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November 18, 2008

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An assisted Chapter 11 has the added benefit of encouraging a return to more standard procedures in the capital markets. Knowing that the normal rules apply but that the government will work to absorb some of the transition shocks is both stabilizing in the short run and allows for a return to long term planning. Uncertainty over who will be bailed out and who allowed to fail catastrophically massively increases the risk of major investments at precisely the moment when major investment is most needed.

Another perspective -- GM was actually doing pretty well in building vehicles that customers liked and working off legacy costs from a bygone era when it was clobbered by the credit crisis, which it did not cause, by the way. Nobody is selling cars and trucks right now, not even Toyota, because customers can't get credit. So it is hard to blame the current crisis on the sins of GM.

So the question really is, do you extend a bridge to the U.S. automakers (and by extension 2-3 million people who rely on them for jobs) or do you let the financial crisis destroy one of the last fragments of America's industrial base. I can tell you what the Chinese, Japanese, Koreans and Germans will do -- lend a hand to their key industries.

We seem to be at risk of "free-marketing" our way right to the poor house.

The demand for automobiles will not diminish if GM fails. People will still want to buy cars. Which means that other companies will take up the slack and end up hiring more workers and buying some of GM's assets. It's not as if all those assets and jobs will simply vanish. Many will be picked up by competitors.

There's also an "inverse moral hazard" issue here. If we allow GM to fail, that insures that everybody else, including the UAW, realizes that they must compete successfully or lose their jobs. It will encourage stockholders of other car manufacturers to take a more activist approach. Once everybody realizes that there's no safety net for companies, I think that they'll be a bit more energetic. As Voltaire quoted someone as saying, "In this country it is a good thing to kill an admiral from time to time to encourage the others."

I argued this in the comments to Publius' original post. I think, first of all, that there's a good chance GM could get DIP financing on its own. But even if it couldn't, I think it makes sense for the government to guarantee a DIP loan, and then Chapter 11 could proceed normally.

The demand for automobiles will not diminish if GM fails.

Demand is quite low right now both because people have less money to spend and because financing is harder to get due to the credit crunch.

Which means that other companies will take up the slack and end up hiring more workers and buying some of GM's assets.

Would they? Demand for cars is low now and will remain low. Those conditions are not usually the ones that favor increasing production capacity, even if such increases are accomplished by purchasing your competitors' remains. Even if other automakers want to purchase these assets, will they be able to get the financing needed to do so? I thought most of them were saving cash in order to prepare for low sales over the next few years.

Turbulence, my point concerns not the absolute value of demand for cars, but the lack of a significant causal relationship between demand for cars and the fate of GM. Yes, demand for cars is low now. That won't change if GM goes under.

Callous. Callous. Callous. Don't you know it is hurtful and insensitive not to give corporations any welfare they ask for?

we could spend money on saving the workers and helping them toward a productive company that can actually make products that people want on a regular basis

Pretend that I don't know anything about metallurgy, engineering, or physics. How would that work?

Yes, demand for cars is low now. That won't change if GM goes under.

I agree. Where we part ways is at your assertion that if GM disappears, competitors will buy up most of the assets. I'm sure that some of GM's assets would be snapped up, but I'm skeptical that the macro conditions allow other automakers to rehire a large fraction of current GM autoworkers.

FWIW, here's a comment by emptywheel at firedoglake speculating on a possible scenario where GM is partially taken over by SAIC (a Chinese business partner of theirs).

I don't know enough inside-baseball with regard to Detroit to judge how plausible this scenario might be.

h/t: commentor Crack at Balloon-Juice.

The demand for automobiles will not diminish if GM fails. People will still want to buy cars. Which means that other companies will take up the slack and end up hiring more workers and buying some of GM's assets. It's not as if all those assets and jobs will simply vanish. Many will be picked up by competitors.

The problem with this assumption is that you're neglecting the global market. Those jobs and assets aren't neccessarily going to stay stateside. The world's demand for steel is still there, yet where did all the steel mills in the Rust Belt go?

Turbulence, I did a little CYA in stating that "many" rather than "most" of GM's assets would be acquired by others. The distinction is enough to make quibbling over this question meaningless. Yes, assets and jobs will be lost if GM goes under. Yes, some of those assets and jobs will be picked up by competitors. How many? That's impossible to say just now.

