An Observation Or Two

Michigan policymakers have been worried about diversification of Michigan’s economy for a long time now. After its new batch of corporate hand-outs, Governor Granholm stated, ” “We have the most aggressive economic plan of any state, and we are working every day to diversify our economy and create new jobs,” Diversification is even written into the law guiding the state’s corporate welfare fund, the strategic fund, which gives ”a preference for proposals that can contribute to the development of economic diversification”.

But for all of its efforts, the state has been ineffective at diversifying the economy. However, recent events have done more for diversifying the state than anything.

During the 90s, Michigan had an average of 7 percent of its employment in motor vehicle and parts manufacturing, compared to the national average of 1 percent. It’s only 3.7 percent today.

Unfortunately, the diversification came not because Michigan has gained in so many more sectors and industries. It’s because we lost so many auto jobs.

Once our media uploader feature works again, I’ll post the chart.

The Ohio Department of Agriculture alleges that a family that runs a food co-op was really running an illegal retail food establishment. The family disagreed and wrote back. So what does the state do? They send the police with guns ablazing into their home to take their food and records, including their computers. It’s enough to make your blood boil.

Thankfully, the Buckeye Institute for Public Policy is helping the family stop this. Legal complaint here. (remarkably readable, for a legal document)

I’ve been reading Democracy in America, so I’m getting sensitive to the author’s claim that it is only the majority that rules in this country. Of course, America has went through many changes since its authorship, but it’s interesting to check his forecasts.

The Land Use Policy Institute recently commissioned a survey of Michigan residents to find out whether, when there’s a deficit, they

1. Prefer to raise taxes
2. Prefer to cut services
3. Prefer to make government more efficient

I don’t like the setup for a lot of things. For instance, the summary says that Michiganders are against #3, but mostly because the base questions were fire people or cut their pay. It’s a very coldhearted thing to do if you don’t know the markets for the services, so it’s not surprising that the options poll poorly.

Aside from that, the survey showed that a majority of people would like to privatize or non-profitize police and fire services. This is impressive because this is not an option for most municipalities. Binding arbitration laws prevent municipalities from contracting out for police and fire (although a few cities have voluntary fire departments that have effectively been grandfathered in).

For de Tocqueville, this is a law whose effects are against the majority and will not stand. But the structure of government prevents it. I wonder whether the law will eventually be stricken down.

 Survey here.

Fellow SFE blogger Jack of All Trades says that Governor Granholm has much more interest in protecting government employees than taxpayers. I think that there should be more public conversation amongst bloggers on this site, so thought I should elaborate on the phrase. “Throw under the bus” is very modern and its origins are unknown.

According to the Word Detective (check him out here)

The earliest solid example of “throw under the bus” found in print so far is from 1991, although a 1984 quote from rock star Cyndi Lauper where she uses the phrase “under the bus” (without “throw”) may or may not count as a sighting.

So hurray for modern language. I wonder what Jack of All Trades may have used to describe the situation in 1983.

Counters think there might be enough votes to pass it. Still a question of what strings will be attached. The  the Free Press reports that one string may be the congressionally-forced dismissal of GM’s CEO. It wants the companies to drop lawsuits against states that made arbitrary and punitive legislation against them. It also reports that ”[t]he bill is to include numerous conditions on the auto industry, including appointing an overseer to monitor the automakers’ progress on restructuring plans.” Nothing is detailed over what power that overseer may have.

The WSJ says that the overseers should be bankruptcy-lite. The board should have powers to force restructuring. It wants change in the dealership networks, labor contracts, even find a foreign buyer for Chrysler. This is a middle-road response.  

Unfortunately, it elsewhere reports that the “car czar” might also be a Washington appointee that ensures that the companies make cars that Washington likes.

Finally, here’s a section in GM’s most recent SEC 10-Q

Looking into the first two quarters of 2009, even with our planned actions, our estimated liquidity will fall significantly short of the minimum required to operate our business unless economic and automotive industry conditions significantly improve, we receive substantial proceeds from asset sales, we take more aggressive working capital initiatives, we gain access to capital markets and other private sources of funding, we receive government funding under one or more current or future programs, or some combination of the foregoing. We are actively pursuing all of these possible sources of funding, but there can be no assurance that they will supply funds in amounts and timing sufficient to meet our liquidity requirements in the first two quarters of 2009 and perhaps in later periods.

