Bailout Deal Stalled

For the record, I wasn't pleased with the $700 billion bank package either, but of the two parties I'm less afraid of the GOP right now with this stuff than I am of the Democrats. Public sentiment doesn't favor bailing out the automakers, and Americans didn't really seem to like the $700 billion going to the banks either, so the stonewalling by the GOP on the bailout seems to at least be responding somewhat to that opinion, which I think is the right move.

After thinking about it a little more, I feel like just saying that it's either a loan or out-and-out bankruptcy is a little too simplistic. One of the big questions regarding the loan is what happens if things continue as they have been for the last couple of decades? Is this just delaying the inevitable and encouraging business as usual? If five years down the road Ford, GM, and Chrysler don't capture more market share and regain that loaned capital, what happens to the American taxpayer? Do we loan them money again? There needs to be more accountability from the American automakers, and that's something that needs to be structured into any bailout package.

I'm sure it's something that's going to eventually pass, but it's mostly just a matter of how much useful restructuring can occur that would encourage an improved American auto industry.

Here is what Mitt Romney had to say regarding the bailout:

IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

And the first of several suggestions he makes:

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

And the editors at National Review had this to say about it:

The agenda also calls for the appointment of a federal “car czar” to direct a restructuring of the car companies. But it does not give this person a mandate to force the autoworkers’ unions to make the realistic concessions that are required if the Big Three are to become competitive again — something a bankruptcy judge could do. The Big Three’s labor costs, work rules, and job-security arrangements are relics of a bygone era; if you want to see what a successful American auto industry looks like, look to Toyota, Honda, and Nissan, which employ a non-union workforce of more than 100,000 at their American assembly plants.

If, as seems likely, this restructuring doesn’t work, consider the $15 billion a down payment: It is the nature of federal czars to attribute mission failure to inadequate resources, and it is the nature of Congress to throw good money after bad. No one wants to call this a nationalization, but that is what it is bound to become unless Senate GOP leader Mitch McConnell can rally enough Republicans to block the bill. McConnell got to the heart of the matter in a statement yesterday: This bailout doesn’t fix Detroit’s problem, he wrote, “It subsidizes it.”

I tend to agree. Our cars are just not competitive. What do you all drive? Does anyone reading this post even have an American car? When I bought my car I didn't even consider any of those three brands. Just as Mitt mentions in that quote above, you just don't get the same kind of car for the money that you do with foreign imports.

It appears that the bipartisan measure that was almost through failed because the UAW refused to cut their wages to bring them in line with the Japanese carmakers. Those guys have way too much power, and if they get that money and continue as is, you can bet that it's only going to be a few more years before the whole thing actually collapses and Congress either hands them another blank check, or they finally do go BK.

One proposal that does seem really interesting concerns the appointment of the "car czar." Who fits the bill? These guys seem to think that Mitt Romney is the right guy for the job, and make a good case for it:

His qualifications are curiously perfect.

First, he knows the private sector cold, based on his leadership as CEO of industry consulting firm Bain & Co. He also knows Detroit.

Growing up in the 1950s, his father was head of American Motors Corp. when it was profitable. Romney's steeped in the car culture.

Second, Romney served one term as the governor of Massachusetts. A Republican, he won the top office in the bluest state in the union. Obviously, he persuaded that state's liberal Democrats that he could work with them and win their trust. And he did.

Third, he's a master troubleshooter, showing his mettle first in the 1990 rescue of Bain & Co. after he had left the company and it fell apart, and again in the financial rescue of the 2002 Salt Lake City Olympics, which had been nearly $400 million in the hole and mired in corruption scandals before he got called in.

Romney revamped the organization's leadership and policies, cut bloated budgets, and raised new funding. And in the end, it made $100 million in profit.

The auto industry could use someone with those unusual talents. If Romney turns the ailing industry around, it would be hailed as historic. And Obama would be hailed for his savvy, mature judgment in naming a capable foe to do the job. He ought to consider it.

