Dr. Detroit (Dan Aykroyd) and his "working girls."In the 1983 movie “Doctor Detroit”, Dan Aykroyd plays a well-intentioned college professor who unwittingly finds himself protecting four Detroit prostitutes after their pimp skips town. Caught in the middle of an ill-considered situation, Aykroyd’s character quickly morphs into a colorful new pimp who calls himself “Dr. Detroit.” Fast forward 25 years, to the current political debate over what should be done to “save” the U.S. auto industry, and the storyline sounds remarkably similar: well-intentioned congressional Democrats find themselves in the middle of an ill-considered situation and are falling all over each other to “protect” another group of Detroit prostitutes – General Motors, Ford and Chrysler – after the GOP skipped town.
Don’t get me wrong, from all outward indications GM needs substantial re-tooling in order to survive through the end of 2009, and America needs GM. Well, sort of. America needs all the jobs that flow from GM’s operations. We could do without the mismanagement, arrogance and disingenuous pleas for help coming from GM’s senior executives.
Unfortunately, now is not exactly the best time to engage in a high-minded debate about “moral hazards.” We need to do something to address this threat to the economy. In that regard, two things seem clear to me: (1) borrowing yet another $10 or $20 billion from China to lend to GM is not the best solution and (2) even a threat this serious does not need to be solved this week. Lawmakers need to slow down and consider all the options, not just the one option favored by the Big 3.
Pigs at the Trough
The first obvious problem with the Democrats’ rush to save jobs is that $10 or $20 billion now for GM will soon morph into $50 billion for the entire U.S. auto industry – once the government feeds one hooker, it has to feed them all. That includes Ford and Chrysler. Witness the feeding frenzy last week (and today) as CEOs of the Big 3 met with Washington lawmakers to plead their joint case for financial assistance. Just last month, Ford CEO Alan Mulally publicly stated that Ford had sufficient liquidity to weather this economic downturn, but now Ford wants to get in on the bailout action too. Chrysler also expects to be included in the government’s bailout largesse, an idea that strikes me as completely ridiculous.
Chrysler LLC is 80-percent owned by private equity firm Cerberus Capital Management and about ninety extremely wealthy Cerberus co-investors. If Chrysler really needs cash – and there’s no outward indication that it does – it can just ask its well-healed investors for a short-term loan. The U.S. Government should not be Chrysler’s lender of first resort when the company is backed by a syndicate of private wealth. Even if the U.S. Treasury were to ultimately turn a “profit” on a loan to Chrysler, why should taxpayers even shoulder the interim risk of a potential default? The fact that congressional leaders are even considering giving a dime to Chrysler is People’s Exhibit No. 1 that Democrats are dangerously close to pimping themselves out as the “new” Doctor Detroit.
Giving Cash to General Motors Will Not Save Jobs; Building Cars that Sell Will
The second problem should also be obvious: even if lawmakers were to write GM a blank check, no autoworker’s job will be saved until GM starts domestically producing smaller, fuel-efficient cars that people want to buy. That re-tooling will take time, perhaps a year or two. In the interim, autoworkers will still lose jobs – our response should be tailored to assist displaced workers first and GM second.
Controls on the Use of Cash are NOT Enforceable
The third problem with the proposal being pushed by the Big 3 is that once the money goes into corporate coffers, the government will have no effective way to determine which dollar was used for which expense. As businessmen say, “cash is cash.” Even if lawmakers could devise some elaborate mechanism to monitor how the cash was used, there would be no way to get the money back if Detroit were to break its promise.
There’s a good reason why General Motors CEO Rick Wagoner told lawmakers that he would be willing to accept almost any restriction: he knows that once GM has the cash, there’s no effective way for the government to enforce the restriction.
Restrictions on Executive Pay Won’t Make a Bad Bailout Better
Attempts to place restrictions on the excessive compensation of corporate executives – a favorite whipping boy of congressional Democrats – are not selling points for an otherwise bad fiscal stimulus idea. Yes, our executive compensation system is broken, but now is not the time to deal with that incestuous system.
Moreover, does any serious observer really believe that Chrysler CEO Robert Nardelli – the former Home Depot CEO roundly criticized for his outsized compensation during a period when his company’s earnings were flat – will accept a true cut in his total pay at Chrysler? If he gives up income now, Cerberus will just give him a fatter bonus when it exits its investment in two or three years.