So, according to this, there are five different ways that the company can be solvent again. The bail-out is only one of them. I wonder why there has not been any report on the companies efforts in the other four categories. In particular, I’d love to hear from bankers about why they have no provided loans to the company.

Today’s theme is unfairness.

“Why is our industry getting all the skepticism, while banks and insurance companies are getting all the money? ” writes the UAW president.

“Citigroup got $20 billion on a Sunday afternoon, but CEO Vikram Pandit was not forced to submit a business plan or drive to Washington from Manhattan to be grilled by the Senate Banking Committee,” writes Daniel Howes.

It’s a dangerous point to make for bail-out supporters. The unfairness argument can mean one of two things. Either the auto-makers should get a bail-out, or that no one should. And since there are all sorts of other fairness issues with giving select companies bail-outs,* it seems the best response is that it was unfair to give finance a bail-out and it would be unfair to give the autos a bail-out. 

But the congressional response would be something like this: Fix finance, fix the economy. Auto industry is not finance, so to hell with it.

Elsewhere, the Detroit Free Press makes makes an appeal to Congress, “You don’t want an economic disaster on your hands.”  It makes other passionate appeals, but all of them economic.

The downside risk argument has been used in a number of occasions, and I have yet to see it in an context that considers the dynamic interplay of the economy (how does this fit with ongoing job losses and job gains?) and even the percent of total economy.  So here’s the context: even using the absolute largest figure for the extent of possible job losses to the economy based on the Detroit 3 dissolving into the ether, the downside risk is only 2 percent of the total jobs in the economy.** That’s including the multiplier effect, so do not come back and ask, “Well, what about all of the spin-off jobs?”)

Today, the newspapers are writing about the legislators that are skeptical of the auto bail-out. I hope it isn’t a coded statement that means more logrolling*** is necessary to pass the loans.

*for example, why don’t we give the other U.S. automakers low-interest loans? Shouldn’t we then give all industries something similar to be fair? And is it fair to pledge the full faith and credit of the U.S. government (i.e.–they’re going to come after everyone if the loans go bad) for selective and discretionary financing?

**Simple calculation. Take the 3 million from the CAR study and divide it by the employment figures of the Bureau of Labor Statistics

*** “Logrolling is the trading of favors or quid pro quo, such as vote trading by legislative members to obtain passage of actions of interest to each legislative member.” http://en.wikipedia.org/wiki/Logrolling

Congressional presentations were made. Numbers were used. Proposals were made. In reporting context, the Free Press uses the largest number of the CAR study.

Also, echoing my family, The Detroit Free Press wants the bail-out to be called a loan. Doesn’t deny that it’s a bail-out, but “loan” is the preferred nomenclature for the Free Press.

In all of the news stories, the companies’ plans for plant and brand closures are treated as a good thing. But contrast that with historical reports over the same moves, which have been treated as doom-and-gloom stories. Only Daniel Howes seems aware of that. 

He’s also sensitive to the changing economy. The Detroit 3 have plans for survival, but the plans are based on a series of assumptions. Howes questions whether the plans will work –  ” Would it be enough? …  Would it come soon enough?  … What if Ford is too optimistic?” Questioning the plan has largely been absent from the public debate. But it also works on other facets of the bail-out. “What if people really aren’t worried about buying from a bankrupt automaker?”

And partly for shock value, I guess, The Detroit News runs a commentary by a Los Angeles Times writer that  calls for nationalizing GM. He wants the company to make greener cars.

Today’s theme is down-side risk.

According to The Detroit News, Ohio Senator Voinovich claims  “that if even one of the domestic automakers were to fail roughly 2.5 million U.S. jobs could be lost… “ That is a misstatement. The number comes from CAR’s analysis (viewable here) and does not say what Voinovich says. You can get to 2.5 million from the CAR analysis, but you have to assume that all the Detroit 3 — not just one company – completely stop production of everything and instantly fire everyone for a year, then rehire half of them next year, and count the multipliers.