You're right, Doug, that some of those jobs will go overseas. But again, we don't know exactly how many. There will still be some jobs saved and some assets preserved. The actual number of jobs saved and assets preserved will depend upon their competitiveness. And what's so bad about losing uncompetitive assets? In the long run, they'll go anyway. Spreading the losses out over time has the benefit of permitting the rest of the economy some time to pick up the laid-off employees. Letting GM go broke is undesirable because of the suddenness of the transition, and if that happens, I think it would be necessary to provide additional support for the laid-off workers because of the especially poor economic conditions in which they'll be seeking employment.

But let me offer another thought on this problem: aren't we just prolonging the agony if we bail out GM? Do we really believe that this is just a temporary bad patch and that in ten years GM will be bursting with economic health? If we can't convince ourselves that GM will recover from this situation, then why keep them on life support? We will have to pull the plug someday -- why not get it over with now?

"The world's demand for steel is still there, yet where did all the steel mills in the Rust Belt go?"

They went to US mechanized plants such that while the production of US steel has stayed about level, the production PER EMPLOYEE has gone way up. Same thing happened in agriculture, the US used to have 85%+ of workers operating in agriculture, now we are below 5% while at the same time production is way up. And that is a great thing for the US economy.

Huh I was hat-tipped above (i'm crack on non-typekey blogs, they don't like my mail.ru address).

Chris, good plan. How many of those dealerships will be purchased by a competitor? If it is SAIC, I'd suspect not more than a third. How many of the suppliers will survive? Delphi is most certainly gone already. GMAC will likely go under without cars to finance. MI unemployment will probably hit 20-25%. Other states will probably hit 10-15%. Now this still isn't depression level, but when we start the massive investment in manufacturing that got us out of the original depression. WWII brought substantial industrial production investment. But hey, I'm sure bailing out AIG and it's ridiculous CDS bets make more sense. I mean its wasn't a ponzi scheme, it was a successful company that used the power of its good name to make people feel better about making stupid investments. Not like GM and its horrible business strategy of making things and paying people.

They went to US mechanized plants such that while the production of US steel has stayed about level, the production PER EMPLOYEE has gone way up.

Not quite true. Most production went to minimills which are living off the carcasses of 20th century Big Steel. In addition to lowering costs, this creates positive externalities by recycling and reducing energy inputs.

A big 3 collapse would kill most of the Rust Belt in the way the Big Steel collapse killed Bethlehem and Gary. That scares me. I wouldn't be surprised by an insurrection.

If there are any positive externalities from a big 3 collapse, other than (perhaps) a shift to a smaller vehicle fleet with somewhat lower gas mileage, I can't see it.

First off, we're not talking about a collapse of the US automotive industry -- we're talking about a collapse of GM. There's still a whole lot of automotive manufacturing going on in this country. The fact that the owners are foreign is irrelevant -- they provided jobs, too. So let's refrain from the Doomsday argument -- a GM collapse will not trigger a Depression or anything like it.

Yes, I am disgusted by the bailout of the financial institutions, and when I think that risk-taking financiers who succeed are given huge bonuses but risk-taking financiers who fail are bailed out -- well, that burns. But it really does appear that these people are sitting at the nerve center of the world economy and we simply can't let them collapse. I am convinced that a bailout is necessary, but I want it to be done in such a way that we own their butts and we slap regulations on them that insure that they can never screw up like this again. These people took big chances with our economy; they must be regulated in the same way that we regulate all other dangerous industries. We need the SEC and the Fed to think more like the EPA. "Are these people polluting our financial environment?"

But that logic doesn't apply to GM. If GM fails, the rest of the economy will survive. So I'm in favor of letting it fail.

A big 3 collapse would kill most of the Rust Belt in the way the Big Steel collapse killed Bethlehem and Gary. That scares me. I wouldn't be surprised by an insurrection.

I've heard this before and I don't understand it. I'm sure that if they collapsed lots of people would suffer and there would be a great deal of dislocation. But an insurrection? Armed groups attacking...what exactly?

If there are any positive externalities from a big 3 collapse, other than (perhaps) a shift to a smaller vehicle fleet with somewhat lower gas mileage, I can't see it.

How could the collapse lead to a smaller vehicle fleet with lower gas mileage?

Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold.

No Bailout until the UAW sees the light.

http://nomedals.blogspot.com

"In this country it is a good thing to kill an admiral from time to time to encourage the others."

Two words: Lehman Brothers.

Not saying we should, or should not, "bail out" GM, whatever that means.

Just saying this kind of "let's face harsh reality" talk has, IMVHO, kind of worn out it's welcome.