Attempts to curb executive pay in Detroit are really just “window dressing” – a marketing attempt to sell a bad fiscal stimulus plan to Americans who are rightly outraged over executive compensation. Doctor Detroit can dress his prostitutes in new clothes, high heels, wigs and ruby-red lipstick, but at the end of the day all he has are hookers.
Before you think that I have gone too far with my Doctor Detroit analogy, let me just add one more thing. I am a proud, registered Democrat; I canvassed neighborhoods for Obama two weeks ago, and I have given a decent amount of money to Democratic candidates over the past couple of years. Those are my bona fides. I just think this blank check approach is ill-considered.
Her Majesty’s Disingenuous Opposition: the GOP refusal to aid Detroit
As much I as believe that current democratic efforts are ill-advised, at least the Democrats are trying to address the problem. GOP lawmakers are doing nothing to help, thus returning to the party’s historic, insular role of providing only opposition, not leadership. Don’t be fooled by high-brow protestations against state ownership of industry and talk fiscal constraint, GOP lawmakers and the Bush White House are not supporting these efforts for the same basic reason Democrats are: (i) the jobs to be saved belong to unionized auto workers, who overwhelmingly vote democratic, and (ii) those jobs are concentrated in three industrial states – Michigan, Ohio and Indiana – that all supported the winning Obama-Biden ticket. For the GOP, it’s payback time, pure and simple.
Perhaps that’s a bit too harsh. Perhaps there are some GOP lawmakers who want to help save Detroit. My question is simple: where are they?
Waiting to Exhale
The GOP’s current refusal to help U.S. automakers may prove to be a blessing in disguise. Their opposition forces Democrats to stop, take a deep breath, and exhale before rushing to pass legislation enshrining the only option that has been presented to them.
3 comments:
I think it is something other than payback which, after all, doesn't get you more votes, and that is what you should assume politicians are always about. It is regionalism. That is, auto manufacturers in the Republican dominated states are doing quite well. They will do even better if the Big 3 continue to struggle or have to sell off major assets in a fire sale.
The feeling among many, including myself, is that the misfortunes of the Big 3 in North America are a result of bad strategies encouraged by the historical influence of the politicians and unions in Detroit's operations. One thing many people overlook is that GM is currently profitable everywhere except North America:
http://seekingalpha.com/article/23629-so-what-if-gm-relies-on-overseas-m
arkets
Giving money to the Big 3 without any conditions or changes in that power structure, would directly affect negatively the fortunes (and
jobs) of auto makers with operations in Alabama, for example.
One answer would be to require all sorts of fundamental changes in the operations or management of the Big 3. In other words, even more deeply entwine the politicians in Michigan in the running of the Big 3. Fair enough. The Democrats just won big, and this is likely to be what they want to impose. To ask the Republicans, however, to vote against the interest of their constituents and strengthen the influence of groups that they believe are a large part of the problem, is too much to expect.
The Republicans are going to support only minimal efforts to keep the Big 3 on life support until the Democrats are fully in charge. It would be different if these problems were being caused by the credit crunch and were affecting all auto makers equally. But they aren't. As the post points out, not even all of the Big 3 are in the same dire straits.
Personally, I would argue that if we keep GM alive instead of letting it be sold to companies who can actually run a car business in North America, then I would favor splitting the bloody thing up into several smaller companies. We shouldn't let ourselves become hostage to companies merely because of their size.
Thanks for your insightful comments.
GM is a pension fund, that just happens to make cars. They screwed themselves in 1950 by agreeing to fund a pension plan in the "Treaty of Detroit" agreement with the UAW. Walter Reuther tried to convince GM that the federal government should be setting up pensions, not GM. But GM didn't think about it. The work force was so young at the time. Pension, smension, we won't be paying that out for years down the road.
The Big 3 need to get the loans. Bankruptcy is not a viable solution, neither is failure.
Wall Street didn't need to have a business plan for their money, they barely even asked for it.
It's just a frickin' loan people, not free money.
I can't imagine how much worse our Michigan economy can get if the Big 3 are allowed to fail or even file for bankruptcy. Bleh!
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