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Mr. Stein on the Auto Bailout

December 15th, 2008 Leave a comment Go to comments

I recently read a piece from Ben Stein titled “Bail Out Detroit – Now“. I’m not a regular follower of Mr. Stein, nor do I have an opinion on his writing – I just happened to see this on the Internet. However, I must say, this was utter garbage! I haven’t seen total crap like this in a while. Below are Mr. Stein’s comments, along with my thoughts:

First, we are on thin ice economically. To allow our largest heavy industrial component to fail at this delicate moment is suicidal. To put a couple of million more Americans into unemployment is just not sensible. Mr. Barack Obama is talking about public works projects to employ hundreds of thousands of Americans -bridge building, school building, airport building. These projects take time to start, disrupt local community life, and are famously wasteful.

Why not be smart about it and NOT LET AMERICANS GET UNEMPLOYED IN THE FIRST PLACE? (Please pardon the shouting.) There are millions of Americans already hard at work making great American made cars and trucks. Why not keep them on the job? Wouldn’t that be smarter than allowing the whole upper Midwest to fall into oblivion and then rescue it over a fifty year period?

Yes, I agree that these are trying economics times, and, in an ideal world, we would only have issues like the auto industry failing when everything else is hunky-dory (heck, in an ideal world, we wouldn’t have issues at all, but you get my point). However, we don’t live in an ideal world, we live in reality, where more than one problem can, and most certainly will, arise at a single point in time. These problems have to be dealt with – it is not acceptable to simply say “we have other problems right now, so let’s just throw money at this problem to make it go away for now”. Furthermore, I don’t see anything wrong with Mr. Obama’s plan to put Americans to work in public works projects. To be clear, I believe Mr. Obama is suggesting this plan to combat the rising unemployment in the U.S. (independent of the auto industry issues) and to create domestic economic growth (though the sustainability of this growth is another question altogether), not as an answer to what several thousand auto workers will do if the industry goes under. Thus, I think Mr. Stein’s assertion about not letting Americans get unemployed in the first place is unfounded. Finally, I disagree that millions of Americans are already hard at work making great cars. If these cars were so great, more Americans would be buying them and we wouldn’t be in this predicament. The problem is that these cars aren’t so great and haven’t kept up with the quality and efficiency improvements in the industry – thus leading to the companies current problems. I see no value in burning tax payer money so we can keep building these sub-par vehicles.

Somehow, we can give bailouts to investment banks where the top dogs make hundreds of millions a year for running the company into the ditch and wrecking the whole credit picture in America. Somehow we can have bailouts for Fannie Mae and Freddie Mac, whose bosses were trading on the credit of the taxpayers to make themselves rich while pumping up a serious housing bubble.

Amazingly, we can have whole fleets of C-130′s fly to remote areas of Iraq and Afghanistan with pallets of hundred dollar bills piled from floor to ceiling. Then we can pass them out to warlords who make tea for our soldiers one hour and blow their guts out the next. We can send CIA operatives into Somalia and give millions, maybe hundreds of millions, to warlords to fight other killers.

But we cannot find it in our hearts to save our fellow Americans in Ohio and Michigan and Indiana who make the cars and trucks that about half of us buy?

Okay, this is just plain old silly. I would hope that someone writing on economics would understand the difference between the bailout of the auto industry and the bailout of the financial services industry, and the underlying reasons behind each. The crisis in the financial services industry and the need for a bailout there is to address short-term liquidity issues. Yes, the real estate bubble burst and that created problems. But most of the carnage we’re seeing now is not directly caused by the actual decrease in real estate asset values, it’s caused by good old fear – the rising of the hairs on the back of your neck as you think about your portfolio value and risk exposure. Investors are scared, much like my toddler daughter when confronted by a new insect – she’s never seen it before, doesn’t understand it, and just wants to hide in a corner of safety until it goes away. The corner of safety for investors is cash, and they’re staying in it until there are clear signs that the insect known as the current crisis goes away. Until then, there’s no liquidity in the market, things don’t trade, and so asset prices fall. After this short-term fear has passed, investors will come out of the cash corner to play again, and we’ll see much more liquidity and an improvement in prices. So, in the meantime, the Fed is providing liquidity (think of it as your mom trying to catch the insect and throw it outside). When things return to normal and asset prices come back to a rational level, the Fed will get its money back.

The auto bailout is quite different. Here we have companies that have been run poorly with very bad cost structures. The impact of foreign cars on the industry has been known for about 25 years now, yet American auto manufacturers have failed to respond. Their labor costs are too high, innovation and sales too low, and understanding of the consumer virtually missing. Throwing money at them will not result in them having an epiphany and completely changing their operations overnight. Given that a bailout would reduce the risk (and thus pressure on mangment) of an imminent failure, the companies are very likely to continue operating as normal – meaning they’ll burn through the bailout money and likely face bankruptcy in the near future. The difference between the two bailouts is that one is akin to an investment, and the other is plain old foolishness.

By the way, I do completely agree with Mr. Stein’s thoughts on the billions we’re spending in Iraq while neglecting our country. But that’s a different topic…

And please don’t tell me how GM and Ford and Chrysler have made bad cars that people don’t want. I drive only American cars, only GM cars actually, and they are the best, coolest cars I have ever driven: my 1962 Red Corvette, my mighty Cadillacs whose potent engines and super brakes have saved my life many times on the freeway.

Sorry Mr. Stein – too late. Please see a few paragraphs above. By the way, I wish most Americans felt the same way about American cars, but they clearly don’t – hence the problem.

Why are we so angry at the unions? They negotiated their deals in good faith. It’s not their fault that roller coaster gasoline prices messed up their world.

Wait, let me get this straight – you’re saying that it’s not fair that an increase in fuel prices shed light on this inefficiently run industry and absurd compensation practices, and ultimately may cause unions to lose the ridiculously sweet deals they negotiated with poor management who should’ve known better? Wow.

Yes, they did negotiate a deal with management. That deal is between them and management. If management can turn these companies around and deliver on the deal, good for both parties. However, they did not negotiate a deal with the taxpayers, so why should the taxpayers get involved to deliver on the unfairly sweet deal?! What about the other hard-working Americans in this country? They don’t have nice fat pension plans and benefit plans – is it fair to them that tax revenue benefits the auto workers?

The bottom line is that these business were run inefficiently – the cost structure was too expensive, the products weren’t what consumers were looking for, and management was too slow to adapt to a changing industry. Just like any other company, its employees, and any deals these employees may have had with the company – the firm has to turn itself around, or become extinct.

I’d love to hear what other people think about this (Mr. Stein’s piece specifically, or the auto bailout in general). I’ll also be posting other things I’m reading and thoughts I have on the subject…

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