The harsh reality we all need to face is that the US is basically bankrupt.

I think we're more or less past the point where we're shaking a few bad apples out of the tree. The whole boat is sinking.

It ain't "why should I help that other guy" anymore. We're all going down. That "other guy" is you. If not today, tomorrow. If not tomorrow, next week.

We get to pick whether we like crash landings, or whether we like our landings a little smoother.

I vote for smoother.

Thanks -

Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold.

This is one of the least informative statements ever. Toyota has no legacy costs. Even if it were UAW it wouldn't have those costs. Also, most of Toyota's employees live in a country with universal health care. It has for years had a government that actively intervened to keep it's currency cheap. It's based in a country with Industrial policy that favors exports over cheap prices in the domestic market. It doesn't have twice as many dealerships as it needs, that it can't get rid of because of state franchising laws. It doesn't have to flood the market with cars to these dealerships because it can't close them. Of course all of this is the UAW's fault.

The UAW has given bunches of concessions, and is about to rid all of the 3 of their legacy health care costs. Why let a little thing like facts get in the way of a good hate?

"Also, most of Toyota's employees live in a country with universal health care."

This isn't true. Japan sets a minimum level of care that is to be provided by companies if they provide health care. Toyota provides that minimum plus other health care and pays the costs for that.

Russell, I am truly nonplussed by your comment. First you criticize all the talk of facing harsh reality -- then you declare that the reality is even harsher than people are saying. Then you state your preference for a smoother crash landing. What do you mean by that? I would guess that, from the context of this discussion, that you're endorsing government support of failing industries. But that would make no sense given your previous comment. So would you clarify your intent here?

This isn't true. Japan sets a minimum level of care that is to be provided by companies if they provide health care. Toyota provides that minimum plus other health care and pays the costs for that

With healthcare costs fixed by the government. We can quibble if universal health care is the right term, but it's not a market and the costs are imposed by government fiat.

I should say that I'm not even sure there should be any bailouts. I just think the UAW is the unnecessary whipping boy. Germany has stronger unions than the UAW and through government cooperation it can still be competitive in the world wide auto market.

The problem I have with the anti-bailout crowd is that the entire economy has been a sham. Precious few industries have a business model that makes any sense in a no-leverage society. Should apple and Best Buy have based their businesses on the idea that there would be no consumer credit available in 2009? The consumer downturn is going to be huge, and the associated job losses are going to create a feedback loop. Unless we get a world war level of inflated demand I don't think we'll get out of this for decades, bailout or no bailout. The bailout may extend the pain, it may not. It would likely slow the onset, but it might not.

OMG...a sensible post. Am I on the right website? Thank you. I can breathe! I can breathe!

So would you clarify your intent here?

I'll try.

I don't know if we should bail out GM or not. I'm not sure what "bail out" means here. Are we talking about buying GM? Just giving them billions to tide them over? Helping them through a more, rather than less, graceful bankruptcy proceeding? I don't really understand what exactly is on the table, so it's hard for me to have an opinion about what the best thing to do is for GM, specifically.

What I do think is that an approach where we just stand back while the market does it's thing, and let the chips fall where they may, is NOT a good idea.

I'm not an economist, and I do not have a sophisticated understanding of the numbers involved. But it seems fairly clear to me that our economy is extremely fragile right now. We "shot an admiral" when we let Lehman go belly up, and they took a lot of other folks down with them. I'm not sure we can afford to shoot any more admirals.

I don't think we're in a position where we can just let GM sink and take the hit. They will take a lot of other folks with them. At a certain point, failure develops a momentum of its own. We might be at that point already, I don't know. But if we're not, we don't want to get there.

So I don't much care which of the various options for dealing with the imminent collapse of GM we choose. Run the numbers and pick the best, or least-bad, one.

But just letting the chips fall where they may is, I think, about the worst thing we can do.

Hope that's clearer.

Thanks -

// I'm sure that some of GM's assets would be snapped up, but I'm skeptical that the macro conditions allow other automakers to rehire a large fraction of current GM autoworkers.//

Since when have the GM autoworkers been assets?

//The world's demand for steel is still there, yet where did all the steel mills in the Rust Belt go?//

Hmmm ... missing steel jobs ... missing steel industry... Rust Belt ... yet the USA still exists ... SHAZAAAM! Maybe we'll survive the loss of an auto industry.

Just a thought.

