Detroit bailout

Are the Golf Carts Made with Union Labor?

by Ivan Osorio on December 29, 2008 · 2 comments

in Bailout Watch, Economy, Politics as Usual

Throughout the Detroit automakers’ bailout saga, the United Auto Workers’ leadership has claimed that the union has made enough major concessions to date, and that demands for it to make more, from company and government officials, are attempts “to make workers shoulder the lion’s share of the costs of any restructuring plan.”

If the UAW leadership is so concerned about the union’s rank-and-file bearing the costs of the Detroit automakers’ restructuring, there’s one item on which it could easily save millions for its members. Reports Foxnews.com:

Even as the industry struggles with massive losses, the UAW brass continue to own and operate a $33 million lakeside retreat in Michigan, complete with a $6.4 million designer golf course. And it’s costing them millions each year.

The UAW, known more for its strikes than its slices, hosts seminars and junkets at the Walter and May Reuther Family Education Center in Onaway, Mich., which is nestled on “1,000 heavily forested acres” on Michigan’s Black Lake, according to its Web site.

But the Black Lake club and retreat, which are among the union’s biggest fixed assets, have lost $23 million in the past five years alone, a heavy albatross around the union’s neck as it tries to manage a multibillion-dollar pension plan crisis.

Necessities, shmecessities….

GM-Chrysler Merger Likely Blocked by Antitrust

by John Berlau on December 19, 2008 · 1 comment

in Bailout Watch, Economy, Features, Odds & Ends, Politics as Usual, Regulation

During the negotiations for the multi-billion dollar bailout being announced today, an option again apparently came up that might have gone a long way toward strengthening General Motors and Chrysler’s viability that wouldn’t have cost taxpayers a dime — a merger between the two of them.

But also once again, the idea was quickly shot down. The companies didn’t give a reason, but more than likely it was the hurdles of antitrust rules. The Detroit News recently quoted an antitrust expert saying that even in their current dire straits, a merger review would take at least a year, and even then it may not pass muster, because of the supposed “dominance” of the combined company of the light truck market.

But artificially dividing the auto industry into this type of market — when the recent oil spike clearly showed the consumers will substitue passenger cars for light trucks — shows how outdated antitrust rules are. Another example of the absurd nature of antitrust rules — in this example, impeding healthy companies creation of more jobs — is the Federal Trade Commission’s ridiculous holdup of the Whole Foods-Wild Oats merger in which the agency’s “market dominance” analysis deliberately exluded competition the combined organic grocer faces from retail giants like Wal-Mart and Safeway. Here is the post I previously wrote about that in Open Market.

So before another dollar of taxpayers’ money is spent by the Bush or Obama administration (and it’s getting harder and harder to tell the two apart), antitrust rules should be suspended for GM and Chrysler and sensible overhauled for the rest of American companies. This and other deregultory actions that would clear government roadblocks to a recovery — such as those detailed in CEI vice president Wayne Crews’ study “10,000 Commandments” — would be the best “stimulus” of them all.

Antitrust liberalization may avert need for bailouts — outdated laws deter efficient mergers from GM-Chrysler to Whole Foods-Wild Oats

by John Berlau on December 14, 2008 · 3 comments

in Bailout Watch, Economy, Legal, Mobility, Politics as Usual, Regulation

In early 2007, the economy was humming along and General Motors was considered to be in the process of a turnaround. To help stabilize itself, the company was considering buying its smaller, money-losing rival Chrysler.

But it faced a stumbling block in the form of antitrust law. According to analysts looking at a potential merger, the government would consider a combined GM and Chrysler too big and powerful with the ability to drive competition out of the market. The Wall Street Journal reported in March 2007 that such a merger “would probably face difficulty gaining approval from antitrust authorities because it would give the combined entity a highly concentrated position.”

Today, with GM on the brink of bankruptcy, such a claim seems especially laughable. But even way back in 2007 it was clear that the Big 3 had more than their share of competition from foreign automakers. An analyst for Bear Stearns & Co. (boy, a lot has happened since the beginning of 2008!) told Bloomberg that while “barriers to entry in passenger cars are relatively low,” the merger might hit the rocks because of the dominant position such a company would have in the “light truck” category that includes sport utility vehicles, minvans and pickups.

And even now, with both companies hitting the rocks, the merger may still face antitrust troubles because of a possible dominant position in the light truck market. A recent article in the Detroit News cited an antitrust attorney who said that a merger “would face a review of up to a year by either the Federal Trade Commission or the Justice Department”. The attorney, Ted Bolema who was formerly with the DOJ, told the newspaper: “The two companies would control about one-third of the light-vehicle market. That’s getting up there in market concentration.”

