December 12, 2008

Trying to Predict the Economy

Justin Katz

Dan Yorke had an economic back-and-forth with Richard from Tiverton, just before 5:00, that points to a consideration of which we ought all be in awe: The economic big picture is just too complicated to predict or guide (hence the genius of the free market). Dan argued that ancillary industries to the Big Three would suffer the consequences of an industry failure. Richard argued that surviving auto manufacturers (whether domestic or foreign) would pick up the demand slack. Dan pointed out that there would be a lag time while suppliers ramp up production. The exchange shouldn't stop there.

As the remaining manufacturers come up short in meeting demand, they would be willing to pay more for parts (etc.), which would make up some of the lag gap for the suppliers, which would be able to charge more for the same number of units. On the finished side, as the supply of cars constricts, the prices would go up, which would open a little bit of cushion for restructuring companies.

Similarly, as workers lose their jobs, surviving and restructuring companies would find labor costs going down. The manufacturers and suppliers would be able to hire more people to make the products that they'd be producing for a smaller pool of manufacturers. Of course, increasing prices would also begin to suppress demand, but my point is that it would be folly to declare a particular outcome, and it is conceit to attempt to tweak and control the industry from the governmental tower.

By contrast, I'd suggest that the political-cultural big picture is a bit easier to predict: The effect of asserting government interest in and practice of sustaining particular companies or industries would be deleterious to innovation and would encourage deeper and deeper unwise meddling in the marketplace, ultimately putting our entire economy in the too-big-to-fail category, but with nobody left to bail it out. Putting emphasis back on the people whose lives actually depend on their own actions, we shouldn't lose sight of the fact that a large dump of unemployed Americans into the marketplace would create an army of workers who must find some way to earn a living and would, therefore, have huge motivation for innovation and the creation of wholly new industries or industrial practices.

Let the car companies go down. No good can come of the process of propping them up, while the process of surviving — of thriving — can renew America for the new century if the government will let it happen.

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We are so following the road that Great Britain followed after WWII it's scary.

The only significant difference between the proposed bailout and a Ch. 11 restructuring was that a bankruptcy judge would most certainly restructure the bloated UAW contracts, whereas with the bailout the UAW remains fat and happy. This was strictly about protecting the UAW, and its refusal last night to agree to concessions, which killed the bailout package, proves it.

As our economic / military power begins to decline, and our political center of gravity has shifted toward the socialist party ("ask not what you can do for yourself, ask what your politician can do for you"), we are losing the things that brought us our success.

In its pander to the unions the British nationalized their "essential industries" a/k/a unionized steel and automakers being the most notable examples.

You may recall "British Leyland" - the conglomerate of government owned autos.

As will happen with Detroit ("American Leyland") the quality and pricing of the automobiles will continue to decline under government control, and the companies will ultimately fail, after costing the taxpayers billions and making the whole country poorer.

Have you driven by an MG or Triumph dealer lately? The British taxpayers have nothing to show for protecting the unions - and in the end neither do those former auto workers.

It'll be the same here. Ten and twenty dollar an hour workers are just being forced to subsidize the $70 an hour UAW workers (at least the ones still left), just so the UAW can keep contributing money to Democrat campaigns.

Posted by: Tom W at December 12, 2008 7:36 PM

Nice theory, but not true. The foreign car companies have their own suppliers in their home countries. Toyota doesn't manufacture cars in the USA. It assembles cars here to avoid the import tariff on cars. A box of parts isn't a car, thus no tax is paid. The foreign part suppliers are more than capable of meeting demand. I on the other hand, work for a supplier to GM and Ford. Several hundred jobs would go away in a very short period of time. And my well paid union job which you love to deride would be replaced with unemployment.
I'm no fan of handing out taxpayer money either. I think bailing out the banks was foolish. But to let manufacturing in this country go away is like cutting your own throat.

Posted by: Jeff at December 13, 2008 12:39 AM

There are many domestic suppliers that feed the "transplant" auto factories - indeed often they build new facilities in close proximity to feed those plants in this era of "just in time" delivery.

>>But to let manufacturing in this country go away is like cutting your own throat.

In this instance, don't blame us. It is the shortsightedness and greed of the UAW. There could have been a bailout Thursday night had the UAW agreed to "concessions" to bring their $70 unskilled labor down to $50 unskilled labor.

Sorry, I have no sympathy for my tax dollars going to subsidize $70 unskilled labor ... no more than I have sympathy for the guys on Wall Street and the big banks.

This isn't about "saving" manufacturing or the banking system, it's about politicians bailing out the greed at the the top who give big campaign donations, and bailing out the unions who give big campaign donations, and sending the bill to those of us in the middle class.

Posted by: Tom W at December 13, 2008 11:07 AM

Three of the most vocal bailout opponents - Alabama Sen. Richard Shelby, Tennessee Sen. Bob Corker and Senate Minority Leader Mitch McConnell of Kentucky - represent states where foreign car makers Mercedes, Honda, Hyundai, Toyota and Nissan have built factories employing mostly non-union workers.

