Detroit – an argument against free market forces

Pure free-marketers argue that the automakers should be allowed to fail and go bankrupt without any taxpayer aid. I’m predicting this lame duck congress will do nothing, but that as soon as the new president and congress are seated in January, help for the industry will be forthcoming.

As I listen to various opinions this morning arguing both for and against bailout, one thing that everyone seems to accept is that millions of people’s lives are going to be drastically changed. The other consensus is that the big three automakers were arrogant in ignoring the demands for lighter, more gas-efficient cars while they continued building bigger, heavier, more gas-guzzling vehicles than ever. And congress failed to mandate greater gas efficiency saying the free market should dictate not the government (thank you gas and oil lobbyists).

The reality of allowing those huge corporations to fail will have not a ripple but a tsunami effect through our already-devastated and fragile economy. It’s the people I worry about. The taxpayers will be picking up that tab, too. And that will include unemployment benefits, health care, food and housing, all while the government loses significant tax revenue from productive working people.

Arguing for bankruptcy, Mitt Romney advises restructuring with the government’s help. Even Mitt admits that the govenment must have a role in saving these companies. And the reason is, they are so big and the impact on our country so great, we can no longer leave it to the management of these companies alone to make decisions that will affect all of us in the end.

And so my point. The pure capitalistic free market ideas don’t work when we’ve allowed companies to be come so big that failure can actually take all of us down. This is why AIG was bailed out. This is why we are bailing out undeserving banks and reckless home buyers. Those of us who were not reckless are having to pay a big price. Reasonable and prudent regulation should have been applied to protect the public interest before things reached this state. This seems to be an impossible concept for conservatives to grasp. They worship at the altar of capitalism with no strings attached.

Time permitting, I’ll follow up this post with one on my favorite old deregulator himself, Phil Gramm.

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  1. #1 by Richard Okelberry on November 19, 2008 - 9:34 am

    Becky,

    I don’t think your assertion that the failure of the U.S. auto industry is due to a failure of market forces. Conversely, it is the lack of true market forces and overwhelming governmental regulation that is the likely culprit. In fact most noted economists blame the fact that U.S. automakers have been held hostage by the auto workers unions as the main reason for their failure. U.S. auto makers currently pay twice as much as foreign competitors for their benefits packages alone.

    Unlike U.S. industry, unions are not restricted by anti-trust legislation. This allows unions to work cooperatively, while various industries are force to abide by strict ant-trust guidelines. While I do believe anti-trust laws are essential for a true capitalistic system because they ensure competition, not requiring the unions to abide by the same rules have allowed unions to run rough shot over the auto industry and function in an overlord capacity. Unions should instead be treated by law as an employment agency. This would allow various unions to compete with each other and thus would bring down the cost of labor.

    Jason Williams at KVNU did write an interesting essay, “Would Universal Healthcare Save GM?” that argued that if the US had a socialized medical program, the big three would not be in trouble because they would not have to pay for the ever increasing cost of medical for their employees. While I disagree with socialized medicine and hold up the VA system as an example of its failure here in the U.S., Jason does bring up an interesting concept that is worth reading and talking about. Also I would like to point to the fact that there are many foreign auto makers that produce cars here in the U.S. that provide employment packages that include non-socialized medical and are still more competitive than the big 3.

    Finally, we need to recognize that the price of gas in this country is a leading factor in the decline of the U.S. auto industry as you have suggested. I would agree to some extent but would also like to point out that the big three have long been producing fuel efficient vehicles that have been sold widely around the world. Here in the U.S. efficiency levels are not as high because the price of gas has been relatively low compared to other nations. Now with rising fuel prices the industry has reacted and in short order is producing some of the most fuel efficient cars in the world.

    Still the fact that their cost of doing business is so much higher than their competitors has led to the big three cutting corners to save money which has resulted in inferior products at a higher price. Ultimately, it is a myth that the efficiency of U.S. vehicles has led to the current financial troubles. While certainly they may have contributed to the problem, it is in no way considered the root of the problem.