Can you imagine what a boost that would be for Mitt if he got that assignment? That would be an enormous punctuation mark on his already solid reputation for turning huge messes into big payoffs. I'm not really sure any other way he could better add to his qualifications if he makes another run for the Presidency other than by occupying a senate seat for several years. If this deal has to happen, I hope it's led by him.

One brief final excerpt from Powerline:

It appears that the last-minute compromise has collapsed because the UAW wouldn't go along with Republicans' request to "slash wages next year to bring them into line with those of Japanese carmakers." I'm suspicious of that account; the real problem the carmakers face is not the wages they pay to the people who are actually working for them, it's the legacy retirement and medical costs they foolishly agreed to bear on behalf of retired workers, decades ago. The UAW represents three times as many retirees and widows as it does auto workers.

Only bankruptcy and a shedding of legacy obligations can, long-term, save the jobs of current Big Three auto workers. Thus, the real conflict is not between auto companies and current workers, it is between current workers and retirees. The UAW can't represent both.

FINAL UPDATE: The cloture vote failed, 52-35. Thank goodness. Now the auto companies can get about the serious task of preserving their businesses and their employees' jobs through bankruptcy proceedings.

Gosh...part of why I haven't been doing political posts lately is that they become so involved. There is a lot of reading that has to go into these posts. I'll allow for the possibility that I could be mistaken with some of this, but things can't get much more worse anyway, right? Right?

UPDATE: I wanted to link you to this Larry Kudlow article on the bailout as well. He is all for cutting tax rates on the supply-side. I really like the way he treats economics. Anyway, he brings up a couple of good points:

President-elect Obama has been cagey about the details of his massive $700 billion infrastructure spending plan and whether he’ll raise taxes on successful earners. But this new New Deal, including Obama’s middle-class tax credits, will not create permanent economic growth incentives.

He starts the article touching on one point made by Salt from the previous post:

So here’s the painful choice for both Republicans and Democrats in Congress: Will the political class risk a Detroit-carmaker bankruptcy that might lead to catastrophic liquidation — including, realistically, a couple million car-related jobs — all while the recession deepens and job losses mount (1.2 million in just the past three months)?

It’s a tough choice — especially for Republicans, most of whom want to vote against bailout nation and stop big-government encroachment on our free-market economy. That’s the right theory. But are the economic risks simply too great to employ it?

Here are some points that he clearly states that I've poorly articulated elsewhere:

Meanwhile, the pressure for more bailouts grows daily. The Avis rental-car company wants a bailout from TARP. A company called BlueFire Ethanol wants a bailout. The trade association for equipment-leasing companies wants a bailout. There’s no end to it. And if we keep going down this path we’ll make a mockery of free-market capitalism.

Where to draw the line? That’s the huge political question.Coming back to Detroit, there may be a pragmatic solution, one that takes some of the apocalypse-now threat of major economic decline out of play. Senator Bob Corker and others have proposed a federal oversight board that would in effect become a bankruptcy court. Strict conditions would be imposed on the carmakers, especially regarding compensation — the single-biggest reason for Detroit’s decades-long decline.

Corker wants Detroit to have the exact same compensation levels as the Japanese transplants in the non-union Southern states. That means moving hourly labor costs down from roughly $70 to $48. It means reopening the UAW contracts that have created the huge pay-gap between Toyota and GM. It means putting an end to excessive pension and healthcare benefits.

And how is the government supposed to encourage economic growth?

What will? A genuine supply-side growth agenda to reduce tax rates across-the-board.If the Republican party wants to put bailout nation to rest it should campaign for lower corporate, individual, and investment tax rates. It should make clear that the Democrats are the government-spending party while the Republicans are the tax-cutting party.

We will not bailout our way into prosperity. Nor will we spend our way into prosperity. Somebody has to stand up and yell: It’s time to cut tax rates on the supply-side. That will reinvigorate growth and infuse new spirit into a demoralized economy.

I basically just cut and pasted his entire article. Oh well.