As I noted in the earlier post, in 2004, while GM paid $1525 per vehicle on employee health care, Toyota only paid $201. However, I'm not clear if one should dismiss that difference because Japanese health care costs per capita are lower than the US. (link)

But moving the thread to a comparative national health systems is probably too much comment trolling, even for a thread based on the concept ;)

I'm agnostic on the bailout, though I tend to agree with crack's point about the vehemence of a lot of anti-bailout folks being sham. I like this LGM post, from which I will lift out a bit.

Does this mean that the bailout is good policy? Not necessarily; we have to see what the plan looks like first. There are real reasons to be skeptical of government intervention. I do think, however, it's important not to kid ourselves about the consequences of deciding against the bailout. Is it worth letting hundreds of thousands of jobs (many of them good union jobs) go while a region of the country is completely devastated as a selective token of adherence to Free Market Principles? Maybe, but let's be clear about the choice we're making. The idea of GM going through an orderly Chapter 11 restructuring in this economy is almost certainly dreaming in technicolor.

// We need the SEC and the Fed to think more like the EPA.//

The EPA. Now there is a model of efficiency and success. Not.

Crack recommends war:

//Unless we get a world war level of inflated demand I don't think we'll get out of this for decades, bailout or no bailout.//

d'd'd'dave, one handle will suffice. No need to redesign yourself.

Liberal_japonicus, also from your link.
Average labor cost per US hourly worker: GM $73.73, Toyota $48. Also, as to your health care point, Toyota makes money on their cars even in the US, where I presume that Japan does not cover the workers’ health care. So whatever is going on, it isn’t obvious that it can be fairly pinned on health care.

Here is my plan for bailing the Big 3:

1. Eliminate employee related legacy costs completely.
1 a. Big 3 must make a public statement that "We made promises to unions and employees that we couldn't keep!" Then the 3 are freed of the costs.
1b. Unions must make a public statement that "We believed crazy promises and sold them on to our members". Unions hand all of their assets and obigations to the federal government who will honor them like railroad pensions.
1c. A law must be made to make it illegal for a union or employer to promise ANY benefit beyond the end of the next pay period.
2. Give the 3 automakers the money they need to get back on their feet $50-100 billion, whatever. In exchange, the gov't will get shares based on today's share prices. (That means gov't will own $50-$100 billion of entities worth $57-$107 billion.)
2a. The government must immediately distribute those shares on a prorata basis to every american who paid federal taxes in 2008 in proportion to the amount of their total federal tax.
2b. The government cannot be allowed to hold shares and exercise control.
3. If you, as a citizen, acquire shares in this way, then you can keep them or sell them depending upon your estimate of their value.

Ok ok. I hear you lefties pointing out how unfair it is for the people who pay the taxes to actually get something for it. Should we divide the shares equally to everyone? Maybe the poor should get more because they need it more. ... Oh wait. Obama will be president. That means the top 5% should fund the bailout but the shares should be distributed only among the bottom 95%.

How come free marketeers never want to allow a free market for labor organization?

Average labor cost per US hourly worker: GM $73.73, Toyota $48.

Sebastian,

These numbers are floating around a lot, but it's important to understand what they mean.

What they don't mean is that GM workers earn $73/hr, even with benefits. Notice that the woman discussed in the story earns $58K/yr. That's a long way from $73/hr. The number is calculated by dividing all GM's labor costs including retiree benefits by hours worked.

So they really reflect the huge retiree costs. They say nothing about efficiency, and little about labor cost per vehicle, since the retiree costs don't change with the number of vehicles produced. It really is important to understand that.

Umm, d'd'd'dave, I think your plan sounds egregiously socialist. You know, the people owning the means of production and all that.

Coyote.
You can have a free market for your labor organization - no problem. It's just that in the case of the Big 3/UAW bailout 'neither the Big 3 nor UAW can afford to pay the pension and medical benefits they promised. They did not set aside enough money. So, in this case only, as part of my bailout proposal, I'm saying the price for me to take on the UAW pensions is that they can not make that kind of promise again. The workers can still organize, and strike, and bargain and do whatever. It's just that they'll have to bargain for work rules, vacations, and cash money: just not deferred benefits. Or, they can turn down my bailout and handle the past pension and healthcare obligations on their own.

That's my offer. They can take it or leave it. I don't care. It's a free market and they are free agents.

Wow, Dave is granting everyone the freedom to take or leave his offer. That's quite a gesture.

