"The Case for Forward-Looking Protectionism"

When people have asked me about bailing out automakers, my answer has been something like "if I thought the problems automakers are experiencing were mostly due to the problems in financial markets, and that once the trouble passes automakers would be healthy and vibrant again - and hence able to pay off any loans they are given to them now - then I might be inclined to bail them out. But as it stands, I have no such confidence. Their problems can be traced back to before the crisis began, so perhaps a bankruptcy proceeding would be a better option."

The argument below by Ha-Joon Chang applies a similar standard to protectionism more generally, i.e. "Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection... Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy":

The case for forward-looking protectionism in the US, by Ha-Joon Chang, FT Economists Forum: ...Many of Mr Obama’s economic policies are unlikely to prove contentious. Few would argue against tighter financial regulation, given today’s financial mess. Increased taxes for high-earners would be hard to oppose after the glaring absence of trickle-down from the Bush tax cuts – after all, the majority of the high-earners voted for him.

Mr Obama’s trade policy, however, is already causing controversy. He has vowed to protect American jobs and even argued for re-negotiating the NAFTA. There is already some hand wringing among free-trade economists, worrying that his protectionist policies may destroy the world trading system in the same way the infamous Smoot-Hawley Tariffs of 1930 did after the Great Depression. ...

However, contrary to what most people think, the US is the true home of protectionism. Between the 1830s and the 1940s, against superior European competition, the US developed its industries behind literally the highest tariff wall in the world, with the average industrial tariff rate ranging between 35% and 55%. Even the Smoot-Hawley Tariffs were not an aberration – the average US industrial tariff in 1931 was, at 48%, well within the historical range.

Moreover, the theory that justified such protectionism, namely, the ‘infant industry’ argument, had been first developed by none other than the first Treasury Secretary of the US – Alexander Hamilton... Hamilton argued that producers in relatively backward economies needed to be protected ... before they mature and can compete with producers from more economically developed countries.

Of course, the protectionism that Mr Obama is advocating is protection to ease the adjustment of mature industries... The case for such protectionism is not as overwhelming as that of infant industry protection. However, well-designed and time-bound protection of mature industries can facilitate, rather than hindered, trade adjustment and industrial upgrading. ...

Mr Obama should use protectionism in a similarly forward-looking way. Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection, but only if they fulfill certain conditions regarding investment and training. Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy.

A forward-looking protectionist strategy will also require a substantial strengthening of the welfare state in the US. A well-designed welfare state with good unemployment insurance and re-training programme can facilitate structural changes by reducing the resistance of the workers to more open trade that exposes them to greater risks. ... Stronger welfare state is why the demand for protectionism is much weaker in the European economies than in the US...

Keeping its market open is not enough for the US to play a genuinely positive role in the world trading system. The US should also stop pushing for trade liberalization in developing countries and give them the chance to use (intelligently-designed, of course) infant industry protection, which it invented and benefited so much from. ...

All these call for a much more activist role for the US government than it has been the norm. Providing protectionism to facilitate structural changes, and not just to protect existing jobs, would require a much closer coordination between trade policy and those policies to upgrade American industries, such as R&D support and worker training. Redesigning the welfare state as a vehicle to promote skills upgrading and labor mobility would push the US government into an uncharted territory.

These are big challenges. However, the US cannot continue its peculiar mixture of free-trade mythology and uncoordinated, ‘reactive’ protectionism that has served ordinary Americans and the developing nations so poorly. ...

I would still be wary of this argument (it is essentially an infant industry argument, i.e. the mature industries need "re-tooling of ... factories and re-training of ... workers," so they are infants as compared to their competitor's level of development.). It is an easy argument to make, you essentially promise you'll do better if you are given help, so I would want a tough standard, i.e. that any protectionism to be justified by overwhelming, clear evidence that temporary protection would in fact allow an industry the time it needs to transform itself and become viable once again, and that, contrary to the firm's history up to that point - perhaps its hands have been tied by previous investment in capital that is now outmoded -  it will actually make the necessary changes.

Comments

[don]

Yes. Pick the winners...
I think it would be more effective to curb currency mercantilism. The undervalued yen has contributed as much as anything else to Detroit's problems. Ghosn's genius? Hardly. Rather, a side benefit of the undervalued yen.

[Brian J]

Are those in the academic community really as worried about Obama being a protectionist as this article states?

[Julio]

The article talks about protectionism/bailout vs. bankruptcy, but there is a third way to look at it: the government can acquire their resources (human and industrial) and repurpose them (greener technologies).

The government is in a unique position to do this. It has the money and risktaking capability. And it can simultaneously address the issues on several synchronized fronts.

For example, the US industry produces lots of (gas guzzling) truck bodies. The government can convert to production of natural gas engines, and simultaneously subsidize large-scale conversion of fuel stations to gas.

Not too far to get from here to there, but private industry would find it hard to do both pieces, and to reap profits from some of the rewards (less pollution, less use of foreign oil).

(Oh, and of course, the government could also impose a windfall profits tax on Pickens.)

The results would also align with the platform on which Obama got elected.

But it's not going to happen if we revive the patient with the same crowd, or a different set of faces but the same myopic incentives.

The key is not to act the St. Bernard to the rescue, but the vulture to pick the carcass. Plunder their assets -- so as to make the most of them.

[Economist Too]

"I would still be wary of this argument (it is essentially an infant industry argument, i.e. the mature industries need "re-tooling of ... factories and re-training of ... workers," so they are infants as compared to their competitor's level of development.)"

I'm not sure what planet you're living on. Your brand of rabid, anti-citizen, anti-worker world view has produced the crisis in which we reside. Corporations are not human beings and the top 5% are still only 5% of the population (no matter what your tables and equations whisper in your ears). Yes we little people have lives and consider ourselves just as important as you do. We don't have massive trust funds to draw on when times are tough, so you might tone down the arrogance and ego.

Don't worry, in the coming purges, those who are anti-American won't be spared.

[Denis Drew]

Isn't GM retooling to build the most advanced and practical version of plug-in hybrid -- the setup that turns the wheels with electric power and uses the small gas engine (set to run at its most efficient RPM) only to recharge the battery?

Might not allowing GM to go bankrupt possibly be snatching defeat from the jaws of surprise GM victory?

50 billion is .35% of our GDP and 10% of what we were shipping overseas on a yearly basis when oil was at its highest. Sounds like a small enough wager (at the worst the money wont end up being wagered by oil sheiks in Monte Carlo) given the endless repercussions in the face of a looming recession (depression?) of allowing America's flag ship industries to slip beneath the financial waves.

[mmckinl]

Reorganization would probably appropriate for the car makers but to allow them to fail would be a huge mistake.

We've already defaulted on most of our manufacturing infrastructure. Letting the automakers go would seal our fate as a third world country.

[Patricia Shannon]

http://www.nytimes.com/2008/11/06/opinion/06thu2.html?_r=1&ref=opinion&pagewanted=print&oref=slogin

November 6, 2008
Editorial
Fill ’Er Up

We fear that a $1.50 drop in gas prices was all it took to blunt Detroit’s newfound fervor for energy efficiency.

Just a few weeks ago, the Big Three American automakers convinced Congress to give them $25 billion in cheap loans to retool their plants to make fuel-efficient cars. Then, with nary a blush, the Ford Motor Company introduced the new star in its line: the 2009, 3-ton, 16-miles-per-gallon, F-150 pickup.

The company has spent about $150 million to retool its Dearborn, Mich., plant to make the new truck, and it plans to restore the third shift at the plant in January to meet demand, adding about 1,000 jobs. As for that commitment to fuel economy? The new trucks should be 8 percent more fuel efficient than the 2008 models, on average — which means that they still use about 50 percent more gas per mile than, say, a Honda Accord.

Ford and other automakers are desperate to find any way they can to dig out of their deep economic pit. And old habits die hard. Ford’s sales collapsed 30 percent in October — a third of its weak sales were F-150s. Chrysler saw October sales tumble 35 percent. Sales at General Motors plummeted 45 percent.

But even if the F-150 gives Ford a temporary bounce, it is not a long-term solution in a world where energy prices will inevitably rise again. Detroit’s automakers must devote their energies and investment dollars to developing the fuel-efficient vehicles of the future rather than tweaking the gas hogs of the past.

Americans seem to get it. As gasoline soared past $4 a gallon in the summer, consumers fell out of love with trucks and sport-utility vehicles. The auto companies that only a few years before had considered switching to 100 percent truck production were suddenly talking about a complete change in strategy.

G.M. sought a buyer for its Hummer line. Ford postponed sending the 2009 F-150s to dealers while it larded on financial incentives to move thousands of 2008’s off the lots. The future, they seemed to agree, would require vehicles that sipped, not guzzled.

