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The Democrats' economic stupidity and Detroit's big three
Gerard Jackson
The Union Auto Workers and its supporters are arguing that the big three — like some other economic entities — are too big to fail. Talk about the wrong end of the stick. In reality, these companies are too big to rescue. Even those who are adamantly opposed to a bailout on principle have only a dim grasp of it will really cost.
To talk about bankruptcy and bailouts with discussing the economics of the situation is very likely to result in an Obama administration pouring billions of dollars down a financial hole in order to pay off the UAW. The bailout would be the first instalment of what would amount to a policy of subsidising Detroit. Billions of dollars would be directed away from alternative investments for no other reason than to shore up an important Democrat constituency.
Of course, some of the money would then find itself going into the Democrats coffers in the form of political donations. (Think of it as a form of financial recycling carried out at the taxpayers expense). Then there is the possibility that a subsidy might be in breach of international trade agreements, the breaching of which might trigger retaliatory actions.
Some defenders of a bailout have been focussing on a loss of jobs and incomes if the Obama does not act. There lies a fundamental fallacy at the heart of this argument. It implicitly assumes that bankruptcy means that these companies' plant and equipment would be rendered permanently idle. There are no grounds whatsoever to support this assumption. The plant and machinery would only remain idle if there was no further use for them. For this to be the case the loss of output resulting from a shut down would have to be made up by other producers. This is not possible. From January to June of 2007 the big three produced 4.9 million vehicles. Irrespective of Detroit's financial straits it is still serving a massive market.
Make no bones about it. The big three are already bankrupt. It wasn't competition that did the dirty deed but the UAW. It was this union's extortion racket that broke Detroit. Thanks to its destructive policy of holding these companies to ransom they jacked labour costs up to an unsustainable $73 an hour while labour costs in foreign subsidiaries average about $42. It's obvious to anyone who takes the trouble to look that all the additional costs that a politically corrupt union piled on hiring labour could be drastically slashed without touching the net wage. For example, General Motors spends over $1,600 per vehicle on the healthcare costs of employees and its retired workers while Toyota pays about $200 per vehicle.
Thanks to the union's racketeering approach to negotiations the companies were transformed into welfare agencies. There now exists the ridiculous situation where the number of retirees greatly exceed the number of employees. Unlike governments the big three cannot print the money to rescue themselves financially.
It is axiomatic in economics that if you raise the prices of any good or service above its market clearing rate a surplus will emerge. Moreover, there is a tendency in a free market for every factor — especially labour services — to receive the full value of its marginal product (the value of the additional output from hiring one more factor). The importance of this fact can never be sufficiently stressed. If GM's $72 hourly wage rates (the total cost of hiring labour is the real wage rate) had been determined by the market then GM would have been expanding output and taking on more labour. Its competitors would have found themselves in the same position. Instead, we find GM in dire financial trouble. Further proof that you defy the market at you peril.
The Detroit situation is a clear case of a union capturing capital. This forced the companies to absorb rising labour costs until driven into bankruptcy. There is no point trying to blame management for what happened. Where a union has de facto control over labour costs management will be badly hampered. In the absence of any union presence bad management would have resulted in undervalued shares that would eventually invite a takeover.
Economic logic leads to the conclusion that it is because of the UAW that no one will touch the big three. It follows from this that any government bailout would in fact be nothing but a shameless pay off to the UAW for its support of Obama, not to mention the state Democrats whose own economic stupidity has wrecked Michigan's economy. Moreover, the pay off would have to be one of many, unless you are naive enough to imagine that the union that thought nothing of bankrupting Detroit would stand idly by while its victims tore up its coerced 'contracts'. (According to law coerced contracts are invalid).
For those of you who think I am exaggerating the union angle, take a look at Barney Frank's lament that bankruptcy "could undo labor contracts". The man is a genuine idiot. Even now he cannot make the link between the UAW's thoroughly destructive activities and the big three's financial plight. His solution is a pay off that will guarantee union power — and to hell with the taxpayers who are going to be frogmarched into paying protection money for the Democrats.
Never mind, Frank, Pelosi, Reid, Waxman and the rest of the economic clowns that make up the Democratic Party — including Rahm Emanual — have now come up with an absolutely spiffing idea of their own. The bailout will have conditions attached to it, some of which would include instructions from these geniuses on what types of cars are to be built. Moreover, to ensure equality — and we know how big the Democrats are on equality — foreign car manufacturers who were dumb enough to invest in the US will now have to accept the UAW as a silent partner.
Situations like this always bring out vulgar Keynesians, and David Ignatius is no exception. His solutions? Print money and socialise investment. For this he drew on Keynes' ridiculous suggestion that putting pounds in old bottles could reduce unemployment*. (To tell the truth, I can never tell when Keynes is joking). (Obama should consider a national investment bank, Daily Star, 22 November 2008). Ignatius is clearly another economic illiterate who cannot grasp that the financial crisis is basically a product of Keynesian policies. It's also clear that the policy he proposes is highly inflationary.
At the moment US unemployment stands at 6.5 per cent. According to Ignatius this calls for Keynesian pump-priming. The only problem with this is that Keynes would disagree. In 1937 unemployment in the UK was 12.5 per cent. Nevertheless, Keynes publicly called on the British to end new public works projects, and warned it against the inflationary effects of any "general stimulus" (T. W. Hutchison, Keynes v. the 'Keynesians'...? The Institute for Economic Affairs, 1977, p. 11). Obviously our media scribblers have no idea just how much inflation concerned Keynes, even when there was heavy unemployment. The American electorate would be far better informed if ignoramuses like Ignatius refrained from giving advice on subjects of which they are undoubtedly ignorant.
*Obama's wheelbarrow economics
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 24 November 2008
The sheer brilliance of this suggestion leaves me awestruck. To make sure they receive even more money from the UAW these economic illiterates are prepared to wreck the rest of the car industry. It is to be deeply regretted that these monkeys are neither mute, silent nor deaf.
From the Iowa Hawk