I'm guessing that this is basically a game to Dave, and he's having a whole lot of fun with it -- so much fun that he hasn't noticed that, in item (1c), he has managed to outlaw contracts. Far be it from me to prevent anyone from getting high in the manner of their choosing. However, I'm a little concerned that in his second-to-last paragraph, he is hearing voices.

Chris Crawford

Perhaps you joke.

In my proposal, INDIVIDUAL people will own the means of production rather than the collective owning the means of production on behalf of the people. It is really no different than now. And maybe not so socialist except for the coercive nature of the taxation that will be required to support it (which coercion the purists will say is not socialist).

And I'm only proposing this as an accomodation to the people who say that a bailout must happen. Okay, if it must happen then since the money comes from individual people via taxation then individual people should get the shares.

hob.
I haven't outlawed contracts. I have merely outlawed certain contract provisions for these particular parties. These parties, the Big 3 and UAW, cannot honor their promises. if they accept my offer, they will have admitted that they were not capable of honoring such promises. Why not prevent them from making the same error again?

And what is wrong with the automakers paying cash and the workers receiving cash every payday for the full present value of their future pension and healthcare benefits? I'm not saying the parties can't negotiate for the full value of the workers services. I'm just saying it has to be paid in cash money every payday.

hob
1c. Perhaps I used poor wording. (I didn't have my lawyers vet the comment before I published it). I did not mean to abolish labor contracts in general. I meant to abolish deferred payments or benefits other than cash.

"So they really reflect the huge retiree costs. They say nothing about efficiency, and little about labor cost per vehicle, since the retiree costs don't change with the number of vehicles produced. It really is important to understand that."

I understand that it doesn't represent hourly pay. I'm not at all sure why it would represent retiree costs though, as that is almost never called 'labor cost'. But either way it doesn't really matter. Whether it includes or excludes the retirement cost, it is clear that GM as currently functioning cannot possibly compete.

I tend to agree with Sebastian that Chapter 11 might be best, as it allows the deeper re-structuring that is sorely needed.

However Chapter 11 might not work because cars are big investments, and they becomes less valuable if the maker goes under. Will parts be available five years later? What will be the dealer network? Even if the warranty period is covered what about a blown transmission five years from now? I wouldn't buy one.

I suspect that an automaker in Chapter 11 simply would not be able to move product. The plants would shut down due to lack of demand and then you have Chapter 7 with all employees let go and the doors locked. An extremely interesting article about the potential fallout if GM fails in Chapter 7 is at:

http://emptywheel.firedoglake.com/2008/11/16/we-are-all-flint-mi-now/

Maybe someone can come up with a scheme that would maintain consumer confidence in the long-term prospects of a company in Chapter 11, but I don't think we can assume Chapter 11 is feasible.

Can someone explain what the consequences of a Chapter 11 style bankruptcy would be? Does that leave all the pensioners and retirees without pensions and healthcare?

Chapter 11. Basically there is not enough money to meet all the obligations as they come due. The various parties negotiate a settlement that gives pennies on the dollar to the various parties and they work out a way to continue. Some parties have more standing than others: secured creditors have less reason to bend than unsecured ones. (Obviously no one bends if they expect congress to rescue them).

Will your warranty still be good? Probably in chapter 11. Probably not in chapter 7. Will you be able to buy parts in 5 years? Yes. As long as there is a market someone will make parts. In general, the quality and usefulness of a car determines it's value. The fact that the manufacturer fails does not necessarily mean the cars it has sold in the past lose value. If you're having your transmission blowing up five years after you bought the car then you must not have bought a Toyota. And yes, they make Toyota Camrys in the USA.

Dddddddddave, if you really don't understand why pensions and health plans can't just be broken up into individual cash disbursements and achieve the same effect, then I'm very glad you're not my boss nor my employee. You're proposing that if we took the combined dollar value of an ICBM and a nuclear warhead, put that money toward the purchase of handguns and bullets, took all those guns to Montana and fired them in the direction of Moscow, we could start World War III.

This kind of discussion works much better when a college dorm and a bong are involved. You may have both of those for all I know, but I'm not getting the benefit of them, so I think I'll leave you to confer with those other lefty voices you're hearing.

Hob
I'm proposing that the pensions and health benefits for retired workers be taken over by the federal government and continued as if there was no problem. Lucky them! Unlucky taxpayers!