This is still true. Gas prices are falling now because the world is tipping into what may be the deepest recession since the 1930s. At some point that will end.

Detroit’s problems will not, unless the automakers understand that the days of cheap energy are over. The Big Three made the wrong bet in the 1990s when they decided to put all their eggs in the truck basket — ceding virtually the entire car market to their Asian rivals.

They evidently haven’t learned enough from their mistakes. Perhaps Congress, from which the automakers are lobbying for more taxpayer money, can help correct their ways — at the very least — by attaching strict fuel-economy requirements to any future aid.

[donna]

All they have to do is sell the cars here that they make for Europe or even Canada. Is that REALLY so difficult for them? Come on.

I've been waiting for my hybrid minivan for a long time now. Toyota has one available in Canada. Come on, guys. Is it THAT hard for GM and Ford to admit they've been wrong for YEARS about what Americans will buy? Or are they just in bed with the oil companies?

[digraph]

absolutely.

I'm actually in favor of some protectionist measures to help Detroit, but it could be somewhat evenhanded as not applied to vehicles assembled in America (so all the Japanese and European companies with investments in American plants wouldn't suffer).

It's not that the US **CAR** industry isn't mature. It's that competition in more than half of that market is fierce.

Detroit should focus on (efficient) trucks / SUVs where by brand name they are highly competitive. they should also start at the bottom up, where no other Auto co. has a stronghold: i.e. tiny cars.

[the end]

Don

"The undervalued yen has contributed as much as anything else to Detroit's problems."

Thats ridiculous. The big 3 design and build cars that most people do not want.

They have no concept of supply chain management. They screw their suppliers. They purchase lower quality parts from suppliers, compared to Japanese auto makers. They pay more for the lower quality parts, compared to the Japanese auto makers.

Thats a big deal. Parts from suppliers comprise 70% of the total cost of a car. US auto makers were at the avant-garde of global industry 40 years ago. Now thety are at the ass, destined for the sewers.

[ken melvin]

Obviously, neither production nor profit are the problem. The problem is that with the demise of the industrial age we have no means of distribution. 'Welfare state' is going to have to mean a great deal more than the author proposes. Wealth takes many forms, but lasting wealth tends to look a whole like knowledge, art, schools, infrastudture, etc., so if we could distribute the income from trade via employment in production of real wealth, that's not so bad bad a legacy or economy.

[calmo]

Denis wins the Nobel Prize for Somewhat Economic Policy Query/Statement of the Year:Might not allowing GM to go bankrupt possibly be snatching defeat from the jaws of surprise GM victory?Your prose has my attention...maybe more.

[bakho]

Paul Ingrassia is pretty close:

http://online.wsj.com/article/SB122628230122212449.html

Daimler unloading Chrysler for 25 cents on the dollar is looking like a smart move.

Any bailout should trash the current stockholders and management.
Especially these political insiders: The principals of Cerberus, include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.

[Dickeylee]

Sure is going to be fun taking 25-40% of 700,000 pensioners monthly check from them when the Big 3 are in bankruptcy, which is the average drop in pension calculations when the Pension Guarantee Trust takes over. Sure is going to be fun when 4,600 Big 3 dealerships default on their business and inventory loans, when they shutter their doors for lack of inventory (Can you say Bank Holiday?). Not to mention all their tier 1-2-3 suppliers when they don't make either OEM or spare parts for cars that won't be made anymore.
Yeah, sure is going to be a lot of fun.

[Richard H. Serlin]

With the American auto companies there's another issue, a huge one. For the last 25 years they've lobbied extremely hard and effectively to prevent the raising of mileage standards. They've stopped them almost completely, and have therefore done monumental harm to our national security, economy, and the planet -- and before that they lobbied against seatbelts, airbags, and other safety features, delaying them greatly.

I'm all for helping the workers with universal healthcare, virtually free college and training, and much more, but do we really want to save these companies so they can continue to inflict monumental harm on our country and planet with their lobbying. They virtually own much of the powerful Michigan delegation.

[don]

the end says...
"Don
'The undervalued yen has contributed as much as anything else to Detroit's problems.'
Thats ridiculous. The big 3 design and build cars that most people do not want."
Well, me and Mr. Yen put the undervaluation at a bit below 20% today, so it was 30% a year ago. That's a pretty big cost advantage. Though I don't deny truth in your remarks, why do youleave out union wages and health benefits (which companies and unions agreed to owing to the tax advantage in this form of pay)? Surely they share some of the blame.

[Beezer]

A cautionary tale. For several years I "covered" as a reporter the local Urban Development Action Grant (UDAG)directors. Every year UDAG granted millions of dollars to the industrial areas, and the industries, targeted by the UDAG laws.
This was in a New England city, which had a rich tradition of millyards and the industries that, at one time, teemed with workers and profits. It was this area that the millions of taxpayer dollars were directed, trying to keep alive millyard types of industries. The Directors were sincere, accomplished and intelligent. They did as well as could be expected.
Reagan killed UDAG. Within months of its demise, the millyard area in my city began a dramatic and sustained recovery, as new industries moved into the millyard, which was now free of UDAG use restrictions.
Thirty years later, this millyard area is probably the single largest economic engine of the city--just like it was in days gone by for traditional millyard industries.
The point? It's not that government help and focus will hurt, it's just that the help should be without much in the way of restrictions, once an industry is deemed to be worth saving. Trying to save a non-competitive industry is probably not worth the money, unless the industry is vital to the nation's economic health and security.
There is no argument that government has tools and capabilities to enable the advancement of selected industries. Use them. But be practical. And don't become catatonic once the programs are in place. Discretion and flexibiliy are necessary for success.

[don]

Just saw the ridiculous advocacy research on how much it would cost the government to let GM fail. Would you believe spending $25 billion now would save $200 billion later in taxpayer money? Neither do I.

[ken melvin]

Unless GM comes out with a fuel-celled, hydrogen fueled, or something similar; they're goners. Plus, there's still an overcapacity problem. As structured, Detroit is a rat hole.

[mrrunangun]

Historical note;
When Hamilton proposed high tariffs in order to allow industrial development, America was emerging from a colonial period under the British mercantile system in which America's role was as a supplier of raw materials. It was illegal for a colonist to own an industrial operation larger than a smithshop serving a village or plantation. Its market for finished goods had been restricted to British manufactures, so there was no American industry at the time and little capital to invest in developing one without protection from manufacturers developed and protected in the mother countries under mercantile systems.

The GM subsidy proposals are justifiable only in terms of job preservation, but it is unreasonable to preserve the generous incomes and benefits the white and blue collar workers in the industry enjoy at the expense of else in the country. That was justifiable when the people in the country voluntarily bought their product, as I have, not wanting to patronize the nonunion shops of the transplants. The non-UAW workers in the auto industry are paid much less. Preserving productive jobs is good policy, preserving uneconomical employment terms is not good policy. Top management at the big three is overpaid, but so is everyone else. Let's hear about the solution to that.

[Denis Drew]

The New Republic
Panic in Detroit by Jonathan Cohn
http://www.tnr.com/politics/story.html?id=a4893b49-36df-4784-9859-2dfa3a3211bf

"while it's worked out that way for the airlines, among others, it's unlikely a GM business failure would play out in the same fashion. In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

"That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM's business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation's assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money."

[Denis Drew]

Patricia Shannon,
How do you manage to post working links here -- if I may ask? I've never been able to figure out a way to do it.

[calmo]

don, are you familiar with GM's $17B bond issue to cover pension funding shortfalls which began ~2000? Roughly, the accountants allowed them to pencil in 9% return on "expected returns"...even when this fund in fact was losing money, for years...and, if I am not mistaken this practice and number continues even though it is now a "defined benefit package"...if you had any suspicions about the profession of accountants and the rules they write...esp after Fannie's lengthy visitation of 2500 of them to clean up their books not all that long ago...that was not ordinary workmanship but the work of real professionals.
So, no...I think the (company and industry) management is still heisting and needs to shoulder more of the blame.
Those "union wages and benefits" you might think are outrageous were the product of lousy, (incompetent) self-serving, short-sighted management...a glance at CEO compensation here (a model for smaller less established industries) is all the persuasion anyone needs.

[Barry]

"It is an easy argument to make, you essentially promise you'll do better if you are given help, so I would want a tough standard, i.e. that any protectionism to be justified by overwhelming, clear evidence that temporary protection would in fact allow an industry the time it needs to transform itself and become viable once again, and that, contrary to the firm's history up to that point - perhaps its hands have been tied by previous investment in capital that is now outmoded - it will actually make the necessary changes."

Mark, how about if the auto industry gives 50/700ths the proof that the finance industry has, which is probably 50/700 times zero.

And that's assuming that the Wall St bailout is limited to $700 billion - I'll be that the cost overruns (i.e., Bush theft) there will make any overruns in an auto bailout look like frugality.

