Monday, December 8, 2008

Where to Draw the Bailout Line?

The bailout-nation saga continued this week as the little-three carmakers from Detroit drove to Washington to plead for a $34 billion federal package to save themselves from bankruptcy and insolvency. Hot on their heels was a devastating report of 533,000 lost jobs in November. Actually, it’s a loss of 732,000 jobs, including downward revisions from the
prior two months. Unemployment moved up to 6.7 percent from 6.5 percent, a number that’s going to get worse as the volume of discouraged workers continues to rise.

So here’s the painful choice for both Republicans and Democrats in Congress: Will the political class risk a Detroit-carmaker bankruptcy that might lead to catastrophic liquidation — including, realistically, a couple million car-related jobs — all while the recession deepens and job losses mount (1.2 million in just the past three months)?

It’s a tough choice — especially for Republicans, most of whom want to vote against bailout nation and stop big-government encroachment on our free-market economy. That’s the right theory. But are the economic risks simply too great to employ it?

Various polling surveys say bailout nation, and a federal rescue for autos in particular, is very unpopular. At least 60 percent are polling against a bailout. The TARP bailout of banks is increasingly unpopular.

Meanwhile, the pressure for more bailouts grows daily. The Avis rental-car company wants a bailout from TARP. A company called BlueFire Ethanol wants a bailout. The trade association for equipment-leasing companies wants a bailout. There’s no end to it. And if we keep going down this path we’ll make a mockery of free-market capitalism.

Where to draw the line? That’s the huge political question.

Coming back to Detroit, there may be a pragmatic solution, one that takes some of the apocalypse-now threat of major economic decline out of play. Senator Bob Corker and others have proposed a federal oversight board that would in effect become a bankruptcy court. Strict conditions would be imposed on the carmakers, especially regarding compensation — the single-biggest reason for Detroit’s decades-long decline.

Corker wants Detroit to have the exact same compensation levels as the Japanese transplants in the non-union Southern states. That means moving hourly labor costs down from roughly $70 to $48. It means reopening the UAW contracts that have created the huge pay-gap between Toyota and GM. It means putting an end to excessive pension and healthcare benefits.

According to Professor Mark Perry of the University of Michigan, GM healthcare benefits add $1,500 to the price of every vehicle, while pension costs add another $700 per car. That will have to end. The lucrative jobs bank that pays laid-off workers 95 percent of their compensation also will have to stop. And bondholders will have to be satisfied with a complete renegotiation of GM’s $62 billion in debt, including the union retiree healthcare fund that is under-funded by $30 billion.

There still will be considerable job losses for downsized Detroit carmakers. They’ll have to cut a huge chunk of their dealer networks. Domestic brands will have to be sharply reduced. But essentially, as would be the case under Chapter 11 bankruptcy, the federal government will
provide short-term financing while Detroit goes through its radical restructuring. It looks like bankruptcy lite, and it will completely change the direction of the former Big Three.

It’s probably too much to ask, but tough federal action under the aegis of oversight-board enforcement also should relieve the CAFE fuel standards that have plagued U.S. automakers. At the very least, worldwide standards should be substituted for domestic ones. Making expensive small green cars is an unprofitable business.

Ironically, with oil and retail gasoline prices plunging, it’s not unreasonable to expect something of an auto-sales recovery. Gas prices have dropped all the way to $1.75 from over $4. This tax cut will help revive the whole economy, along with auto sales.

But if Washington can put this car-bailout business behind it, perhaps Congress can move on to the ultimate solution: restoring economic growth. President-elect Obama has been cagey about the details of his massive $700 billion infrastructure spending plan and whether he’ll raise taxes on successful earners. But this new New Deal, including Obama’s middle-class
tax credits, will not create permanent economic growth incentives. What will? A genuine supply-side growth agenda to reduce tax rates across-the-board.

If the Republican party wants to put bailout nation to rest it should campaign for lower corporate, individual, and investment tax rates. It should make clear that the Democrats are the government-spending party while the Republicans are the tax-cutting party.

We will not bailout our way into prosperity. Nor will we spend our way into prosperity. Somebody has to stand up and yell: It’s time to cut tax rates on the supply-side. That will reinvigorate growth and infuse new spirit into a demoralized economy.


Intrade said...

