I’ve had my share of tiffs with David Brooks, but he nails this one:
Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler? …
If ever the market has rendered a just verdict, it is the one rendered on G.M. and Chrysler. These companies are not innocent victims of this crisis. To read the expert literature on these companies is to read a long litany of miscalculation. Some experts mention the management blunders, some the union contracts and the legacy costs, some the years of poor car design and some the entrenched corporate cultures … A federal cash infusion will not infuse wisdom into management. It will not reduce labor costs. It will not attract talented new employees. As Megan McArdle of The Atlantic wittily put it, “Working for the Big Three magically combines vast corporate bureaucracy and job insecurity in one completely unattractive package.”
November 15th, 2008 at 11:04 am
I think the implicit industrial policy of not having an industrial policy is a bad idea. A true CC industrial policy would support new design firms, and also support manufacturing near the design shop.
Everyone cites Apple as a great star. While it is a profitable company (when Steve’s at the helm), I am not convinced that the model of US design and contract manufacturing won’t eventually tend to foreign manufacturing, and foreign design. There’s a big advantage to having the engineers in close proximity to the floor work. It adds a healthy dose of reality to the engineers, and a healthy chance for meaningful innovations on the shop floor. A perfect example is the redesigned 737 factory at Boeing, were the office windows look out onto the production floor. In the computer world, there is an example of just this sort of coordination in Texas Instruments. A while back, TI wanted to move its next fab overseas, but also wanted a fab close to the designers in Austin badly enough that they agreed to build the next fab in Austin, if the design was cost-competitive. The engineers designed a very energy-efficient fab (it’s a talking point for RMI, which helped with the design). Last I heard, the construction was waiting for demand to recover, but there are companies that understand the useful synergy that arises when the design, development, and manufacturing are all close enough so that the people involved in eah can interact and cross-pollinate each other with ideas.
The solar power company with the CdTe thin film panels is another example of this. The design started up in Ohio, the first 25 MW capacity pilot scale assembly line is nearby, but the first full assembly line, with 500 jobs, is in Germany, because most of what they were making was exported to Germany, and Germany has as part of its industrial policy, support for solar power. Japan incubated a lot of the silicon-based solar companies, now Sharp is the leader in that technology. Germany is wooing this company because it uses a different technology, while also trying to get others. At this rate, innovative solar companies may have no choice but to locate either in Germany or Japan, for the same reason that serious IT companies need a presence in silicon valley.
November 15th, 2008 at 3:13 pm
BINGO!! SWISH!! Yes, he does nail it. Let them die, please!!! That might eliminate a big part of the problem with the union’s control of the Democratic party, or at least the auto workers’ unions. No Detroit Big 3, no auto unions wielding influence and power inappropriately.
November 16th, 2008 at 8:20 am
It would reduce the money that the unions can raise for the Democrats, but I think they would remain a force. The real power of the unions is in the numbers and the organization, which is at least in part due to the fact the membership knows each other. In the immediate aftermath of this propopsed Carmageddon, I’d expect the UAW members to organize around populist/nativist firebrands in primaries and in general elections. In other words, if you try and cut the unions out, they will back the sorts of candidates no one around here would want to see elected.
A much better, though more challenging, response would be for some insightful leader to create a path to transitioning these folks out of dead-end industries and into jobs with a future. Like out of SUVs and into electric cars, highspeed trains, renewable energy, and energy effieciency retrofitting.
November 16th, 2008 at 9:31 am
Ah, if the ‘market has rendered a clear verdict’ on the Big 3 I fail to see why the same verdict is not applicable to the financial system? If the Big 3 have a ‘long history of bureaucratic entrenchment’ so to does the financial system – Savings and Loan collapse, Junk-bond collapse, dot.com collapse, housing ‘bubble’ crisis, Enron and all the trash companies with no real value, one after another, how much more history do you need? What do they have in common? = speculative gambling with OPM (other people’s money).