[lark]

The Volt which GM is working on is an industry leader in technology. It will change the car industry. It will set the standard. Only if, however, GM isn't liquidated.

Google it. It's been VERY well-publicized. If you've posted to this thread and you don't know about it, you're not qualified to have an opinion on GM.

See
Do GM's arguments against bankruptcy hold water?
at http://curiouscapitalist.blogs.time.com/2008/11/10/do-gms-arguments-against-bankruptcy-hold-water/> curious capitalist

[run75441]

A couple of comments or maybe several:

Patricia:
You quoted Gross weight when you cited 6 tons for the F150. The Curb weight is ~4700 pounds, truck empty of everything. Gas mileage is up 8% over the 2008 which is still minute compared to what it should be.

Large cars:
Best bet to solve the problem of all of you driving too big is to tax it. And sorry, you all have had that lust of driving big and going from 0 to 200 mph in three second flat (not the bathroom scale either). Its just that you changed your mind once gasoline hit $4/gallon. Otherwise, Fords plans for 700,000 F150s yearly would have gone nowhere in the past. Plants don't retool overnight. Ford/GM/Chrysler are still stupid though. And who is buying the Toyota Tundra? Think the Japanese would make this vehicle with no market for it?

AIG:
Seems like we have dropped ~$150 billon on these con artists who hold ~$440 billion in an unregulated CDS in the Derivatives market. Estimates have been the treasury will loan, spend, and buy a whole lot more to prop this company up. Seems to be an attitude we must save the banks, financial institutions, and their workers; but, the hourly workers of most of America? Let them eat cake! AIG employs ~100,000 people and automotive directly and indirectly provides employment for 3 million. I am sure it will look good in the U3 Unemployment Rate and the subsequent drop of the Participation Rate.

Economists:
They are great at the macro level. I have yet to see one who can explain throughput and what retooling a factory means, automotive or nonautomotive. Couple them with Congress and we have a group of blind men describing an elephant. Unless they are Druckers in disguise, the words are basically opinions with little backing to support their contentions.

Current Events:
It is true that automotive was in trouble. The first to show it was Chrysler before Mercedes bailed out. Other than Jeep and the Mini-Van, all they have are the roger-rabbit looking cars which are not efficient and ugly to boot. GM and Ford had a ways to go before reaching the crisis levels of Chrysler. Did the current economic crisis cause their ultimate demise. No, management stupidity did that to these companies. That and a government that was more interested in a "laissez faire and unregulated market place." The maestro hisself campagned heavily for non-interference in industry, banking, and derivatives (special thanks to Gramm).

The collapse of Wall Street fast forwarded their problems by a year or so as Ford and GM could have limped along in a weak consumption based market. Consumers are not buying and banks do not appear to be lending.

"keiretsu"
I am not so sure we could pull this off in the US as it may be illegal. Supplier relationships are treated differently in Japan and are governent supported. The Supply Chain is good in the US, the design is not so good. Do we need ten different types of door handles? Seems like we forgot the lessons of standardization.

Automotive should be retooled if we are hell bent on saving AIG. It will probably be 10-20% of the cost of propping AIG up for those who believed the CFTC should not regulated a thriving market place replete with knowledgeable investors, good rating agencies, and a watchful SEC. Automotive should also be pared down from its present size, remade into 3 companies that are leaner, with less of the fixed costs of plants, fewer automotive models, and a reduced work force. There is no advantage to being #1 in volume if that is all it means. It can still be a viable tax base that the service industry has yet to provide.

Just a few comments after reading the thread here.

says...

Of the $50 billion in auto bailout money, reportedly half goes to the UAW health plans. Don't forget that's also a subsidy to the medical profession. Didn't know those guys were hurting for cash. Did you?
A lot of production lines are already silent. Use some of the money to enable quick production of green energy components. Hell, I don't care if we give it to GE to make turbines. Just get the damn lines up and operating. Why don't we just Do Something, for Heaven's sake? If we could gear up to mass produce war machinery for WWII, then why won't we do the same thing for all the infrastructure, green energy industries we so obviously desperately need right now?

[calmo]

Some clips just scare me: Just get the damn lines up and operating. Why don't we just Do Something, for Heaven's sake? If we could gear up to mass produce war machinery for WWII, then...

[OhNoNotAgain]

"If we could gear up to mass produce war machinery for WWII, then why won't we do the same thing for all the infrastructure, green energy industries we so obviously desperately need right now?"

In a word ? Leadership.

We'll see soon if Obama has it. I, for one, sure hope that he does.

[Patricia Shannon : workable links]

Denis

To create linkable URLs here, I cheat ;) I use my blogspot blog to format it, then copy it here.
It's the standard HTML code for links.

I see you are on blogspot, so that makes it easy.

Copy the url into a blogspot msg.

Select that URL in your msg.

Then make it a link using the symbol with the chain link.

Click the "Edit HTML" button if you're not already there.

Then you can copy the properly formatted HTML code.

Good luck

[Denis Drew]

calmo,
What's wrong with those high auto manufacturer wages and benefits? They are comparable to manufacturing wages in other modern OECD economies.

Oh, I forgot; other OECD labor markets have solved the race to the bottom problem (no legacy costs for johnny-come-lately manufacturers in the American auto case) with a labor market practice legislated into reality everywhere -- from the third world, to the second, to the first -- but which you cannot get our progressive heros here to pick up on even though the solution is right in front of them: SECTOR-WIDE labor agreements.

Wal-Mart closed all 88 big-boxes in Germany because it had to pay the same wages and benefits as everyone else doing the same kind of business BY LAW -- compete by quality not by squeezing employees. The unchecked (and card check wont check it) race to the bottom is why auto wages and benefits seem out of line -- only in America's uniquely unbalanced labor bargaining.

[Denis Drew]

Patricia,
I'll give it a try; thanks.

[Andrew]

Of the $50 billion in auto bailout money, reportedly half goes to the UAW health plans.

An important point. Starting with the Grand Union Screwing of Labor with the Delphi bankruptcy in 2005, it is evident that escalating health insurance costs are the primary problematic labor expense.

Fix healthcare, fix the auto industry?

[Winslow R.]

While the Fed 'gives' over $615 billion to bailout foreign banks and $700 billion to domestic banks, the U.S. can't bypass the frozen credit markets and make a loan to car makers that indirectly employ 3 million u.s. citizens?

http://www.moslereconomics.com/2008/11/14/fed-swap-lines-up-to-615-billion/

[Winslow R.]

" Hamilton argued that producers in relatively backward economies needed to be protected ... before they mature and can compete with producers from more economically developed countries."

At some point people will realize what 'infant industries' or mature industries need is 'access' to financial capital. Too often 'access', not product characteristics pick winners and losers.

'Access' should not be what determines whether a firm survives or fails.

Right now, only banks have access.

[Jim]

I'd like to see a low cost health system on Indian reservations or across the border that could not be sued. What you pay for is what you get.
Jim

[save_the_rustbelt]

We have already pulled the plug on American manufacturing as we once knew it, we are just waiting for it to die.

When the UAW dies, then Honda and Toyota will be free to cut wages and benefits, the transplants tend to be in rural areas where the workers have nowhere else to go. Clever.

I guess all those leftover workers can work at Wal-mart, those who cannot can be come economists maybe.

[outsider]

Toyota good,

Fix
Or
Repair
Daily, bad

Viva capitalism!

[run75441]

Maybe you guys missed it? Auto healthcare for retirees was already sold to the unions for ~ 60 cents on the dollar. Tis will be negotiated downward yearly.

It is not just healthcare that is the issue between here and Asia. It is all of those bennies you enjoy when you go to work. It is also EPA, OHSA, Child Labor laws, etc. What you get in China/Asia as a worker and at a better plant is two meals a day, a nurse on staff, and a bus ride in and out of work. Those are the bennies. Direct labor content (the actual labor needed to make a part) is ~10% of the cost (no bennies) of the product and the rest is Overhead and Materials.

Thats reality

[run75441]

rustbelt:

You are correct. You forgot the price increases as the prices will be new and improved with no competition. Toyota is a great car with a crap paint job. Why the Japanese have not improved the paint is beyond me. I like the Altima.

[BJ Feng]

The reality is that once you get into protectionism, it is hard to remove and becomes politically impossible to change. Look at farm subsidies for example, even with record crop prices it is still impossible to eliminate subsidies. And once you start protecting one industry, others will clamor for help too, just like with the bailout plan. Since it is opinion which industries have hope and which don't, I predict the result will be that every industry will get some sort of protection and money if we start down this path. And let's not forget that we're likely to face retaliatory tariffs, not to mention we would be destroying the WTO framework we've worked decades to establish. This would be a very bad and stupid idea.

