohio can switch from manufacturing Honda Civics to making Honda CR-V’s in only 5 minutes. However, a Ford SUV factory in Michigan is switching its production from SUV’s to small cars, but because of a lack of innovation at Ford, the factory is shutting down for 13 months to retool, which is costing the company $75 million.

Bailing out Detroit will subsidize bad behavior, similar to giving a juvenile delinquent child a raise in allowance in the hopes that it will somehow change his behavior (if you think that will work, ask my parents). The government should reward good behavior, not bad behavior. Rather than raising the allowance of the bad kid, why not reward the good child? Wouldn’t this be a valuable lesson, not only to the “children” involved, but also to all the other children out there (airlines). “Bailing out” the Japanese Big 3 will lead to the creation of American jobs, increased research, and increased profits for these companies. Bailing out Detroit will only extend the pain and slow bleeding.

Americanly Yours,

Phred Barnet