But lost in such an analysis would be that the market for light trucks itself has shrunk due to the spike in gas prices earlier this year and general economic woes. People are are choosing passenger instead of light trucks for a variety of reasons. Thus, defining light trucks as a separate “market” — instead of as part of the overall market for automobiles — gives a skewed look at market concentration.

Unfortunately, this is not the only instance where our antitrust laws are stuck in “Reverse” with antiquated and static definitions of markets. The Federal Trade Commission, for instance, is still fighting organic grocery chain Whole Foods Market Inc.’s acquisition of competitor Wild Oats based on the dubious claim that such a combination would dominate, in the words of an FTC official, the “premium natural and organic supermarkets” market.

Wait a minute, the what market?!! The parsing of the FTC’s words tells the story. Even though as known by people who love organic food (and by people, like the folks writing for this blog, who think the organic’s claims of superior quality is greatly inflated), every supermarket and its brother has been trying to cash in on the organic food craze, the FTC is trying to reverse the merger based on an extremely narrow definition of a market. The FTC analysis deliberately excludes the competition Whole Foods and Wild Oats face from grocery giants like Safeway and well as the retail behemoth Wal-Mart, limiting the market to stores that only sell organic and natural food.

But this market definition flies in the face of reality. Consumer surveys done by Whole Foods and others show that Whole Foods and Wild Oats and the conventional grocers are indeed competing for the same buyers of organic food. As an article in Smart Money noted last year, “Shares of both chains suffered badly last year as conventional grocers such as Safeway (SWY: 22.82, +0.01, +0.04%) and larger retailers like Wal-Mart Stores (WMT: 54.63, -0.16, -0.29%) boosted their organic offerings, pushing same-store sales down at the specialized purveyors of pesticide-free endives, hormone-free goat milk yogurt and fresh made whole wheat pasta.” And in a tough economy, there is probably even competition between organic and the lower-priced conventional food.

The sad thing for both taxpayers and consumers is that if GM and Chrysler had been allowed to merge in early 2007, they may have had the efficiencies and economies of scale needed to ride the current credit crunch out, even with the other management problems. Thus, they would not be begging for a bailout now.

Of course, there was no guarantee that a merger would have avoided the catastrophe they face now. And Whole Foods will still likely be healthy company even if the FTC succeeds in stopping the acquisition. But irrational regulations that stop efficient mergers may indeed mean the difference between survival and bankruptcy for many companies in a tough economy.

So liberalization of antitrust law away from outdated definitions of markets may be one of the best economic stimulus plans of them all. And the best part is that this change won’t cost taxpayers a dime.

Deregulatory Bailout

by Iain Murray on December 12, 2008 · 10 comments

in Bailout Watch, Economy, Mobility

There are hundreds of regulations that Congress and agencies have imposed on the auto industry, driving up their costs unnecessarily. As an illustration, these are the new rules from the DOT identified by Wayne Crews in the 2008 edition of Ten Thousand Commandments:

– Reform of the automobile fuel economy standards program.
– Light-truck Corporate Average Fuel Economy standards (2012 model years and beyond).
– Upgrade of head restraints in vehicles.
– Rear center lap and shoulder belt requirement.
– Monitoring systems for improved tire safety and tire pressure.
– Automotive regulations for car lighting, door retention, brake hoses, daytime running-light glare, and side impact protection.

Plus these from the EPA:

– Rulemaking to address greenhouse gas emissions from motor vehicles.
– Clean air visibility, mercury, and ozone implementation rules.
– Review of National Ambient Air Quality Standards for lead, ozone, sulfur dioxide, particulate matter, and nitrogen dioxide.
– National emission standards for hazardous air pollutants from … auto paints.

These rules and all those from previous years need to be reanalyzed in the light of the industry’s troubles to see whether they should be repealed, suspended or weakened. In particular, attention should be paid to their aggregate effect on the industry. A deregulatory bailout would save the industry billions, and also save thousands of lives.

Federally Sanctioned Propaganda Machine

by Gary Howard on December 11, 2008 · 1 comment

in Bailout Watch, Economy, Intellectual Property, Nanny State, Odds & Ends, Privacy, Regulation, Tech & Telecom

 

Apple's 1984 "Big Brother" commercial.

Apple's 1984 "Big Brother" ad

An article over at Ad Age brings up an angle on the whole auto industry bailout probably not considered much before.  The fact that a yet-to-be-appointed “car czar” will have control over a multibillion dollar advertising budget for the big three.  Under the guise of “oversight,” this would effectively “Create World’s Most Powerful Marketing Exec[utive].”  

The draft rescue plan for Detroit sent to the White House by Congress yesterday calls for the appointment of a “car czar” who will oversee the Big Three automakers’ expenses over $25 million — which, by extension, would include media buys. Based on Advertising Age’s estimates of spending by General Motors Corp., Chrysler and Ford Motor Co., that would give the as-yet-unnamed car czar control over some $7.3 billion in marketing spending in the U.S. alone.