[benamery21]

It seems to me that any government assistance to the auto industry in the current crisis should not be evaluated on whether or not it would permanently save the domestic Big Three. The most important issue is whether it will kick the can down the road far enough that any failure will occur after recession ends, so as to avoid worsening the current economic downturn. Think of it as stimulus, not a bailout. The deal could easily be structured to give the government senior rights in any future bankruptcy proceedings.

[PierGiorgio Gawronski]

I disagree. This is sheer "beggar thy neighbour" policy: it's self defeating if/when other countries play the same game. Very damaging indeed. The right case to make in this depression is exactly THE OPPOSITE: boost world trade (and incomes) through a quick partial but substantial agreement in the WTO (Doha round). This way you fight global depression. Anyway -> Better than protectionism is subsidies + fiscal deficit. Better than subsidies + deficit is subsidies + monetize some of the debt (if it risks going bananas: no inflation possible in a depression, and FED may tighten back later). Better than subsidies (they are selective, arbitrary) is: support poor families and spending in general, and only in this indirect way support private firms' sales: this is the policy thatminimizes "distortions" of an optimal resources allocation. COULD YOU REACT MORE NEATLY PLEASE TO THESE GUYS THAT QUOTE HAMILTON AS IF HE WERE A GREAT ECONOMIST AND TALK ABOUT THE INFANT INDS ARGUMENT As "OVERWHELMING"??!

[BJ Feng]

There is a good reason why GM and Ford concentrate on gas guzzling SUVs and trucks. It's the only sector they can compete in! Think about it, when you want to purchase a sedan or regular 4-door car, what models do you consider and why? If you want luxury, then BMW, Mercades, and Lexus would be your answers. For everyone else, it's the Camry, Accord, Corolla, or Civic. They are incredibly reliable, fuel efficient, and are no worse in styling than any other brand. Most people who want a family sedan don't care too much about styling anyway, but the fact is that GM and Ford's cars look the same anyhow.

So why would you buy a GM or Ford in the same class as Corolla or Civic? If they were cheap enough, you'd consider it, but high labor compensation makes it impossible for GM and Ford to compete on price. Frankly Toyota and Honda are more efficient and can't be beat on price even if labor costs were the same. Still, Corolla and Civic enjoy such an advantage that both Toyota and Honda are able to charge thousands more than comparable Ford or GM models.

The Volt, would be a game changer if GM can actually produce it as promised. It is incredibly ambitious, so ambitious that both Toyota and Honda aren't even considering doing R&D to investigate the technology the Volt would run on.

What GM did is base a car on a technology they hope will be invented by Toshiba in the future. Currently, we do not have the technology to do what the Volt is promised to do and time is running out for GM. The fact that both Toyota and Honda thought that it was impossible to invent the technology in such a timeframe gives me very little hope for GM. I'm pulling for them, this would be a story worthy of a book, and a premier movie if GM can pull off the Volt against all odds. But deep down inside, the realist in me has big doubts.

Why did GM take such a huge gamble? Because they're in such bad shape that they need a grand slam to make a difference. The Volt would be a grand slam and more, but most people who try to hit grand slams end up striking out.

[benamery21]

One aspect of the Big 3's troubles for which the government DOES bear significant responsibility is their benefit obligations (pension and healthcare). The U.S. government thru (tax, labor, trade,etc policy) historically engendered the development of the type of benefit structure that prevails among the domestic automotive companies, and then allowed the subsidized/unregulated entry to the market of foreign firms which were not forced to bear the same cost structure. This has led to a situation where a declining share of the market supports the retiree benefits of the entire historical automotive market. The appropriate government reform of this situation is to pool all U.S. autoworker retiree benefits in a sectoral fund, and to fund that pool thru an auto sales tax. The field would be level, rather than the current tilt that has been induced primarily by inconsistent governmental policy over time.

[BJ Feng]

Benamery21, there are better ways to stimulate the economy if stimulus is the goal. In fact, I don't think a bailout can be called a stimulus as the additional money would just go to refinance GM's debt obligations. Ford says it has enough money to last until the end of 2009, GM has enough until early 2009, and no one knows about Chrysler.

I'm glad that a bailout for the autos is looking less and less likely. There really isn't a compelling reason to do so, and I don't think a bailout would make a difference in the long run. In a few more years, the Big Three are likely to go bankrupt regardless, they simply have too much debt and onerous labor rules that make it impossible to improve quality.

[benamery21]

run75441: the VEBA still requires funding by the automakers in the short term ...

[benamery21]

B.J. Feng. -- I doubt very seriously that the costs of keeping the automakers afloat for a couple of years minus all of the proceeds of a future liquidation exceeds the direct governmental costs of allowing the majority of their past and present primary and secondary workforce to go on the dole during the next couple of years.

[BJ Feng]

Foreign firms were wise enough not to agree to the poisonous terms that the auto union stuck the Big Three with. That was the biggest failure of management, the Big Three thought that they would always be insulated from competition and never took the foreign car makers seriously until it was too late. If you remember, there were car import quotas on Japanese cars, forcing Japanese car makers to open up their own plants here. US auto makers had more than a decade to adjust, but they just couldn't get their act together and produce a better car than the Japanese. Yes the Big Three have come a long way in increasing quality, but the gap was so large that they cannot catch up because Toyota and Honda continue to improve as well.

By the way, neither Toyota nor Honda are laying off workers. Instead, the excess workers take classes and form discussion groups where they try to come up with ways to increase efficiency and save the company money. Workers who come up with ideas that are later used receive rewards, money, and recognition. Unfortunately, labor union regulations prevent the Big Three from doing any of the above. Most changes to the manufacturing process has to be approved by the union and rewards are set through a complex formula using semi-relevant metrics. The unions are so concerned with keeping the status quo that they're killing their employers. It's the adversarial mentality and backwards thinking of the union that caused all this. Instead of a bailout, the Big Three could survive if only the union would let them. The solution is simple, the unions would get a large chunk of equity and the Big Three would renegotiate the labor contracts and receive flexibility to shut down plants and move around labor.

[benamery21]

Not all light trucks are sold for personal transportation, there is a substantial fraction of that market which is motivated by a need for utility transport. Ford data says 45% of pickups are used for towing at least monthly and 81% are used for hauling at least monthly. The capabilities of the 2009 F-150 are higher as is the gas mileage. To the extent that the redesigned 2009 F-150 captures market share from heavier trucks with even lower gas mileage, that is a net positive. Ford data says 9% of new F-150 buyers are trading down from an existing F-250.

[benamery21]

B.J. Feng--Foreign firms entered the market under different terms than domestic firms because they entered the market WHEN different terms prevailed. This is the direct result of changing U.S. policy. That is not Detroit's fault, it's Washington's.

[calmo]

You bring such a wealth of information to the issue ben, can I ask you what is your connection to the auto industry?
In the meantime, some thoughts on your post above [like so]It seems to me that any government assistance to the auto industry [not "bailout", nor "rescue plan", nor "help", we notice ] in the current crisis should not be evaluated on whether or not it would permanently save the domestic Big Three. [Such a socialist sounding position --izit?] The most important issue is whether it will kick the can down the road far enough [the social work tone] that any failure will occur after recession ends, so as to avoid worsening the current economic downturn. [But this is so much less: political expedience] Think of it as stimulus, not a bailout. [Marketing the political expedience]The deal could easily be structured to give the government senior rights in any future bankruptcy proceedings.[More salesmanship]

Ok, an MBA holder? [calmo sharpens claws, bares teeth...maybe mo]

Broadly, the apex of our nation as a manufacturing concern is behind us and has been for decades. Our perception of ourselves lags this reality...by a similar amount. As the world is now understanding, America has just past its apex as a Financial concern and our current identity is in transition. Will we continue to be the world's Policeman? Can America start charging for this service?...even in the event that there is no other Super Power contender? Is nationhood itself in transition as the transnational corporations have their way with us?
I don't bloody know.

[hari]

Mark - Thanks for putting the archive together for review. I found it extremely informative - given my three decades of professional trade and development background.

Now, WTO might (legally) intervene shld BO decide to go *protectionist* with import tariffs - against competitors.

Alternatively, BO could seek a fixed period of trade and adjustment process for Detroit to retool and redesign its products.

IMHO neither the Japanese/Koreans nor Europeans will practice generosity towards Detroit. It will either fold or be scaled down.

[Worker]

If we wanted to create a dynamic new industry around fuel efficiency, we would subsidize start-ups. Let each of them take one of the many idle plants are provide capital to retool.

One beautiful thing about energy efficient technologies such as the PHEV's is that they require lower economies of scale than gas-engine vehicle manufacturing. Without needing to spread powertrain engineering costs over 1 million + vehicles, you can have many more car companies, driving innovation.