I plan on giving a longer description of the CAR study if I get some time.

Tom Walsh carries a similar theme in the Detroit Free Press when he writes that ”hundreds of thousands of jobs in the heartland are at stake.”

Of course, the country has already lost a third its auto jobs. And that is over the past 8 years, not just recently.

An omission in the public debate thus far has been the recent gasoline price reductions. Right now, a big chunk of the narrative has been:

Detroit 3 produce Trucks and SUVs –> gas prices increase –> lose market share

Foreign companies produce cars and hybrids –> gas prices increase –> Gain market share

With falling gas prices, we’re going to see if that works in reverse.

But it also highlights danger of making business decisions in Congress. There is a contingent of legislators that wants to see the car companies make fuel-efficient vehicles. Right now, it argues that fuel-efficient vehicles make good business sense. But if that assumption is no longer relevant, Congress may still insist on low-gas cars for other reasons.

Have the companies responded to Congresses demands? The Detroit News reports, in presenting to Congress, Ford “will highlight its small car strategy and shift to more fuel-efficient vehicles.”

There’s a lot of rhetoric being used when discussing the Detroit 3 bridge loan idea, so I thought I’d track it.

Mark Phelan suggests focusing on the long-term in the Detroit Free Press. Unfortunately, the view is entirely squared upon finding ways for Washington to micromanage the car companies. And no mention of Congresses prudent section–ensuring that the rules in which all car companies operate are just.

Paul W. Smith invokes Ford’s World War II manufacturing in The Detroit News. Is still can’t quite figure out why. Perhaps as a reminder that there are secondary and tertiary effects of economic actions, some of them positive and may have ramifications for national defense. But that’s the case for almost every economic interaction. And whatever form GM takes with or without a bail-out, someone is still going to produce vehicles (maybe even still Hummers) for the army.

The Wall Street Journal editorializes that America already has a strong auto industry, just not one that’s based in Michigan. It also observes, though, that the Detroit automakers have made large strides in productivity in recent years. But talking about labor hours per car ignores how much those hours are worth. On that point, Mark Perry reminds us of the large difference in labor costs between the Detroit Three and its in-country competitors, which I’m shamelessly ripping:

http://1.bp.blogspot.com/_otfwl2zc6Qc/STPujPiTUFI/AAAAAAAAH6E/uV95mvf0lOg/s1600-h/wages.jpg

Lastly, my family had a reunion on Thanksgiving. On a couple of occasions, they bemoaned the use of the term “bail-out”. They were concerned that the words mean cash for nothing and that’s not what is being proposed. However, I argued that the term is allowed since we’ve been told that the companies will go bankrupt without government intervention. To go straight to the metaphor, if your ship is sinking and someone pumps out the water, they’ve bailed you out regardless of whether you pay them afterwards.

What would the United States look like if the auto industry went away? That’s been on the minds of everyone when discussing the auto bail-out.

Now, it’s unclear exactly what would happen in event of a bankruptcy, but we shouldn’t expect that all of the auto jobs would go away. But what’s the limits of downside risk?

David McCurdy, president of an auto trade association, says that there are 13 million auto-related jobs out there. The BLS, the official government tracker of this kind of thing, says that there are only 842,600 auto sector jobs out there (including parts) so McCurdy is likely using a multiplier.

But the BLS also gives us trends that McCurdy does not, and that’s important. Employment in the auto industry has been declining since 2000. It has already lost 487,200 jobs since 2000. So given that more than a third of jobs were lost and using McCurdy’s multiplier factor of 14.4 (he says it’s only five, but the math says 14.4); has the country lost 7 million jobs since 2000? No. The economy added 5 million jobs, (and that’s including recent events!).

We live in a very dynamic economy. Every year, about 10-15 percent of jobs are both created and destroyed–typically more created than destroyed. So far, the country has already been able to afford giant decreases in auto jobs. It’s happened without propelling recession. If we wanted to prevent harm from a loss of the industry, we should’ve acted back in 2000, not 2008. 

Of course, the possibility of bankruptcy is happening at a time when the rest of the nation was growing, but that changes the focus, doesn’t it? The focus should be on how to improve the overall economy–not whether to subsidize some players in an industry.