An employee that works going forward would receive a check every payday that includes money for his wages, and his current health insurance premium, and extra cash for him to save and invest until he retires, and extra cash for him to save and invest to cover his future health care. Why is that so hard? Currently, for the Big 3 and UAW an actuary somewhere is calculating what money to put away to cover that future expense. The assumptions and arithmetic is available. Are the assumptions wrong? NO ONE CAN KNOW THE FUTURE. So, we make our best guess and go forward. Why is that so hard? How is it unfair?

The worker knows what he is getting and the automaker knows what he is paying.

Hob
Perhaps you're concerned that the individual workers won't be able to manage their cash well for retirement or that they can't buy into group insurance plans. All I can say is there are whole industries providing these services.

You may counter that, in the present situation, the investment industries have all failed pensioners. First, it is not strictly true that they have failed pensioners. But more importantly, if you think a big company or big union has more ability to not fail in the way that you think in the investment industries have then you are mistaking a ponzi scheme built on the backs of future workers for investment acumen.

Average labor cost per US hourly worker: GM $73.73, Toyota $48.

Here is what the workers actually get:

Toyota Motor Corp. gave workers at its largest U.S. plant bonuses of $6,000 to $8,000, boosting the average pay at the Georgetown, KY, plant to the equivalent of $30 an hour. That compares with a $27 hourly average for UAW workers ... General Motors Corp., which lost $10.6 billion in 2005 and didn't issue profit-sharing checks last year, paid its production workers an average of $27 an hour, GM spokesman Daniel Flores said. That would be a base of about $54,000 a year, based on a 2,000-hour work year. The $30 average at Toyota's Georgetown plant, which includes a bonus, equals $60,000 a year.

Ford Motor Co. and Chrysler Group representatives said GM's base pay figures are similar to theirs. Only Chrysler, which had a 2005 profit, paid a bonus last year. The $650 bonus was not enough to surpass Toyota's pay.

Unknown in the calculation is overtime, which boosts UAW workers' pay.

The $73.73 figure is a figure for "labor burden". Not only does it include wages, benefits, etc., it also includes things like training, uniforms, cost of equipment that workers use, cost of floor space for the factories they work in, cost of the kitchen sink in the employee break room, etc.

The right wing talking points people put numbers like that out because people don't know what is actually behind the number and it gets the reaction they want - those autoworkers are getting rich and the UAW is running their companies into the ground. Then people who don't even know what the numbers mean pick them up because they confirm existing biases, and the next thing you know people are yelling, "Why are we bailing out autoworkers who make 70 dollars an hour!!!!11!".

It's silly.

The actual hourly wages the UAW workers received was previously only a few bucks an hour above what the Japanese companies were paying in the US, and in recent years the Japanese companies have paid more per hour in some instances. They do this because they want to forestall union organizing in their plants.

Japan sets a minimum level of care that is to be provided by companies if they provide health care

True, but misleading, as pointed out the other day. Japanese companies have to pay for employees health care insurance costs. GM has to pay for its employees health care insurance costs. Japanese companies don't have to pay for former employees health care costs. GM has to pay for former employees health care costs.

See the difference?

"General Motors Corp., which lost $10.6 billion in 2005 and didn't issue profit-sharing checks last year, paid its production workers an average of $27 an hour, GM spokesman Daniel Flores said."

This can't be, because OCSteve assured me here, here, and and here that the workers make $75 an hour, no matter what my cites say.

"Here is what the workers actually get"

Could you give a link for where you're quoting from, please? Thanks.

now_what
//Japanese companies don't have to pay for former employees health care costs. GM has to pay for former employees health care costs.

See the difference?//

Yes. I always did see the difference. The appropriate question is 'why does GM pay for former employees health care costs while Japanese companies don't pay for health care costs of their former US employees?'

If the answer was GM was dumb enough to promise it and the workers were dumb enough to believe the promise ... then how dumb will I be if I dig in my pocket to keep the promise? [Even though, in my bailout proposal I have pledged to honor this promise].

If the answer is Japanese companies have promised it but don't have enough american former employees to amount to much yet ... then I don't know what to say. I doubt this is the case.

If the answer is Japanese companies have promised it but don't have enough american former employees to amount to much yet ... then I don't know what to say. I doubt this is the case.

Well, Toyota opened its first factory in the US in 1988. I understand that GM has run factories in the US for considerably longer.

The appropriate question is 'why does GM pay for former employees health care costs while Japanese companies don't pay for health care costs of their former US employees

You are way off in the weeds here.