Yo Dude. said :

    Did Goldilocks planted your mustard seeds? If she did, I hope they get drenched with weed killer.

Intrade said...

JC said :


A friend of mine explained the actual theory behind trickle down economics to me.

John; I had trickle down economics explained to me by a 88 year old black man in narainger, fl. just south of miami in 1992. He said it was the rich upperclass white fat cat ,standin on the roof ,pissin off the edge, and low and behold it is tricklein down on him!!! So far no one has explained it any better than that...
Reagan started this trickle down economics and the result has been eliminating the middle class and sending the aged into poverty. Let's try the trickle up economics. Give em jobs and wages. They will spend their wages and that money will move up the chain till it reaches the producers and even the fat cats will get their honest share. Trickle down is starting at the top, but instead of the money moving down the chain, the greedy invest it trying to increase their wealth. My theory is certain to work. We have seen what trickle down has done to our country.

Intrade said...

bailey said :

     What is an excessive pension? and before you answer is there anything wrong expecting a payment for working 30-40 years, a pension that was was agreed on by both parties. Auto workers probably wished they kept a better eye on how their deferred pay was being invested or spent on rewards to executives and share holders. You the supply sider wanting less regulations made monitoring the use of the deferred pay really difficult,
The stated $70 an hour is not a true picture of what is in their pay I have seen an auto workers pay check and its not close to your lie. When unions negotiated pensions and health care for retirees, it was considered deferred compensation. Workers sacrificed higher wages in return for a secure retirement. The companies passed the cost on to consumers, but the companies’ didn't invest those higher profits in a trust that would provide for retiree health care. Instead they indulged themselves and their shareholders. Are you getting it yet?
Now to the Jobs bank You think that the jobs bank is a crime. If you look at the Japanese they have the same program (no layoffs). The American managers could have put those people too work, why wouldn't they give these people productive jobs? There is a reason that businessmen like you wear fancy suits and ties, and not work clothes. you don't create wealth, you don't have to shower after work, you are just a paid advertisement. How much money do you make? what are you needs? the working class and the auto workers aren't very much different. Oh yeah, Companies wouldn't have to beg for bail outs if they had lived within their profits and had a cushion of money set aside for an economic down turn. Workers wouldn't use 40:1 leverage, workers get fired when they make a mistake, Corporations get bonuses, options, and golden parachutes when they mis- manage and executives get a gob of retirement paid up front when they retire.

Intrade said...

FPRox said :

    'Trickle up economics' ... more like trickle up poverty! Sure, let's keep taking money from productive people to give to the fat, lazy & unemployed! Communism has only killed over 100 million people, why not give it another shot?

Intrade said...

dr461 said :

    GIVE THIS SENILE OLD FUCK THE HOOK----he's a hopeless RepubliKKKan shill, and as such, his economic advice is as sage as Dick Cheney or Karl Rove.

Intrade said...

Fanning the Flames said :

    The credit crisis has caused Economic Chaos because the Middle Class are underpaid and have been buying the output of the boom years on credit, you need more good, well paid union jobs so people can afford to buy the products in US stores for cash and thus get the economy going again.

Kudlow just represents the greed of those at the top not wanting to pay a living wage, in the long run this will kill Capitalism faster than any policies of the communists or socialists.

Intrade said...

Press-flat (inflation w/ depression) said :

    Right on Larry...the only way out is for us to produce more than we cuts for production and thats have Congress revist all the laws it has passed in the past half century that have stiffled production.

Intrade said...

nancylgeorge said :

    Someone said that trickle-down economics is like horse-and-sparrow economics. You feed the horses, and what comes out falls on the road and is eaten by the sparrows. Supply and demand would be two sides of the same coin. Doesn't it make sense that supply and demand would have to be in balance? As usual, Kudlow and the rest of his class and the class they represent want to "stimulate the supply side" -- again. Of course they do! They are getting richer off of supply side economics!

But that won't help the economy when there's no demand because people don't have the money to spend. When there's no spending, there's no demand, so production is cut, jobs are cut, there's even less money in circulation, and even less demand. Real estate purchases decline some more, the stock market falls some more. The downward cycle feeds on itself, gaining momentum.

It is clear that Bush's intent with the auto bailout is to destroy the unions. That will be one of his last great gifts to his class, which he has already enriched a great deal. Today, the upper 1 per cent of families held 39% of the wealth of our country. Just before the great depression, this same 1 percent held about the same proportion. Haven't the supply siders done enough!