The most disturbing thoughts about this (particularly to those concerned with liberty) are provoked here: 

The car czar would wield a budget more than double those of AT&T, Verizon, Unilever and Johnson & Johnson, which round out the nation’s top five marketing spenders, and give the car czar more clout with media and agencies than such famed names in marketing as Walmart Chief Marketing Officer Stephen Quinn and Anheuser-Busch VP-Marketing Dave Peacock.

…If the bailout goes through, agencies that work for the Big Three will essentially be toiling on a government account, with all the associated red tape and strictures that involves.

So there you have it.  We should all be concerned about this for many reasons.  As mentioned, the large ad budget that comes with a czar-controlled U.S. auto industry will allow a government bureaucrat to wield unbalanced and unchecked influence over not only who gets ad contracts, but what media outlets get ad money. The czar can simply refuse to give business to an advertising agency who works for a foreign competitor of the big three (or a “non-compliant” corporation), or refuse to pay money to show ads on outlets that they deem “unfriendly” to the administration or its mission.   This will be an unequivocal disaster.  We have already seen the lengths to which administrations (and pre-administrations) have gone to influence and/or silence media they do not like.  What kind of power plays do you think are possible when the administration’s appointee controls a major source of media outlets’ ad revenue? Whatever it ends up being, it won’t be pretty.

Auto Bailout – Destroying Detroit by ‘saving’ it

by John Berlau on December 11, 2008 · 8 comments

in Bailout Watch, Economy, Mobility, Nanny State, Odds & Ends, Personal Liberty, Politics as Usual, Regulation, Zeitgeist

In a famous quotation from his 1986 address to the annual White House Conference on Small Business, President Ronald Reagan quipped that “government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

The Detroit bailout bill that passed the U.S. House of Representatives last night — agreed to by the White House and Democratic leaders but at this point apparently without enough Republican support to survive a filbuster in the Senate — is unique in that it fulfills all three of the government actions Reagan describes in one fell swoop. All it once it not only subsidizes U.S. automakers, it subjects them to heavy regulation as well that have nothing to do with profitability and everything to do with fulfilling “environmentally correct” objectives.

Existing mandates can in part — but only in part — explain some of Detroit’s downfall. As CEI’s Sam Kazman wrote recently in the Detroit News, the Corporate Average Fuel Economy (CAFE) standards are a “$100 billion research and development burden” that “have long been a noose around the industry’s neck. CAFE ignores the market, in which consumers balance their demands for fuel efficiency against other needs such as size, and forces automakers to sell models of cars, so that the “average” car meets a ceratain miles-per-gallon.

Over the years, CAFE has led to the abandonment of popular models such as the family-size station wagon. It has also meant, as Kazman points out, a reduction in traffic safety as consumers have been forced into smaller, less crashworth cars. The National Research Council estimates that CAFE has caused 2,000 additional traffic deaths per year.

Yet Congress accelerates these efficiency mandates that are deadly for the industry and, literally, for drivers, as a condition of providing the money to “save” it. As Wall Street Journal columnist Holman W. Jenkins Jr. writes, “To become ‘viable,’ as Congress chooses crazily to understand the term, the Big Three are setting out to squander billions on products that will have to be dumped on consumers at a loss.”

The bailout conditions the dollars the federal government would hand out on the industry largely adhering to an emission standard from California that is much stricter than that of the federal government and based on faulty science. As Jenkins writes, this mandate would mean “an even more massive auto wreck” that “would render most of [the industry's] auto designs, profit centers and tooling unsalvageable.”

If Congress really wanted to provide immediate help to the auto industry it would repeal the costly CAFE, or at least get rid of the “two fleet” rule that mandates that smaller cars have to be made in the U.S., not in Europe where they are more profitable. This mandate is another expensive demand that autoworker union muscle had enacted that is now dragging Detroit down. Congress should also suspend antitrust rules to make cost-saving mergers or joint ventures easier.

In the meantime Detroit — the vast community including the parts makers and others that work with the auto industry — should really ask itself if bankruptcy would be any worse than the price of becoming an appendage of Washington in a bailout. A Chapter 11 bankrupty gives the car firms a chance of being restructured into lean, profitable companies. This bailout would not only squander billions of taxpayer dollars, but put the foot on the pedal of government regs driving Detroit into “reverse.”

Claim of consumers’ fear of auto bankruptcy a canard in bailout debate

by John Berlau on December 8, 2008 · 6 comments

in Bailout Watch, Economy, Intellectual Property, Legal, Mobility, Politics as Usual

Eli, in answer to the blog post you phrased as a question, the argument from the individual you heard, echoed by other Big 3 execs, is not a valid point in support of a bailout.