Sebastian's claim was, "Japan sets a minimum level of care that is to be provided by companies if they provide health care". He is referring to, for example, Toyota employees in Japan (the majority of Toyota employees) vs. GM employees in the US (the majority of GM employees).

The point being made is that Sebastian claims that both Japanese and big 3 automakers have to deal with health care costs, while he has ignored over and over the point that in Japan, a government health care plan covers everyone that is not an employee. Say, for example, a former autoworker.

I don't think Sebastian is being deceptive here, I just think that by his statements it is clear he doesn't have any knowledge of the subject - he is just deep in the talking points.

I'd like to step back a bit and state explicitly something I tried to imply, which is that there is a bigger picture involved. I don't think that the only reason that GM is in the crapper is because of health care, but I do think it is one of the reasons. And I don't think that the reason is because of dollars (or yen) spent by the companies per se, but something that goes towards the notion of a comparative advantage of nations. When Toyota puts money into health care, they are simply supplementing a national health care system which generates a lot of economies of scale. Companies like Toyota and Honda benefit from this. This is a bit far afield of the whether GM should be bailed out, and as I said, I am agnostic on the notion. If GM were magically swapped for Toyota, it wouldn't solve its problems, but, if green energy is of great import to our future, I'm not sure Chapter 11 or Chap 7 are appropriate for the national interest.

Is Obama simply playing populist when he asks for a bailout? Perhaps, but I also discern a national strategic interest that I hope Obama is thinking about, over and above all those votes. I'd argue that the Big Three are key components of a green energy economy and if various tax breaks for green vehicles or green technology end up going to the foreign entities that snap up the best parts of GM, there's a problem. Of course, being in Japan, I have a vested interest in wanting those stimulized revenues to flow over here, especially since we are now officially in a recession. And if any of what Jon Cohn writes comes to pass, such as:

The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM's business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation's?assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money.

Restaurants, gas stations, hospitals, and then cities, counties, and states--all of them would feel pressure on their bottom lines. A study just published by the Michigan-based Center for Automotive Research (CAR) predicted that three million people would lose their jobs in the first year after such a Big Three meltdown, swelling the ranks of the unemployed by nearly one-third nationally and leading to hundreds of billions of dollars in lost income. The Midwest would feel the effects disproportionately, but the effect would reach into every community with a parts supplier or factory--and, to a lesser extent, into every town and city with a dealership. In short, virtually every community in the country would be touched.

(and he adds caveats immediately after that, to be sure) At any rate, I'm not sure if we can risk not bailing out GM.

This is pretty far from the question of how much of GM's problems are health care, so I hope I have wandered back to the subject.

I'm leaning towards a bailout as the lesser of two evils, based solely on the idea that letting GM collapse at this point will, like not bailing out Lehman, only make a bad situation (much) worse at a time when we can't really afford to let things get worse if we can help it. But there's a couple of things I'm curious about.

GM says it needs 25 billion, because of restructuring costs, setting up a trust for legacy costs, credit cruch etc. How long will this last them, and do people think that that's long enough to ride out the credit freeze? I'm not talking about riding out the recession or the slump or what have you, just the freeze in the credit markets. Presumably that will loosen up at some point with or without a general recovery.

Compared to that 25 billion, how much in loans would we have to guarantee to get GM through Chapter 11? Would those loans be safer than the 25 billion they've asked for?

How much revenue (in income taxes etc.) will the government lose if GM folds? Does a bailout make financial sense in terms of income for the government?

I think the first question is really the most important one. Will this get them past the credit hump? The ammount of money at stake is minor compared to the financial bailout (how deep are we into AIG at this point?) and would certainly seem worth it just to avoid the wider repercussions of GM collapsing, provided that they aren't back on the Hill in three months asking for some more. The question for me isn't about saving or not saving GM, it's about preventing the wider crisis from getting worse in a sensible way.

now_what makes an excellent point: You can't take hourly cost of labor and make that wages, because it's not. It's burdened wages, which can be over 2x what the worker sees in his gross.

Just because the LA Times, for instance, mentions that $75/hr figure doesn't mean it's gospel. It could mean the reporter hasn't really done his homework, or doesn't understand how these things are tracked, or some third or fourth possibility that I'm too lazy to explore.

You have to be careful when you come across unbelievable numbers; sometimes they're unbelievable for a reason.

Now_what,

Can you direct me to the source of your information?