The intellectual capital that remains at the big 3 companies is committed to primarily on engines and transmissions, the most technically complex components. Engine, transmission and distribution are the strategic high-grounds of the gas vehicle business. Neither the engine or transmisison competencies is particularly relevant in the PHEV (though it has a gas engine, the engine is small and since it needs to run at a constant RPM, much easier to engineer). With electric drive, transmissions are completely irrelevant (no gears). Interiors and most non-drivetrain parts are outsourced to suppliers. Distribution? The big 3's system is overcapacity.

The key powertrain components of the PHEV are the electric motor and battery technology. Again, the big 3 have no real advantage in either of these technologies. Electric motors are quite mature and manufactured by numerous other industrial companies. Battery technology is evolving quite rapidly, driven by a number of young tech oriented companies, basic R&D research. Again, the best technology will not come from Detroit, but rather from the electronics industry.

The Chevy Volt does look like quite a nice vehicle. But I don't think people realize how far it is from GM's core competence.

But the primary goal here is not creating an efficient and competitive new industry- it is about making a political payoff to the UAW.

[Denis Drew]

Worker,
To me your post supports the future viability of the big three for the ironic rationale that electric technology is simpler (easier to manage? :-]) -- electric design being sort of digital, you can do it on a blackboard, right; chemical tech being more analog, much more subject to nature's eccentricities, right?

To those who keep bellyaching about "poisonous" Detroit wages and benefits,
Please keep in mind that Detroit's wages and benefits are one of the few such in the "poisonous" American labor market that meet modern OECD pay standards: like the kind they pay at BMW, VW, Honda (only in overseas factories of course!).

[save_the_rustbelt]

On a political note, if the GOP opposes the bailout both Michigan and Ohio will likely become blue states for at least a generation (unless the Dems screw up later, which is always possible).

In modern times no Republican has become president without winning at least Ohio.

Hmmmmm.

[Worker]

The market changed. First with consumer acceptance global competitors from Europe, Japan, Korea.

Now, new technology (PHEV) with lower economies of scale is about to hit.

There are lots of problems with the big 3, but probably biggest is they can not reduce their costs to meet demand for their products. They have way too many dealers, but state laws prevent them from reducing the network. They have too many workers, but work rules and "jobs banks" keep them from cutting costs. And they made too many promises to their retirees to keep based on their current capacity for profits.

These promises assumed in the original Big 3 strategy were based on passing cost onto consumers impossible. This works with pattern bargaining, where there is no competition from non-pattern labor.

Bailing out the big 3 is targeted at labor, not the industry.

A good book on the industry is "Time for a Model Change".

[Lafayette]

MT: When people have asked me about bailing out automakers, my answer has been something like "if I thought the problems automakers are experiencing were mostly due to the problems in financial markets, and that once the trouble passes automakers would be healthy and vibrant again - and hence able to pay off any loans they are given to them now - then I might be inclined to bail them out.

Evidently sound logic. One in which I would want to agree.

However, the current plight of the American motor industry is partly due to government mismanagement and cronyism. Here's why I make that accusation:
* American car makers knew full well the advantages of a diesel engined car in the 1970s when Europe started going diesel -- GM/Ford/Chrysler factories in Europe were producing them. Why was the decision not taken by the American government to go the same route to higher mileage?
* Why do European gas taxes cost more thereby inducing customer purchasing behaviour towards higher mileage cars.
* Why, when the American motor industry turned to higher-margin SUVs, were these vehicles classed as cars and not trucks, though they have the manufacturing content of the latter, in order to benefit from a lower Federal tax?

Most of the answers to the above can be made in terms of "Well, that's because the car industry lobbied heavily Washington for what they wanted. And, what they wanted was not higher-mileage cars. What they wanted was a car that would cost less and generate a profit margin.

So, is the automobile industry to blame? Of course. But, not alone. Washington connivance is at the source of Detroit's mistakes as well.

So, should the industry be bailed out? Yes, but only to make amends on its disastrous product strategy, and make a commitment for the bailout (meaning equity collateralized loans) in terms of providing more efficient cars.

Also, we could entertain the notion of a Chapter 11 proceeding, if the Federal government would come in as the White Horse candidate to pick up the pieces. (Though I'm not sure, not being an American bankruptcy lawyer.)

[Lafayette]

DD: Please keep in mind that Detroit's wages and benefits are one of the few such in the "poisonous" American labor market that meet modern OECD pay standards: like the kind they pay at BMW, VW, Honda (only in overseas factories of course!)

You are comparing apples and oranges.

The comp & ben stateside includes Health Insurance. Which is factored into the cost of the car and born by the buying public. European National Health Insurance is subsidized partly by the larger pool of general taxation.

The result is that the US had a car market where decent Comp & Ben (including generous Health Care insurance) was produced from vehicle sales. In Europe, Health Insurance issued from three sources: worker payroll taxes in general, employer per capita professional taxes - both topped off with government subsidies.

Shift Health Insurance to a nationalized scheme and I'll bet we'd go a long way towards "saving" GM and a host of other companies facing the same threat due to expensive Health Insurance policies.

[wjd123]

Mr Obama should use protectionism in a similarly forward-looking way. Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection, but only if they fulfill certain conditions regarding investment and training. Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy.--Ha-Joon Chang

Auto makers do have a future, a future where their products fit into a greener world. The greener world that policy makers will help to make. Those who have the ear of policy makers should control the boards of our automakers. With policy makers controlling the boards of American auto makers taxpayer dollars would be a vote to where society wants to go. Where auto makers want to go would be the past. Social interest can be placed before auto makers interests. That were social interests belong.

Automakers future is in building cars society needs and not ones lobbyist advocate for.

We'll have these cars all the faster if American automakers are directed toward a single minded policy. No more it can't be done, or we can't do it until our customers want it. It will get done and it will get done all the sooner because there will be fewer tensions between what ought to be done and what can be done.

We could just let Congress mandate standards that fit with our social needs and give all automakers a time limit in which to meet those standards. That's the slow way, the way with the most resistance. And it certainly wouldn't end up giving us the redundancy we would need for competition to motivate all auto makers.

Rescue our American auto makers, give them directors with a mandate and we will answer our social needs that much faster. That's worth a bailout

[hari]

G-20 meeting - going on presently in D.C. - is opposed to forward looking sectoral protectionism of any type. Gordon Brown has been espousing his mantra on the subject, since the last EU Summit. Merkel is already shocked at the idea of bailout of Detroit- and its impact on German auto industry. Japanese are not saying much in public, but their share of US auto market is critical.

To think that US can *protect* its auto industry - in isolation from global auto industry - is macabre, at best.
Politically it won't be able to get thru WTO Council either.

It may be better state strategy to avoid a *bailout* - per se - and make the auto industry invest in restructuring and adjustment process on its own. It could borrow money from SWFs, for example.

[Worker]

From what I've heard, a start-up could get a good deal on a vacant plant in OH or DE, and probably a lot of other states. The UAW would actually be helpful to a start-up (and more accomodative on workrules) by bringing a trained workforce to the table on day 1.

$1bn and a decent entrepreneurial team could launch a company built around 3 PHEV cars.

Dealing with the legacy costs separately via the PBGC and government healthcare while subsidizing the production of new vehicles would be the ideal solution.

The government could most effectively implement this through a pre-packaged bankruptcy guaranteeing suppliers, but not debtholders.

[Worker]

Hari,

The WTO could let the US take the big 3's ongoing health and legacy pension obligations. That would solve the problem without running afould of trade sanctions.

wjd123, I think one group guaranteed to do a worse job designing cars people want to buy is policy makers.

If we want people to drive more efficient cars, raise the gas tax, or tax vehicles by weight/ fuel efficiency. GM is still selling a lot of big vehicles in Russia, the Middle-East and other places with cheap oil, one of the few bright spots in their business.

[hari]

If you saw pictures of last nights G-20 State Dinner, hosted by GWB, Da Silva was sitting on his right and Hu Juntao on the left. This is really incredible under GWB last days in WH. He is literally honoring his creditors finally!

[Fred]

Thank you for supporting protectionist policies. I'm glad we're all agreeing that China is not the USA. Only politicians and academics support the unfair trade policies that are destroying our country.

[Barry]

save_the_rustbelt says...
"On a political note, if the GOP opposes the bailout both Michigan and Ohio will likely become blue states for at least a generation (unless the Dems screw up later, which is always possible).

In modern times no Republican has become president without winning at least Ohio. "

I'm not so sure, although I'd love to see it. A Great Lakes region free of Republican office-holders would be sweet, indded! However, there is a hardcore 40% who would remain with the GOP even if the GOP harvested them for organs, without anesthesia.

One important thing is that a flat-out Michigan/Ohio/Indiana/Pennsylvania *depression* (I mean something which makes '81-82 look good) is likely, and that's going to put the USA on the same course. The country is on the edge right now, in the best case.