Other dinosaurs still roam the earth too – they are called ‘Freddie and Fannie’ and they too, will not be allowed to fail.
Many economists argue that these dinosaurs must also be allowed to fail, and the only real medicine for the current crisis is collapse and bankrupt re-organization of the dollar based system.
November 16th, 2008 at 8:38 pm
IF the feds are going to bail out the Big 3, it should be structured to take place in late January. With the financial bailout, the Bushies have shown that they’re either totally incompetent or outright malevolent — i.e. Paulson forcing $50 billion on the big banks, no strings attached so they haven’t used it to make loans. At least let any future bailouts be run by competent people who put the country’s interests at heart and can make the deals work.
And why the Big 3, why not the Big 2? Let Chrysler fail the way they did Leyman Bros. Force them into the merger with GM, or better yet Toyota.
November 16th, 2008 at 9:44 pm
Let’s face it, other than minivans, Chrysler has been on life support since about 1970. They already were bailed out once in the 1980s.
November 17th, 2008 at 3:03 pm
The problem isn’t just that Bush and his people have mis-managed the bailout. The real problem is with the bailouts in general. When you bail out companies who have made bad business decisions, you’re only encouraging more people to ask for money and for those same bad decisions to be made. Capitalism works with the balance of the possibility of success and failure. Take away one of those two outcomes and you’ve completely distorted the market and have set it up to fail.
Brooks makes a great point. Why are the Big 3 worth saving but Circuit City, Lehman Brothers and Linens ‘n Things aren’t worth saving? The “too big to fail” argument doesn’t fly either because nobody can be insulated from market forces (without using the heavy hand of government regulation). The Big 3 have made poor decisions over the past 25 years that have led to the dominance of foreign cars in the US. While they’ve been trying, in recent years, to turn that ship around, they simply haven’t been able to produce a car that enough Americans want to buy. That’s not “too big to fail”, they’re simply not satisfying the marketplace and should therefore be allowed to fail. At the very least, they should declare bankruptcy and try and figure out how to restructure.
November 17th, 2008 at 3:16 pm
JR Loew,
As someone that is almost a pure free marketer, I initially had many misgivings about the bank bailout for the very same reasons that you have cited – if the government deems them “too important to fail”, where do we draw the line in applying this standard to other sectors, such as the auto and steel industries? I absolutely agree with you in principle here. However, in practicality, I’ve come around to agreeing with Secretary Paulson that the financial industry is a “special” scenario where the circumstances have justified the need to grant them government aid (and I must point out that I personally loathe government intervention in the markets) while denying it to firms in other sectors that are in financial trouble. We can look at the mistakes of a number of financial firms and see that they took gambles that have all gone bad and were poorly managed, just like the Big Three automakers. The difference, however, is that a huge number of healthy and well-run financial institutions and businesses were on the other side of deals with the strained financial firms to the extent that if those financial firms collapsed, then all of those healthy and well-run businesses would also be taken down with them. (In fact, if Secretary Paulson had the benefit of 20/20 hindsight, the government would have not allowed Lehman Brothers to die exactly because this scenario began to play out – the collapse of Lehman ended up putting the more financially stable investment banks in jeopardy, which forced the government to take much more drastic action in the form of the $700 billion bailout.) This would then cascade down to a complete seizure of the credit markets, which would essentially affect the financial stability and access to credit of every single business and individual in the country – it would have been a credit Armageddon.
From a practical standpoint, the collapse of the Big Three automakers would not have the same widespread effect on the economy. While there are certainly many peripheral businesses to the auto industry (i.e. parts-makers) that would affected, it is not the same as having a scenario where access to credit would virtually be completely cut off in the economy (which would exacerbate already dire economic conditions – people and businesses need more access to credit in order for there to be an economic turnaround, not less). That’s why the financial firms are different than the automakers. This isn’t necessarily “fair”, but it’s a recognition by the government that the financial industry has an impact on the broader national and even global economy that goes far beyond their own income statement.