It's a Friggin' Christmas Miracle: Bush Comes through for the Auto industry?

It's a Christmas "Miracle", George Bush came through. $13.4 billion for the auto industry. Or maybe, not so fast. This is a stay of execution, not a pardon.

The troubled U.S. auto industry will receive emergency loans of $13.4 billion from the federal government in return for an extensive restructuring of its outstanding debt and labor costs over the coming year, according to administration officials.....

Funds for the loans will come from the Troubled Asset Relief Program initially set up to aid the financial industry. An additional four billion will be available in February.

But the money will come with some extensive strings attached. Though the White House will not appoint a "car czar" to oversee the industry going forward, the companies will have to restructure their wage agreements so that they are competitive with foreign automakers by the end of next year. In addition, by March 31 of this year the companies will have to show they are financially viable and able to repay the government -- a requirement that may, for example, force them to renegotiate outstanding debt and other agreements.

Be afraid, be very afraid. Although this money is going to push the industry through till March, a whole new set of challenges await the President-elect come March. First, let's set lay down a few facts to start the discussion.

The Big Boys Are Threatening to do..... What Hitler Couldn't Do

This man is from Middletown. Middletown is Muncie, Indiana. Muncie, Indiana is dying. Or more to the point, being killed by the Masters of the Universe who got their $700 billion back at the beginning of the Fall. If these guys had their way, my town would be wiped off the face of the Earth. Why?

Because my town, and all the other auto towns scattered throughout the Midwest are proof of what once was, and what can be again. If only we have the courage to fight for what's right.

Until the end of the Cold War, Muncie, a town of less than 100,000, had Soviet missiles targeted on it. We made transmissions. The Chevy plant hummed on at 8th street on the city's southwest side. Just outside of town sat Borg Warner factory. Both churned out a huge chunk of the nation's transmissions.

By wiping out these two transmission plants, and the dozens of other supplying them, the Soviets could cripple our ability to fight. Time, and mostly just the Masters of the Universe, did their work for them. The Chevy plant is razed to the ground, a gaping whole in the heart of the city. Borg Warner is slated for closure in 2009. You'll have to pardon the mixed metaphors, but it reminds me of that line from Springsteen....

Now the yard's just scrap and rubble/He said "Them big boys did what Hitler couldn't do."

And it's not just Middletown/Muncie that's in the Big Boy's sights these days. They've done their best to us. Now, they can't seem to find it in their heart to loan some of that $700 billion that the taxpayers provided them (and they've been using to consolidate their stranglehold over the economy) to keep the auto industry afloat. And the consequences of an auto industry collapse? Something damn near Armageddon.

Earlier this month, I wrote about wave of job losses that would come with an auto industry shutdown. The Economic Policy Institute concluded that in the event of a total shutdown, around 3 million jobs would be lost. Job losses would not, however, be
equally distributed. I used the October 2008 state level unemployment figures in order mock up the following map.

The employment consequences of even a GM collapse would be drastic. 914,000 jobs would be lost nationally increasing the unemployment rate by 0.7% from 6.4% to 7.1% the highest since 1993. A total shutdown would result in the loss of 3.3 million jobs increasing the unemployment rate by 2.5% to 8.9%, the highest since 1983.

More bothersome, is that the job losses will be concentrated in a handle of states. The top 6 auto industry states (Michigan, Indiana, Ohio, Kentucky, Tennessee, and Alabama) stand to lose almost 285,000 jobs in the event of a GM shutdown. If all three fail, these same states would lost over a million jobs.

If all 3 shutdown unemployment in Michigan would rise to 18.2 %. In Indiana 11.4%, in Ohio 11.3%, in Kentucky and Tennessee 11% and in Alabama 9.6%.

It's not just union jobs at GM that will be affected. It's all the jobs generated by the money spent by autoworkers. So say goodbye to a huge chunk of retail jobs, restaurants, and professional services. Even worse, a collapse of GM sends much of the auto supplier base into bankruptcy. This means a series of economy racking disruptions, so that even if there was a demand for the finished product, shiny new cars, there would be no ability to produce it. Even in the Toyota plants,with suppliers not producing, they are unable to put suppliers parts together into the finished product, cars. The alternative is for them to ship parts from Japan when those prices are rising because of an appreciating yen.

Now, let's turn to one last "problem" that Sen. Corker and the rest like to beat home. Wages.

That $71 "wage" that Corker and the rest fixate on.

Let's break that motherfucker on down.

Wages and benefits at the Big Three are already comparable to those offered by the transplants. The single biggest difference comes when "legacy costs" are accounted for. The transplants have been in operation for less than 30 years. They have few retirees. GM, Ford, and Chrysler have something on the order of 10 retirees being supported for each one person working on the line today. If Corker and the gang want to cut costs here, they need to be honest what they are talking about.

Stealing the contractually guaranteed pensions and health insurance that UAW accepted in lieu of wage increases over the last 50+ years.

Corker needs to have that one thrown in his face. Stealing money from old men and women who've worked their entire lives, so your boys on Wall Street can give themselves another bonus? I guess it isn't crime if you're already wearing a pinstripe suit.

I'm trying to keep this short, but I want to leave everyone with a bit of hope. There is a way to do this right. To save the auto industry, and shore up the country's ability to produce fuel-efficient vehicles.