  2. #2 by Richard Warnick on November 19, 2008 - 1:04 pm

    I really doubt if the Democratic Party will allow the Big Three automakers to fail in the near term, because that would deal a death blow to the UAW and other unions.

    That issue aside, these companies certainly deserve to go down. They have never made a car that I wanted to buy. Now, GM seems to have canceled the long-awaited Chevy Volt plug-in hybrid, and the high-mileage Chevrolet Cruz– which is already being produced overseas.

    GM’s market cap is only $1.75 billion, Ford’s is $4.11 billion. Yet their CEOs flew to Washington, DC on their corporate jets to beg for $25 billion. Matt Yglesias: “Asking for loans that are many times the total value of the enterprise seems to me like a mark of a very, very unsound underlying enterprise.”

  3. #3 by Richard Okelberry on November 19, 2008 - 2:26 pm

    Richard W.

    I agree with you but would like to add that I don’t believe Republicans either would allow the 3 to fail, if they have to make the decision on it. Oh sure, they will make a stink if the Dems do it with the ball in their court, but would never take responsibility for failing to act on their own… Unfortunately, this is the nature of politics and is why neither party is truly representative of the respective political philosophies. In the end each Representative or Senator will spend money as necessary to keep their seat on this issue.

    From everything I have read this entire deal comes down to what would ultimately be on the table if the 3 went belly up and had to re-organize, the pensions/benefits of current and past employees. If restructuring is called for the courts will certainly look at the obligation of the 3 to the union and force major cut backs to keep the companies solvent and profitable. Both Republicans and especially Democrats aren’t willing to allow such a blow to the unions and have to face the union lobby during the next election.

  4. #4 by Richard Warnick on November 19, 2008 - 2:47 pm

    R.O.– You really surprised me, because I thought that the GOP would be delighted to deal a death blow to the unions if it were in their power to do so. Carly Fiorina was on “Morning Joe” today (video link) saying basically that. Also, you have to wonder how much political clout the UAW would have if most of their membership was out of work.

  5. #5 by Larry Bergan on November 19, 2008 - 3:07 pm

    Here’s the best article I’ve seen on the subject. By working actively to remove alternate forms of transportation in favor of the automobile, we have built an infrastructure that isn’t adequate for any type of transportation besides cars.

    How in the world didn’t see this coming is astonishing, considering the gas crunch of the 70′s and Japan’s capitalization of it.

  6. #6 by Richard Okelberry on November 19, 2008 - 4:04 pm

    Richard W.

    I am simply being a realist. While the GOP may have no love for unions they certainly aren’t willing to be labeled as those responsible for putting them out of work or taking their benefits away. Talk is cheap on Capitol Hill.

    Larry B.

    I remember growing up in the 70’s and remember everyone talking about the need for alternative transportation. Once the gas prices subsided the talk went away. Unfortunately, we do what is easiest at the time not what is in the best long term interest of the nation. Plus the automobile is the ultimate reflection of freedom. People like to go where they want when they want. Even now, try talking about taking peoples cars away and see what happens. It is arguable that almost no one NEEDS a car right now. Yet how many people here get along without one?

  7. #7 by Becky on November 19, 2008 - 5:30 pm

    I’m a little late returning to this conversation, but I appreciate all the comments here. This is a complex problem and the unions are going to have to be part of the solution. I think the unions serve an important purpose, but they are going to have to be realistic about the current situation and be willing to make concessions, too.

    Present management of the big three continue to be arrogant and think of themselves as essential for those corporations to survive. What a laugh! It’s because of their management that those companies are on the brink of dissolution. If we do end up giving taxpayer money to save those companies, I do want to see management go. And I also want to see strings attached — like maybe require them to pay it back?

    If it were nothing more than the failure of the companies and the shareholder losses, I would say let them go bankrupt. But it’s the workers that need saving.

  8. #8 by glenn on November 19, 2008 - 6:11 pm

    Becky, most “American” car manufacturing is not done in this country. Due to the Crown funding of healthcare in Canada, the majors have relocated there long ago to avoid having to pay for their employees benefits. Made them more profitable.