Intrade said...

bangkoklucky said :

    there are so many factual errors in your article, that clearly any conclusions you draw are invalid. But how do ou get this forum? you clearly either dont know what you are talking about, or you have an agenda that over rides what you do know. a waste of bandwidth

Intrade said...

none said :

    "Making expensive small green cars is an unprofitable business."

Tell that to Toyota and Honda, who aren't asking for a bailout, and who do build those cars. I don't know how you can write something so blatantly wrong and still be a paid pundit.

Intrade said...

charlie said :

    I don't believe the principles you advocate are in the interest of you getting rich as someone commented. I think you are simply ignorant on the subject of economics, so ignorant that you do not know enough to be embarassed at your lack of knowledge.

Intrade said...

Christine said :

    Typical Kudlow. Apparently he doesn't even feel the need to provide a rationale for his "supply side" magic solution to everything anymore. Bascially his argument boils down to this: "lower MY taxes, and YOU'LL be better off... I promise..." Pathetic.

Intrade said...

RainCityBlues said :

    We should apply the same standards to corporate America that we do to lower-class America. If you want welfare, it comes with strings. Just as people on the dole have to prove they are looking for work and produce proof of their expenses regularly, just as they receive money that can only be spent on food and only on certain kinds of food, the Corporations asking for handouts have to be compelled to provide proof of what they intend to spend every last penny on, and Congress should put restrictions on how the money is to be spent. Should they fail to comply, all aid is to be cut off and they are to be held liable if they do not return the full amount of money disbursed to them previously.

The reason why we do not have hordes of people running to get on welfare when they do not need it is because it is unpleasant to be on welfare; the registration process is long and difficult, all money received comes with strings, and you have to answer when called upon for information regarding your case, no matter how inconvenient that may be. Corporations made to jump through such hoops will find them similarly distasteful, and will find them an equally powerful disincentive.

There is legal precedent for this, since corporations are considered persons under federal law. As such, requiring them to observe the same rules as any other person for similar benefits is not difficult to justify, since the 14th Amendment states that the laws apply equally to all citizens.

Intrade said...

Mark in SF said :

    none: "Tell that to Toyota and Honda, who aren't asking for a bailout, and who do build those cars. I don't know how you can write something so blatantly wrong and still be a paid pundit."

Frankly I don't know why anybody listens to this guy. And yet I still read him from time to time, just to see what the shills are saying.

Kudlow today: "And if we keep going down this path we’ll make a mockery of free-market capitalism."

Just a few weeks ago:
"The TARP plan purchase toxic assets from banks and other lenders in order to unclog the credit system, which is so essential to the efficient functioning of the economy. I supported that plan then, and I still do now."

Ah, essential to the economy!! So we should bail them out as much as is needed, why should they pay for their mistakes when the taxpayer can do that!?

Kudlow is a true socialist at heart, but only for the rich.

Intrade said...

To : lary kudlow said :

    What propganda machine do you work for? Be transparant so we can make an informed decision if your short novels are fact or fiction. Disclose all your sources of income. Everyone of them.

Intrade said...


    From biography below, Larry is also the host of CNBC's "Kudlow & Company", which airs weeknights at 7pm EST. Looks like that show got canned. Intrade should follow the lead.

Intrade said...

MakeSense said :

    Supply-side tax cuts won't solve the problems.
The consumers (whose spending represents 70% of the economy), are up to their ears in debt.
Even if you cut supply-side taxes to zero , their customers are still up to their ears in debt , and thus unable to spend more...

The problem is simply that wealth has become distributed too in-equally, which is what always happens to a capitalist system (just play the monopoly board game..).
Once the wealth is distributed very in-equally, the capitalist economy runs into a brick wall.
On the one hand a lot of people with lot of needs but no money to spend (or worse: debts to service..).
On the other hand a "successful" minority who doesn't know anymore what to spend their money on..
That's the logical conclusion of any competition based economy.

If this happens in the Monopoly board game, everyone understands it makes no sense to continue the game, and the cards are reshuffled to start a new game.
But somehow in real life we insist to continue playing..., till war reshuffles the cards..

This is the basic flaw of capitalism.
It is a divergent system, that self-destructs in the end.