Gregory Saltzman, a professor of economics and management at Albion College said, "I think there's sort of a regional tension here that, from their perspective, they would like to see the Michigan-Ohio-Indiana-Illinois part of the auto industry lose ground to the Tennessee-Alabama part of the auto industry. They have a regional interest here."

Saltzman goes on, "It seems very inconsistent to me to demand immediate pay cuts from auto workers when there was no pay cuts required for highly paid financial executives," he said.

It should also be pointed out that the UAW was ready to make additional concessions when the Republican led filibuster quashed the House's proposal entirely.

Tom W might want to tell us how he got the $70.00 per hour figure that he throws around, and he also might spend a few words on his thoughts about CEO compensation and benefits packages paid by th big 3 auto producers in a dreadfully declining market. Let's be fair Tom W, we're talking about two sides of the same coin.

Posted by: OldTimeLefty at December 13, 2008 6:22 PM

“Let the car companies go down. No good can come of the process of propping them up, while the process of surviving — of thriving — can renew America for the new century if the government will let it happen.” So say Justin.

Auto Industry Jobs in New England from CNN Money:
NY= Total Jobs 82,357; 607 Assembly; 28,792 Parts; 52,958 Sales
NJ = Total Jobs 43,294; 688 Assembly; 7,100 Parts; 35,506 Sales
MA=Total Jobs 28,464; 178 Assembly; 3,839 Parts; 24.447 Sales
CT =Total Jobs 21,086; 165 Assembly; 5,734 Parts; 15,168 Sales
NH=Total Jobs 8,329; 0 Assembly; 797 Parts; 7,532 Sales
ME=Total Jobs 6,864; 0 Assembly; 636 Parts; 6,220 Sales
VT=Total Jobs 4,143; 0 Assembly; 1,145 Parts; 2,998 Sales
RI=Total Jobs 4,123; 0 Assembly; 476 Parts; 3,647 Sales


Most of these jobs will go away increasing unemployment and straining unemployment benefits of the New England states thus driving all of New England states deeper into recession.

Rhode Island budget deficit does not look any better either. According to Center on Budget and Policy Priorities, Washington, DC
Rhode Island FY 09 total budget gap (deficit) is now ear marked at $802 million or 24.5% of the budget.

With more people being laid off, more houses going into foreclosure and off property tax rolls, more business and people leaving the state, less income, sales, business taxes and lottery players where is the state going to find the extra money?

Force more state employees to retire, cut pensions, cut aid to cities and towns, cut aid to schools, colleges and university, cut welfare programs and health care driving more people out of the state.

Who will RI have left to operate state departments. With the 1,500 state employees that just retired an enormous amount of industrial knowledge walked out the door.

RI needs to be a little creative with tax reform and expand the sales base and lower the rate (this last quarter, Honolulu, HI pulled in $61.2 million on a 0.05% surcharge to the general excise tax paying for light rail transit system).

I still don’t understand how RI powers to be think they can drop state of RI toll booths on a federal interstate highway.

Posted by: Ken at December 13, 2008 7:19 PM

>>Tom W might want to tell us how he got the $70.00 per hour figure that he throws around, and he also might spend a few words on his thoughts about CEO compensation and benefits packages paid by th big 3 auto producers in a dreadfully declining market. Let's be fair Tom W, we're talking about two sides of the same coin.

The $70 figure is widely reported, and is accurate for it includes benefit costs and pension costs, all of which are compensation (similarly to RI teachers, whose pay doesn't superficially appear to be that high on a base annual salary basis, but skyrockets when you calculate their total compensation). That is why the foreign / transplant factories pay is %50 an hour - that doesn't mean that those workers salaries are 100K a year, but their total compensation with benefits comes to that.

As for executive pay, there were limits included in the bailout package, along with haircuts for bondholders. So the UAW President flat out lied when he stated that "the Republicans" were trying to force the restructuring only "on the backs" of the workers.

Besides, the question isn't whether the UAW should be exempt from even discussing concessions until the expiration of the current contract - which is what the UAW demanded and what killed the bailout, but whether the pay and benefit package is realistic and would enable the companies to again become competitive in the marketplace. It won't - so giving taxpayer money to the Detroit automakers is just "corporate welfare" for the UAW, delaying the collapse of those companies.

The government should not be in the corporate welfare or bailout business. The financial bailout was wrong; so to is a bailout of the UAW.

Posted by: Tom W at December 14, 2008 12:11 AM

As said, the UAW isn't concerned about "saving the U.S. auto industry" it's about the Democrats taking money from our paychecks to protect and reward the UAW - it has milked the companies dry, so now it wants to milk the taxpayers.

Our net gets smaller so their gross can stay larger.

Posted by: Tom W at December 14, 2008 12:25 AM

UAW Is Driving Detroit Off a Cliff

Posted by: Tom W at December 14, 2008 12:28 AM
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