And given (as I've said above) that the Wall St bailout was as wasted and as cost-overrun as the outgoing Bushies could make it, it's far from certain that the financial sector is not going to continue to fall.

[hari]

Merkel said at G-20 meeting in D.C. that Opel (GM) has requested funds from public funds established by German Gov to stimulate the macroeconomy during the recession. She promised a decision asap.

[hari]

Opel (GM) is asking for about Euro 2 Billion from German stabalization fund - as a guarantee - in case GM (US) is forced into bankruptcy. Decision to aid Opel will be made on 18th Nov, it says.

[Denis Drew]

Lafayette,
Couldn't agree with you more on tax paid health leveling the playing field with competitors here and abroad. It is so absurd to see physical factories moving to Canada over a paperwork argument over how we are going to pay for health care. No free lunch has another side; you are going to have to pay for lunch whichever way.

[Keith]

Yeah, no potential for corporate welfare in all these great ideas. Nope, for the first time in history, "good" leaders will execute the perfect central plan. It'll totally happen this time. Really.

This fucknuts industry has gotten protection for 30 years, always promising to get better, and the politicians have always said those tariffs would phase out, and those tariffs never did go away. Washington's connivance made things worse, you tell me, so now everybody wants more Washington connivance? You think the political-bureaucratic process will cater to social needs better than the market process? Ha! Even with recent events, history still proves you overhwlemingly wrong.

Let the automakers die, already. If people out there actually have good and actionable ideas on greener cars, then the workers and automaking infrstructure are right there waiting for them, at dirt cheap prices once the automakers are gone. Hell, if th Big 3 had any good dieas on greener cars, our new vulture entrepreneur can get those, too. But this'll only happen if we finally do the right thing, accept the verdict rendered by the free market, and let these guys die or do whatever the hell bankruptcy process they gotta do. Hell, for this money, how much could we give each autoworker directly to see them through the hard times?

And we never will find greatness with some government effort to rebuild or protect manufacturing. Move the fuck on already. For most manufacturing, the margins just ain't there. Even from an industrial policy standpoint, saving the Rust Belt don't make sense.

For now, let the darwinian forces wash out the moronic middle management weenies and dinosaur union bosses that ruined the auto industry.

And for God sake, don't some politicized Mussolin-style ownership of the automakers. That's a surefire recipe for disaster. Anybody remember Carter's synthetic coal initiatives and how they ended up?

Pull that central planning bug out of your ass, people. The free market works; the government just has to enforce transparency so investors can actually know what the hell they're buying; so investors can make sure that greedy execs don't make dumb bets with their money, and so investors have no excuse to bellyache to taxpayers when shit goes bad.

So let the government focus on doing what it should do, like enforce transparency so balance sheets actually mean something, and set externality taxes, and then let the market work. That's what it means to live in a free society.

[calmo]

Such a note from hari..stamping "the global economy" onto my forehead.
But izit as clear/short/sweet azallthat?

Do I need to see Ford doin the same thing?

calmo mulls over the rescue of MS by Mitsubishi and decides the answer to that is: No.

Can we see labor making the same kind of global steps?

No. This is the asymmetrical feature of the transnational character of the global economy.

Of course there are few foreheads that are wide enough to accomodate "the transnational economy".

[OhNoNotAgain]

"So let the government focus on doing what it should do, like enforce transparency so balance sheets actually mean something, and set externality taxes, and then let the market work. That's what it means to live in a free society."

The problem here Keith is that it is *you* who is living in a fantasyland right now. I agree with just about everything that you state, however we are not in a position right now to allow the automakers to fail. It would be the nail in the coffin and you would see a rapid escalation in deflation and a total capitulation in American industry. These are some of the last high-paying blue-collar jobs in the US, and while we all might want to move on and let them go the way of the dinosaur, we should have done so before now, instead of now during a major recesssion. So, we're going to have to bite the bullet and shell out the money to keep things going until a more orderly transition can occur.

Frankly, if I were the government, I would put some serious terms on any assistance. Something along the lines of a line in the sand on gas mileage and an electric vehicle. If they want government money, then they've lost their right to dictate the terms of how their companies are run.

[YetAnotherReader]

There are a couple of factual oversights in these comments.

1. One huge reason for the popularity of SUVs was the tax loophole which allowed faster depreciation, as if they were Class 6 trucks. Few dentists would buy a Kenworth K250 to take advantage of the tax benefit, but Cadillac Escalades were blessed by the IRS, too.

2. Regarding new technologies, Tesla is instructive. They are facing financing issues and their survival is being questioned. I think the ideal outcome is for a Big 3 company to buy them and combine Silicon Valley R&D with modern production techniques. I'd suggest this is a reasonable use of some of that $700B.

3. Full disclosure, I hold a little Ford stock and have been driving F-150s since before some of this thread's readers were born. In my opinion, part of the problem is shifting safety, emissions and economy regulations by the Federal government. For comparison, my 1992 F-150 with a 4.9L six cylinder got about 16 MPG in a mix of highway and town driving, with mostly weekend cargo hauling. My 2008 F-150 with a 4.2L V6 and the same driving mix gets 14-15. The new truck is heavier and probably safer.

But...government mandates have been a big part of the market changes. Some of the money being discussed can logically be termed a repayment of costs that the Federal government has imposed on the Big 3.

4. The argument that they should have been building small cars is a good one...but they already do. The Escort and Focus were highly successful outside the US. However, Ford can't import the high-mileage diesel Focus because it won't meet EPA restrictions.

(The EPA regulations for diesels over the last few years have caused a lot of issues. The timelines needed to be stretched out and more notice given. As it stands, recent emission change cycles have been about as short as the time needed to design a new engine...but that's a different thread.)

5. Regarding the 2009 F-150, it was planned for a long time before the recent gas crisis, and it takes longer to design a truck and set up production lines than it does to write an editorial. An F-150 is certainly not a reasonable vehicle for Manhattan, so I guess part of their attitude is natural given the NY Times location. But for the rest of the country, some of us need to haul and tow. There are a couple of new engines planned - a 4.4L diesel and the Ecoboost V8s - which should deliver better mileage. They aren't ready for the 2009 year.

Pickup trucks, especially full-size pickups, are an entirely different market from cars. And, in many ways, Ford is really a pickup truck company who also happens to make some cars. I can't speak for GM or Chrysler.

And pickups are something that the Big 3 do better than the Japanese. Sales of Honda's Ridgeline are disappointing and I've seen rumors that it will be dropped. Nissan is going to stop making the Titan and cut a deal with Dodge to re-brand their trucks. Toyota has some quality issues - google Tacoma frame buyback for the most well known - and Tundra sales are down with all other trucks.

I suspect that this sounds like a Ford commercial and that is not the intent. The Big 3 have made plenty of mistakes. But some of their problems have been due to Federal regulations which have been poorly planned IMHO.

[OhNoNotAgain]

"I suspect that this sounds like a Ford commercial and that is not the intent. The Big 3 have made plenty of mistakes. But some of their problems have been due to Federal regulations which have been poorly planned IMHO."

Well, it does sound to me like a lot of ass-covering. For some reason Honda and Toyota have been able to make cars that people want to buy, given the exact same regulations that the big 3 have had to comply with. This all sounds like a bunch of excuses - the big 3 (and the UAW) have had the US government kissing their asses for many years now, and have fought every increase in mileage standards tooth and nail. That seems to be the main reason for their problems - they wanted to use lobbying efforts to prevent change instead of adapting their businesses to the changes that were going to come no matter what they did.

[Don]

But, who is going to pay for an "enhanced Welfare State"? The workers who still have a job have had declining real wages for years. Cutting a shrinking pie into more pieces is not a viable long term plan.

If this is such a good idea why haven't the Chinese opted for an "increased welfare state" versus protectionism?

[roger]

Surely more should go into the effort than just money. I think that the government should enforce an open carware project, rather like the crash R and D programs of WWII, in which engineers of all the car companies and others with the expertise devise the car motor and body for the 21st century. The NYT editorial today said that milage should be required to be 50 mpg in 2020 - no way. 2012. To bailout the car companies should mean investing in what the car - which the U.S. has invested in majorly, in terms of highways - should run like. Anything else is not acceptable.

[BJ Feng]

What's the incentive for the participants? If you have a superior technology or design, why would you share? We already have cars that can go 50 miles per gallon, but they aren't powerful enough for most Americans. Stop trying to mandate building cars Americans don't want.

What was the reason for the arbitrary 50 miles per gallon? Seems to me a high standard for absolutely no reason. We will use gasoline as long as it is cheaper than alternatives. As long as it is cheaper than alternatives, we will be "dependent" on it just as you are dependent on buying groceries from the cheapest market (quality adjusted).