I've been under the impression, as I commented above, that the figure included retiree costs, but intensive googling has not led to any clear explanation of the $75 figure. There are newspaper reports, but these are either ambiguous, or have no explanation at all. Even GM's annual report wasn't that helpful.

It seems plainly wrong that workers making around $30/hr in wages actually are getting 1.5 times that in benefits, but I can't seem to locate a breakdown of the figure.

Not just benefits, Bernard. Burdening includes overhead expenses as well.

Now_what: "The point being made is that Sebastian claims that both Japanese and big 3 automakers have to deal with health care costs, while he has ignored over and over the point that in Japan, a government health care plan covers everyone that is not an employee. Say, for example, a former autoworker."

*Retired* former autoworkers of the right age could get the already existing health care that exists in the US--Medicare.

So in the comparison with Japan, the only legacy costs which are allegedly forced by the US lack of health care is in the gap between retirement and Medicare eligibility. Those few years are not what is killing GM.

Now in point of fact, I suspect that most GM retirees don't ever go to Medicare. They are almost certainly on gold-plated health insurance for the rest of their lives on GM's dime. Which was negotiated by idiot GM managers and overly pushy UAW negotiators. Which brings us back to the inherent disfunctional relationship of the Big 3 and the UAW as opposed to some systemic problem with the US in general which is reflected in the Big 3 and the UAW.

Slarti,

Maybe that's right, but then we shouldn't be talking about it in per hour costs, even though lots of people like to.

I'm sure I don't have to explain to you that there are impprtant differences between fixed and and variable costs, and that while lumping them together is OK for some purposes, it is deceptive for others.

Anyway, I'd still like to find a decent source for these numbers that explains what they really are. "Overhead" covers a lot of territory.

I kind of dreaded making my last comment to you, Bernard, because I was nearly certain that you knew more about it than I did. Still, I couldn't help myself.

Which should set the scene for this: I too am a little unsure of what fully burdened per-hour cost means in the context of a non-contract manufacturing process. It's very useful in, just to pick a random example, the defense sector, where you bill hours for services based on labor hourly cost plus overhead burden. In that example, overhead means the total cost of running the company, spread out over the entire direct-charging workforce.

I should point out once again that I Am Not A Beancounter, though, and also that I can't seem to resist pedanting to people who know more than I do.

This has been posted before, but Dean Baker disputes the $70 per hour figure. Sorry if I've gotten my threads confused.

Slarti,

Nice to know I strike awe into your heart, at least sometimes.

True, contract manufacturing is one area where it makes sense to look at the burdened cost, at least in submitting bids and so on.

In the auto industry case, I'm frustrated that I haven't been able to pin down the source of the $70+/hr figure, and see exactly how it is calculated and what it includes. I've seen a few people say that it includes retiree costs, which makes sense to me on a "how can this number be right" basis, but I can't find anything definitive.

The trouble is that there are folks going around saying the auto workers are making $70/hr, which is patently false. More subtly, others are saying that production costs include $70/hr for labor, which I also believe to be false. So I'm looking around, but have found nothing yet. (Story of my life, in other contexts).

Sapient,

God bless you.

Sebastian,

I understand that it doesn't represent hourly pay. I'm not at all sure why it would represent retiree costs though, as that is almost never called 'labor cost'. But either way it doesn't really matter. Whether it includes or excludes the retirement cost, it is clear that GM as currently functioning cannot possibly compete.

I agree that retiree costs generally are not considered "labor costs," but per Dean Baker, (thanks, Sapient) and some others, they are apparently included in the hourly figure.

Does that mean GM can't compete? No and yes. The retiree obligations are a fixed cost, not dependent on the number of vehicle GM makes. So they are not properly included in its production cost per vehicle, any more than interest payments on debt are, for example. So it may be that GM can compete in terms of its actual manufacturing costs, but has other costs that prevent it from being profitable. That is exactly the sort of situation that Chapter 11 is intended to remedy.

Put briefly, the operating structure may be sound, while the financial structure, of which retiree benefits are a part, is rotten. I don't know if that accurately describes GM, but it might, which is why I favor the "assisted bankruptcy" approach.

I'd start by selling the corporate planes. Morons.

"God bless you."

I posted that link to Dean Baker's piece November 16, 2008 at 05:17 PM and the link to those links yesterday at 10:03 PM.

Yes, God bless you, Gary Farber. I copied your link to Dean Baker, and have since pasted it all over town. I had forgotten who led me there.

God bless you too, Gary.

Just to do my part, I note that Felix Salmon is on to the scam also.

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