Their claim that consumers won’t buy from an automaker in bankruptcy is a specious argument. Yes, some won’t, but many consumers also are not going to buy cars from companies perceived to be so weak that they have to beg for a bailout from the government. A company’s clutching to a government lifeline to keep from going bankrupt wouldn’t be that much different for many car buyers than an actual bankruptcy.

This is particularly true if the government forces the companies, as a condition of the bailout, to make “environmentally correct” cars that no one really wants. A company emerging from a Chapter 11 bankruptcy, by contrast, has a chance to win consumers back by making products that they want.

I also addressed your argument that “If the manufacturer no longer exists, then the car parts might not” in a previous Open Market entry (that was cited in a brilliant Washington Times editorial on Thursday). That entry noted the thriving reproduction parts industries for DeLoreans and Studebakers, both made by automakers long defunct (DeLorean went bankrupt in the ’80s and Studebaker folded up shop in the ’60s). The fact of these industries’ existence cuts in favor of consumers in a Big 3 bankruptcy. Given that there would be millions more Big 3 cars on the road than DeLoreans and Studebakers, entrepreneurial firms would rush to acquire the intellectual property rights that a bankruptcy court could easily award so that new parts could be made for consumers. Warranty claims could also be given priority by the bankruptcy court, as the Times editorial noted, and those are usually backed up by the insurance company of the warranty issuer, anyway.

It looks like to tide the companies over, Congress is going to vote this week to let them use money already appropriated for “green cars” for general operating purposes. From a free-market perspective, this action is neutral and may even be a net positive, as it reduces the promotion of a state-directed “green agenda.”

But when Congress comes back next year, bankruptcy must be on the table for both big automakers and big banks, as it is for small businesses every day. Otherwise, the economy may never get out of “Reverse.”

DeLorean disproves domsayers in debate over auto bankruptcies

by John Berlau on November 28, 2008 · 8 comments

in Bailout Watch, Economy, Intellectual Property, Mobility, Politics as Usual

In the debate about bailing out the Big 3 automakers, it is said that we just can’t allow a bankruptcy. Despite the fact that Chapter 11 bankruptcies have taken place for retailers such as Circuit City and many airlines such as U.S. Airways, autos are said to be different because of the duration of time that people hold on to their cars for.

Horrific senarios are painted of consumers not being able to get parts for their automobiles if manufacturers are no longer in existence. But of all the many admittedly complicated aspects of a bankruptcy of General Motors (the company the Congressional hearings established was in the most trouble), these consumer issues provide the least reason for worry.

In a Chapter 11 bankruptcy, GM would most likely be reorganized into a new company, sans the current management and heavy costs. This is something that has proved impossible so far due to lax management, generous union contracts, and state dealer franchise laws that make car companies pay an arm and a leg to sever a relationship with a car dealer. A bankruptcy could finally force the tackling of these tough issues.

But even if no reorganized company emerges, the production of parts for consumers with existing GM models will almost certainly continue. All that would need to occur is the relatively simple process of the bankruptcy court transferring the GM’s intellectual property rights to a company that wants to manufacture its parts. To see how this would work, it is instructive to look at thriving reproduction parts industry for a car that hasn’t been made since the ’80s: the DeLorean.

The DeLorean Motor Company operated from the mid-’70s to the early ’80s. The company filed for bankruptcy protection in 1982 and the company went into liquidation instead of reorganization, and no new DeLoreans have been made since.

But there is still an active interest in the cars, and the sporty DeLorean DMC-12 was immortalized in the 1985 movie “Back to the Future” and its sequels. According to Wikipedia, “A very large number of the original cars are still on the road after over 25 years; most estimates put it at 6,500 cars surviving out of just over 9,000 built.”

So what happens when these cars need a new part, with the company that makes the cars no longer in business. Well, their drivers can get original and reproduction parts from the new DeLorean Motor Company. This is a new firm with entirely different owneship that acquired the trademark to the original company’s name as well as the rights to its designs.

According to the new DeLorean Motors’ web site, “when the supply of any part is exhausted or becomes no longer available, we endeavor to have the parts remanufactured using our set of the original engineering drawings.” They even sell “new build” DeLoreans using a combination of original and reproduction parts.

Going back even further, one can even buy new reproduction parts for a Studebaker, a car last made in the ’60s. An Indiana company called Studebaker International Inc. performs, according to its web site, “drilling, machining and assembly of parts” for nearly all models of Studebaker.

Of course a lot more people have GM cars than DeLoreans or Studebakers, but this fact cuts in favor of GM consumers. If there can be a thriving business in parts for cars that exist in this limited amount, entrepreneurs will rush to fill the needs of the owners of millions of GM cars on the road.

Resolving warranties is slightly more complicated, but a bankruptcy court would likely award warranty service contracts priority among the debts to be paid. And most warranties are backed by insurance companies, anyway, in the case of a firm’s bankruptcy. More on this in another post.