We have gone through a classic cycle of overproduction, so that we now have an aging fleet of vehicles. The destruction of the auto industry would force us to hang on to these vehicles for an extended period, greatly reducing fleet efficiency, until the time that there have to be replacements to the fleet imported from abroad.

The answer lies in culling the already existing auto fleet to generate new demand for autos, and securing a base level of production for the Detroit Three to cover R&D and retooling costs for making new fuel efficient vehicles like the Chevy Volt (100+MPG) and the Cruze (40+ MPG).

One of the real ironies of the credit freeze is that GM has had to cut costs where they are able to in order to stay afloat. This included halting construction on the new, $349 million engine plant in Michigan, producing fuel efficient engines for the Cruze and Volt.

This plant is vital to the future of the US economy, because it allows us to wean ourselves off oil. Replacing a single late 80s vintage vehicle now getting perhaps 15 mpg with a new Cruze getting 40 mpg, will in average save around 625 gallons of gas (62.5%) annually. It's a long process, but repeat that 10 million times, and you save around 400,000 barrels of oil daily. That's more than 2/3rds of what we import from Iraq daily.

An industrial policy that targets lower end, elastic, demand for vehicles with fuel efficient engines, and saves the high technology for higher end, inelastic, demand able to bear the burden of a premium makes good sense. It took use 40 years to get into the mess we are today, it is going to take at least that long to get out of it unless we jump start the process.

The best way to do that is to forcibly change the composition of the auto fleet, through culling out old, gas guzzlers, and pouring money into mass transportation, affordable housing, and a national urban planning code (this is a push, but condition federal road funding on it like Dole did with hiking the drinking age to 21 in the 80's and it can be done).

We need an active government implementing economic policy to channel demand, and industrial policy to insure the right supply is there.

This is not an alien concept. Done through a "cash for clunkers" program like that proposed by Alan Blinder would allow the incoming administration and Congress to use a limited government input to generate a gigantic economic stimulus.

Gas prices are low right now, but if we take the example I gave above of replacing an 80s era vehicle with a new Cruze, 625 gallons are saved annually. At $2 a gallon, that's $1,250 saved. A cash for clunkers program taking fuel inefficient, older vehicles off owners hands with an add-on government grant program could generate a huge surplus.

It could be done like this. Have the government sign contracts agreeing to the purchase a million fuel efficient auto each from the Detroit Three. Think, 400,000 Chevy Cruzes annually, 400,000 Clean Diesel (Ford can build an engine plant here) Ford Fiestas, and something comparable for 200,000 units from Chrysler. Let's say that the government can get the unit cost down to $13,000.

So you have a single mother driving an 80s era vehicle, making minimum wage ($13,624 a year). Right now, she spends a full 20% of her income ($2,000) annually on gas. With a Chevy Cruze, she could cut that to just over 6%, saving $1,250 a year (just over a $100 a month). But she can't get credit for a new car.

So let's have the government come into and offer her double blue book for that clunker. Let's say $4,000. So we've got $4,000 for a down payment. Now let's have the government kick in a $3,000 grant for purchasing the cars in the program. Now we have to finance $6,000, let's say over 6 years at 3% (this is a government loan, guys). The monthly payment ends up at just over $90 a month. It ends up at about $170 in terms of money put in pocket. But in reality, it's probably much higher, because a new car doesn't have to be dragged into the repair shop every few months for a $200-$300 repair.

Not to mention that having a vehicle that is guaranteed to function takes a huge amount of stress off your back, allowing you to think in longer terms when making economic decisions.

The cost?

About $7 billion annually.

And it removes a lot of older vehicles from the auto market, improving the fleet. If these older cars aren't available, there is going to an increasing demand, because it well drive up the cost of used vehicles in the long term. And when these cars start to recirculate, the are going to form much better base for the used car fleet.

And I think that spending $7 billion to keep an industry that brings in nearly $300 billion in tax revenue is worth it.

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Comments

Corker

I think he's either got some other motivation or....he's just an idiot.

I don't know if we are going to get sane policy from Obama either. So far, it doesn't look like it.

At least they got some money, yesterday it was like Bush corporation was going to let them fail.

Blinder's idea is a wise, practical one. Therefore he will testify before Congress and be promptly ignored.

Great graph on the wages. It's absurd to think America should match lower wages in the first place, but in the 2nd place, the workers are already competitive.

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Talk about christmas presents...

Angelo R. Mozilo, whose Countrywide Financial came to symbolize the failings of the mortgage industry, took home more than half a billion dollars from 1998 to 2007, including $121.7 million from cashing in options last year alone. Charles O. Prince, who led Citigroup to the brink of disaster, was awarded a retirement deal worth $28 million. Now, in a show of purported restraint, top Wall Street executives are going without bonuses.
If you're angry that so many executives got paid so much for screwing up so spectacularly, you might take solace in the fact that shares they still hold have lost value, too. But if you think executive pay is finally succumbing to the force of gravity -- if you'd like to believe that an epic destruction of investor wealth will fundamentally and permanently change the way chief executives are paid, or that you, dear shareholder, have the power to join forces with others just like you and create a more rational order -- don't bet on it. http://www.washingtonpost.com/wp-dyn/content/article/2008/12/20/AR200812...

They're asking for another four years -- in a just world, they'd get 10 to 20 ~~ Dennis Kucinich

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executive class

It really reminds me of the aristocracy of the 18th century, even the 19th. This has nothing to do with competence, global growth and any of that. They feed their own.

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