Friday, December 05, 2008

The Auto "Bailout" Debate Is Prologue To What Obama Faces In The Next Congress

The Detroit auto company "bailout" is the beginning of the debate Obama will be facing in the next Congress. We are in a recession and possibly heading to a depression. The questions we face now, and in the coming months, revolve around what, if anything, the Federal government should do in response to this economic crisis.

The battle lines involve some familiar themes. Should the Government spend money? If so should it be through Republican favored tax cuts, for both wealthy individuals and corporations, or should the pump be primed directly with spending on projects and programs that create or preserve employment? Second, should the government actions promote well paying jobs, including unionized jobs, or should we go for the cheapest labor possible, with the secret hope of busting the union movement? Lastly, do we want to help people in this time of crisis or fiddle around enough so that the economy continues to slide with the hope of regaining lost seats in the next election and in the 2012 Presidential race?

These issues are at the core of the current debate and will be front and center when President Obama proposes new spending on Infrastructure, health care, and other priorities and revisions to the existing tax policies that favor wealth, capital, and the wealthy.

I don't carry any brief for Ford, Chrysler and GM. Many of their past actions have created the vulnerabilities they now face. But they are charting a new course. More importantly, they are an integral part of our manufacturing base. One can argue the outcome of one or more going into Chapter 11 bankruptcy. But these things are inarguable. The union contracts will be gone and with them the hope for revitalizing the union movement. That will be the sweetest victory long hoped worked for by Republicans for decades. More importantly, it will accelerate the race to the bottom for all wage earners in our country. Make no mistake, this is a source of the major divide in the current debate. And when the infrastructure debate occurs next year there will be a big push for the projects not to be built with people in unions or earning union prevailing wages.

I need to digress a little by mentioning two points. Labor costs are not the issue. The companies and the UAW agree that labor costs represent only about 10% of the cost of a new car. That said, the average UAW wage is not $70. It is about $30 and is only about $5 higher than the wages paid by foreign transplants. The real differences are these. UAW health coverage is better than in the transplants and union retirees are not thrown onto the national trash heap in their old age. Those things do cost more money and are built into the cost structure of the big three. But consider the alternative. If bankruptcy occurs and the pension obligations are dissolve, the Pension Benefit Guarantee Corporation will have to pick them up. PBGC payments are lower and since it is currently underfunded, taxpayers will end up having to cough up more money.

The second point relates to Michael Moore's proposal to just buy up all their stock. Yes, that could be done for about $4 billion. But then what? The companies would still need the money they are currently asking for to service their current debt and continue operating. Yes, it would enable the Government to put in new management, but that can already be done under the current proposals by establishing an oversight board with the power to remove existing personnel.

There are those in Congress who are saying "no" to this proposal and will oppose President Obama's ambitious agenda to put this country back to work. Many of them simply do not believe that is the role of government. Others believe there is political advantage for them in this position. Generally, they will oppose anything.

There is another group will only support "supply side" actions. They cling to the failed dogma made popular by Reagan but still largely accepted. It holds the only way to increase national wealth is to cut taxes, which will spur economic growth and benefit all eventually. After almost thirty years of following this prescription the results are plain to see. The gap between the rich and the middle class has widened and the continual underfunding of public works has not only killed and endangered people, but is crippling our productivity with bad roads, clogged ports, drowned cities, and an electric grid and telecommunications system far behind many of our competitors.

The financial bailout was the most recent example of supply side at work, this time on steroids. Under the threat of impending doom we passed a law designed to pump money into the top of the economic pyramid in the expectation that it would trickle down and free up credit for average people. We're still waiting for that promised result. We have seen these institutions hoard the money or use it to acquire competitors. It is time to blow the whistle on the supply siders and say no more. Moving forward we need to inject money directly where it is needed.

The auto industry presents us with the opportunity to change course and lay the groundwork for future actions. Loans to these companies will do several things. It will directly benefit the current employees and retirees. It will give the government leverage to make the companies maintain their new focus on more energy efficient vehicles. This is especially important with oil prices declining since consumer memories have historically been short. It will be a leverage point for building a domestic industry that leads the world in alternative fuel vehicles. Lastly, the inevitable disruptions cause by bankruptcy of the companies which could accelerate a slide into a depression would be avoided.