The Big Three cannot survive with these dumb CAFE standards. They can't make small cars better than Toyota or Honda, they only have a chance with big SUVs and trucks. Asking them to compete in a segment that they suck in is the same as asking them to go into bankruptcy.

[roger]

Well, I agree Feng. No point asking. They have to do it. And of course American desires for SUVs can be easily changed by making SUVs unaffordable.

This is a great time to destroy a lot of the free market nonsense that has caused systematic damage both to the environment and to the American place in the world, putting the U.S. in the position of being the world's great warmmonger. Make cars that don't suck, share the basic technology, then let the car companies get back to selling cars. The U.S. government in effect nurtured the car industry from the beginning, decided against the trains and trams - as we all know, it is total nonsense about what the American people wanted - and now has to make another large systematic decision. I figure the libertarian and free market crowd can cry about it later, or forget that it happened when it succeeds and attribute it to what the people "wanted" and the ingenuity of capitalism. They are good at backstory revisions.

[btg]

"Pickup trucks, especially full-size pickups, are an entirely different market from cars. And, in many ways, Ford is really a pickup truck company who also happens to make some cars."

There is so much to comment on in this discussion - I want to pick on one thing.

Yes, there is a legitimate need for trucks like the F150 - tow truck, contractors, etc. need a vehicle of that size and ability.

In the 1980s, Ford and GM came out with compact pickup trucks - the Ranger and the S10 respictively. The S10 grew into the bigger Colorado (Chrylser had the slightly larger Dakota) - the Ranger still soldiers along but hasn't been substantially updated in over a decade, and is to be phased out within the next year - event houg sales have been strong as of late, particularly up here in Canada where one can pick up a new one for as little as $13000 plus freight etc.

Back in the 70s, Toyota and Nissan had even smaller pickup trucks - 4 cylinder jobs - evewn there trucks have grown, not just because of regulations, but because of cheap gas and the tastes of the american public... few pickup trucks are sold in japan.

even honda makes certain cars only for north america because the market here is so different from the rest of the world - the accord honda sells here is not the same as what they sell in europe - the european accord is imported as the honda tsx!

toyota is not doing so well as of late either - rapid expansion has meant more lemon and recalls of their products, and they make lots of biggish trucks and SUVs too - and their sales are down.

ford and gm have made lots of mistakes - but many of these have been markter driven - where there is room for criticism is that they did not design in the ability to quickly shift production should the market change - honda builds it plants so it can shift production of a vehicle to other plants and increase its ability to crank out the hottest models - gm and ford cannot do this.

but the workers, suppliers and dealers should not be the ones who pay for this by the failure of government to intervene.

[Lafayette]

Health Care is a Public Service

DD: No free lunch has another side; you are going to have to pay for lunch whichever way.

For as long as Health Care in the US costs twice as much, per capita, in Europe, we are hobbling American industry that is is expected to pay for it by recuperating the cost in their pricing.

The disadvantage vis-à-vis Europe is patent and not just for cars but across the spectrum of exports. Which is why we need a National Health Care system that levels the playing field. Unions should not have to negotiate good Health Care packages.

However you look at it, the consumer pays for Health Care, either directly via payroll taxes or taxation. Let's just try to make it more efficient (one payer) and more affordable (mandated pricing that offers HC-practitioners a decent standard of living).

It is "free market" medicine that got us into this mess, with a class of doctors bleeding its fellow citizens with exorbitant pricing; for a service, elsewhere, that costs half as much at the same level of quality.

That's not Health Care ... it's insane. If we had the same practices at the DoD, Generals would be earning the top-end salaries of corporate America, with stock-options.

Health Care is a Public Service. It should be treated as one where its practitioners give up high salaries for the benefit of guaranteed long-term employment, a hallmark of Public Services throughout the world.

Ever see a doctor or a nurse in the lines at the Unemployment Office?

[Lafayette]

The Total Solution

DD: Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

This is a good example of "unfreezing the credit mechanism", which is the objective of banking recapitalization. (NB: Let's get this bailout straight: The Total Solution to both Credit Unfreezing and Economic Recovery consists of (1) Treasury loans to banks to offset the Subprime Toxic Waste AND (2) recapitalization of banks in order to resume industrial and private loans (where that capital is necessary) that are guaranteed by the Treasury.

If these two measures are undertaken by means of asset collateralizing (partial Federal ownership of the bank), then Treasury officials on the bank Boards should be particularly on the watch for precisely the sort of credit need cited above. And, they should be expecting results (meaning transacted loans) and not excuses.

After all, a national Treasury does not make the offer of loan guarantees with no provisions attached. The banks are NOT expected to put the recapitalization funding into the money market and sit on it, just earning a meager return. It must put the funds to work in Federal-guaranteed loans to industry/commerce responding to consumer demand. (Which demand will be spawned by government spending. The other shoe that must drop.)

However, we cannot be sure that Paulson understands this aspect of the problem. After all, he's an investment banker (not an economist) with only one finance mechanism in his (alleged) brain ... called ROI. For all he cares, inter-bank lending should be sufficient to "unfreeze" credit.

Hank got that wrong, as PM Gordon Brown of the UK has tried to drill into the mentality of Investment Bankers. Brown is the guy who thought up the second option of bank recapitalization – having first considered how that tactic worked well in Sweden (when it had its own Bank Meltdown in 1991/92.) The credit mechanism works not only when inter-bank lending resumes, but when banks provide loans to industry to respond to market demand.

This is what is meant by the Treasury guaranteeing such loans, as has been the case in both the UK and France and (I believe) Germany. It's a risk that must be assumed, which the "market solution" is presently refusing to do adequately on its own.

[BJ Feng]

And how are you going to make them share their technology? By transporting the engineers to Guantanamo and torturing them? Besides, the BASIC technology is already common knowledge, the difference is with execution, and process. The Big Three are not as flexible because of labor contracts that prevent them from transferring a person who works on Buicks to Chevys. Plus the Big Three can only give rewards and bonuses with the approval of the Union, and by a metric that is approved by the union. They have a very convoluted set of metrics all which try to measure quality.

Let's say the government intervenes, why would Americans buy more GM and Ford family sedans vs. the superior Japanese Camry and Accord sedans? So the government mandates all cars must now get at least 50 miles per gallon. Toyota already has the top selling, and top quality rated Prius, why would people stop buying the Prius in favor of an American alternative? Just how can government intervention solve the Big Three's problems? The only way I can think of is for government to illegally void all the labor contracts, rules and obligation so that the Big Three can start from scratch and copy the Japanese model. Still, thanks to the great reputation and goodwill the Japanese carmakers have built, the Big Three would need to consistently build better cars for several years in a row for Americans to consider them equal. They don't have that long, and even if they did, that's a lot harder than just typing in the solution.

Lafayette has the same problem, the very one that popped up during the Depression and plagued the Japanese after their bubble. You can't make banks loan out money and take on risk that they don't want to take. People with great credit and low existing debt can get loans, it's the subprime and Alt-A people who were previously able to get credit that are now locked out. That is locked out at the previous interest rates they were used to getting.

Isn't this what you want? Banks to be more prudent? Certainly banks shouldn't be giving out the same loans that caused this crisis right? That means a great number of people are simply unworthy of a loan, especially one at 5%. Plus it's not just banks, one of the wonders of modern finance is that all savers act as banks because they finance bonds and all sorts of debt through mutual funds and the like. I haven't reduced my risk levels, but I was already very conservatively invested on the bond side. How many people are willing to buy credit card asset backed bonds or auto receivable bonds? If people like you and me decide to play it safe, then others can't borrow. If it were that easy Lafayette, the Japanese would not still be suffering from their banking bubble. You can't force people to accept a risk price. People's risk tolerance has shifted, they will not accept risk at the same price they once did.

[OhNoNotAgain]

"What was the reason for the arbitrary 50 miles per gallon? Seems to me a high standard for absolutely no reason. We will use gasoline as long as it is cheaper than alternatives. As long as it is cheaper than alternatives, we will be "dependent" on it just as you are dependent on buying groceries from the cheapest market (quality adjusted)."

And what exactly do we do when the oil supply hits a crunch again and we're then paying $6-8 a gallon ? It's a little late then to start transforming our entire society off of cheap oil. The most successful automakers in this world were nurtured and brought along by their country of origin. It was a deliberate effort and a significant level of public investment. It didn't just magically happen. The same holds true for countries that are investing in alternative energy sources.

"The Big Three cannot survive with these dumb CAFE standards. They can't make small cars better than Toyota or Honda, they only have a chance with big SUVs and trucks."