    If the bailout does not happen, sure there will be trouble here, but a point not much considered is, that the Canadian economy, in point Ontario, will collapse.

    As Canada is by far our largest trading partner, more value crossing the Detroit-Windsor bridge than what we do with China, this automotive bankruptcy has far greater economic implications than anyone realizes.

  9. #9 by Becky on November 19, 2008 - 6:39 pm

    Good point, I hadn’t considered that.

  10. #10 by glenn on November 19, 2008 - 8:05 pm

    Yes, despite the hype of the media, in dollar value, Canada is far and away our biggest trading partner. Be thankful, there is responsibility in the relationship that is purely western North American, and culturally borne.

    It has been this way since elements of real and cultural family were physically expelled from America, after the War for Independence. Despite that breach, families, relationships, transcend the physical boundry. We have been, and are, much the same people. All political attitudes here, can find their counterparts in Canada, very much regional, very much English, in the model, left or right, in law.

    It is how our law, our freedom, has been defined. Our alter ego, lies North.

    From the commodity/energy sector, to the intellectual propety enterprenuers from the brilliant nation of Canada, that flee here to avoid the punitive reality of wealth gerneration taxation of the Crown lands…she, we, have interests in one another.

    For me, I say look not to foreign lands, look nearby to the synergy of what we can become. For that truly is the promise of North America. Forget globalism, what we have here, and to our demented, though hopeful neighbor to the south, can create a reality powerful, a wholly separate from corporate world machination.

    There will be no globalism, we enter age of regionalism, the obvious result of the post nation state. Globalism is for bankers, no account industrailists, and general douchebags. Love the prospect of this region. Be logical, do not trifle in issues nationally that you could well decide in your own life personally.

    The challenge is to be our North American selves, not some image projected upon our landscape by self interested internationalists. We have far less problems than so many other world regions…and so much wealth and knowledge, intellectual property, and the conditions that allow it to flourish. Let us move forward, personalities aside, and when one leader fail…let us bring another, and hold them to the same account.

    America. What a concept. That it still lives considering those that would be better off us gone. A Divine miracle, no matter what it is you revere.

  11. #11 by apple jacks on November 19, 2008 - 8:11 pm

    you guys are nuts. better watch your backs.

  12. #12 by glenn on November 19, 2008 - 8:17 pm

    Apple Jacks, bowel movement in the evening after a long day. After all, I may have eaten you for brefass (breakfast for the uninitated).

    we’re hardly skeered….

  13. #13 by apple jacks on November 19, 2008 - 8:55 pm

    mormon luver

  14. #14 by jdberger on November 20, 2008 - 1:07 am

    Favorite deregulator, Phil Gramm?

    Not Robert Rubin? Not Larry Summers? Not Bill Clinton?

    I never thought you’d list a Republican as a “favorite” anything.

  15. #15 by Richard Okelberry on November 20, 2008 - 6:51 am

    Apple Jacks,

    I always find it interesting how many people are willing to toss out hate filled rhetoric and threats like, “better watch your backs.” Is it because you falsely believe that calling yourself Apple Jacks protects your identity?

    I thought that most people have gotten the word that there is no true anonymity on the web when people break the law. The fact that you tell people to watch their backs then call someone “Mormon luver,” it’s self could under law be considered a Hate Crime. I hope you don’t think that Cliff will stand up against the police for you if they come knocking on his door, looking for your I.P. address.

    I understand if you are not able to put forth your own intelligent contribution to the discussion. Some just aren’t up to the task. But please try to be civil.

  16. #16 by Becky on November 20, 2008 - 7:26 am

    Good lord, RO, isn’t the paranoia meter a little high this early in the day? Too much coffee? Or, just nothing else worth commenting on yet. Relax, I don’t think it was a death threat.

  17. #17 by jdberger on November 20, 2008 - 11:32 am

    Nah – Becky. I thought the same thing. – And it’s one reason that I maintain my anonymity.

    (Just ’cause you’re paranoid doesn’t mean that people aren’t out to get you)

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