Really ? So we should just segment all of the automakers into their own little niches and not demand that they actually compete ? And how are you so sure that American automakers can't make a better small car than the foreign automakers ? Have they ever really tried to any large degree ? I would say not (the K-Car doesn't count, because it wasn't really a car, but rather an abomination on wheels). Let's face facts here, tying the fortunes of the American automakers to SUVs and trucks is signing their death warrant. These vehicles will become nothing but niche vehicles with very small sales figures in the very near future, and will have to be significantly smaller than they are now. Sooner or later, the American automakers are going to have to compete on the basis of fuel efficiency, no matter what type of vehicle they are producing.

[roger]

It is pretty easy to use the tax system to favor cars made in america, and to favor fuel efficient cars.

As for making the carmakers pool into an open carware program - well, Feng, you don't have to invoke prison. The reason this is under discussion is because the carmakers need a big chunk of change to survive. It would be simple to make this a condition. And if you made this a condition with the loan to one carmaker - that a portion of the loan be set aside for carware r and d, into which the government would contribute itself - then I imagine the other auto manufacturers would actually want in. Does Ford want the U.S. to go into partnership with G.M. in designing a better car engine? I doubt it. In the same way that the Treasury just forced banks to borrow money, you can force a program to completely re-engineer the auto engine.

The problem with CAFE standards has been that they aren't high enough, not that they are "stupid". "Stupid" is the policy of faux laissez faire that got us into this situation. But it looks like the unwinding of those grotesque policies is speeding up, which is a great opportunity to jump up and down on them with hobnailed boots. State intervention started in the wrong place - trying to prevent the systematic meltdown of the financial services sector, which is not going to be preventable. But that vector can serve to create "socialism" in the U.S., spread the wealth around, and in general make the U.S. economy greener - the Limbaugh nightmare! It will be great. Later on, fifty years down the road, say, libertarians and rightwingers will then be able to lie and spin about how President Obama didn't end the depression of 2008-2012, but how it was all due to poor people taking out mortgages and too much government regulation. They love their fairy tales.

[Keith]

"The problem here Keith is that it is *you* who is living in a fantasyland right now. I agree with just about everything that you state, however we are not in a position right now to allow the automakers to fail."

Yes, we are. We're sure as hell not in a fiscal position to turn the financial bailout (which was a bad idea to begin with) into a pinata for every politically connected jerkoff. Not when we're the world's largest debtor nation with the world's reserve currency. We really are getting close to that point where piling on debt may cause a run on our currency. And that should scare us a lot more than the Big 3 going down.

[roger]

During the Bush years, the government did an experiment in borrowing heavily and cutting taxes radically - and even so, after going into a 400 billion dollar deficit coming out of the 2001 recession, the government rapidly started filling the deficit gap. Given that the Bush people simply ignored the business cycle, they were destined never to fill that gap, but it ought to hearten those who worry too much about deficits - they can disappear quickly, if the government has the courage to raise taxes when the boom gets going (and, of course, lower taxes when the cycle moves negative).

A two trillion dollar debt looks like it might be coming - but if the money is borrowed to do the right things, the economy could probably stamp that into a normal deficit in five years. On the other hand, the U.S. government could turn towards an Andrew Mellon like policy, and simply prolong the recession into a depression for who knows how long.

[ken melvin]

Allst needed is 3 million good paying replacement jobs.

[benamery21]

calmo -- I'm guessing the comment on my 'wealth of information' and connection to the auto industry was sarcasm given that my connection to the Big Three is that I read about them in the newspaper and some of my relatives drive their product.

MBA? Them's fighting words. I'm a P.E.

[Lafayette]

Why is anybody shocked?

benam: MBA? Them's fighting words.

It doesn't require even a high school diploma to understand why the US automotive industry is in the pits from which it is patently unable to crawl out of since about ten years.

It has constantly lobbied the American government, through various administrations, in order to tweak both standards and tax breaks to favor their industry. One of those major policy decisions was to keep gas at the pump as cheap as possible in order to provide Americans with gas-guzzler humongous clunker cars.

It's time to pay the piper ... we've had it coming for a long time. Why is anybody shocked?

Europe has been taking the right measures for a long, long time. Car production transited to a majority of diesel engined cars in the 1970s and 80s to obtain the stricter standards of total fleet mileage. Diesel engined cars have been using bio-diversity ethanol for at least five years.

And, the very latest tweak is a bonus/malus tax for cars that produce below/above a CO2 emission limit -- effectively make ecologically favorable cars less expensive. Also, btw, the larger the car engine, the more CO2 emission it produces.

Where did the Japanese get their efficiency product spec upon which they based their car production? From building cars that address the needs of the European market, where the cost of gas was always taxed far more higher in Europe in order to force its efficient usage. (This suited the Japanese as well in their home market, where they implemented the same policy as regards pump-prices.)

The America automotive industry went the other direction, seeking lowest cost pump-prices -- because Americans liked (note past tense) larger cars (which, btw, offer larger margins).

The dice were cast ... Detroit lost.

[reason]

OK - I have pointed out several times - and nobody has noticed - that VAT taxes imports and not exports and income tax taxes exports and not imports so the tax system has (or should have) an enormous effect on exchange rates. I actually think an extra import is justified to pay for product safety and contraband controlls and to allow marginal industries to survive minor volatility in exchange rates. You need viable marginal industry to adjust to changes in terms of trade (expanding if the terms of trade moves against you, contracting if the terms of trade move in your favour). For this to make sense you just need to acknowledge that cost of adjustment are substantial and less if a core of knowledge in a particular industry still exists. All that said, the government taking out its crystal ball and picking winners seems silly to me - I'm for a moderate flat tarrif, but totally against administered industry by industry tariffs. Call me an incorrigably moderate triagulator.

[Real Person from the Real World]

Taxing gas in Europe is one thing. Here in the US, it is something else. I suspect you have more urban density in Europe. Scooters seem to be pretty popular in many cities. Here in the US, if you live in a suburb, you need a car to get anywhere. Some cities have public transportation, but the price of that that keeps going up, urban buses are few and far between, and both buses and trains can be unsafe at some hours of the night, and working late is common. But our car makers seem reluctant to invest in making electric or hybrid cars. Why? Gas to sell cars? Plenty of old clunkers out there. Mine is 130k miles from 1993. I don't drive it because I like it, I drive it because that is what I can afford. Sell cars, even hybrids, at affordable prices, and those who need them will buy them. I suspect that the luxury car market is the big problem. Everyone wants to sell a Lexus, to the top 10% of earners, at a price that would buy a house for someone else. I think car manufacturers are fixated on selling to the top end of the market, who buy new luxury cars/SUVs/Exotic muscle cars.... every couple of years, and low wage end of the population is left with the aging clunkers and buying the used cars.

[Real Person from the Real World]

Again, here as with the recent wave of economic crises, the problem is profit motive. Sales people who live on commission want BIG commissions. One BIG commission is a lot less effort and a lot more rewarding then a bunch of small commissions. I don't think gas is the reason why they sell gas guzzlers, as much as the well-heeled who are in a big hurry to go nowhere fast, in as much style and luxury as they can get.

[Lafayette]

RP: and low wage end of the population is left with the aging clunkers and buying the used cars.

Do you take your car in for annual check-up, which, if not passed, will require that the car be sidelined and the plates repossessed until repairs are made? Does the car require an emissions test, that could very well cost you a either a new car motor or some costly repair?

Does it have numerous safety tests (brakes, seat-belts, lights) to assure that it is a safe vehicle?

Say no to all the above questions and you have a very good reason why you can still drive a 1993 clunker that would have been put, here, in the junk-yard a while ago as either unsafe to drive or the registration be taxed for its level of pollution. (Aka, the Polluters Pay Principle.)

It would also help retire older cars were the Federal tax suspended on those who trade in a car older than 7 years for a new car (but not a used one).

It would help if there were a bonus/malus (a sort of tax credit/debit) depending upon the level of pollution of the car, hitting especially larger engined cars that pollute most.

[Denis Drew]

TEST

http://news-service.stanford.edu/news/2008/january9/nanowire-010908.html

TEST

[Real Person from the Real World]

I'm sorry Lafayette, but taxing the victim doesn't hit me as a solution. If I chose to drive an unsafe vehicle merely to be frugal, that would be one thing, but I really would like to buy a car, preferably a hybrid, if only to "stick it to OPEC". Actually altho my car has problems, it has past its tests and is actually quite fuel efficient, thank you. I remember in college reading about BF Skinner and his ideas on behavior modification. Advertisers and Sellers use it too, and get away with promoting bad behavior and make big bucks doing it. Consumers faced with punitive behavior modifying taxes have less choice other than to "ante up". Everyone likes to think taxing someone other than themselves is the "painless" answer to some problem, and so "fear of taxation" becomes a manipulative tool of the right, mitigating some of your great social agenda ideas. Maybe we have to realistic and honest about what to tax, and why, and about creating decent wage paying jobs so proportion of taxes to income is smaller. Not that you will probably read this, or agree, but there it is.