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Geriatric Monolith Getting Money, Giving Misery

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The following is a guest post by Greg McFarlane. He is an advertising copywriter who lives in Las Vegas and Lahaina. Greg runs ControlYourCash.com and recently wrote Control Your Cash: Making Money Make Sense, a financial primer for people in their 20s and 30s who know nothing about money. You can reach him at [email protected]. Finally, please note the opinions of Mr. McFarlane do not necessarily represent those of Lazy Man and Money

Read into this post what you want, but it's not intended as political commentary.

Last week, the New York Stock Exchange relisted General Motors' stock at $33. GM had spent much of the past year drawing billions from one taxpayer-funded account to pay its obligations to another. The automaker is celebrating its new viability by spending yet more money taking out ads thanking the American people for our "generosity", as if we had a choice.

Earlier this year the president spoke to autoworkers in Detroit, defending his and his congressional cohorts' decision to confiscate an average of $283 per American and award it to the managers of General Motors, Chrysler, and the United Auto Workers to distribute as they saw fit.

The president didn't just impoverish critics of the auto bailout, he chided them "“ adding insult to inconvenience. GM and Chrysler sales rose since the bailout: of course they did, those companies can name their own taxpayer-subsidized prices. The president argues that the relative "success" of GM and Chrysler proves that those of us who criticized the bailout weren't just wrong, but unpatriotic. As he phrased it, "Don't bet against the American worker. Don't bet against the American people."

Speaking up in favor of the 99+% of American people who aren't autoworkers is now betting against the American people. In 2010, the intercontinental, universal language is not English so much as it is hyperbole. If the stock market retains 95% of its value on a given today, and is all but certain to regain much of the losses the following day, it indicates a "crash". The Gulf of Mexico is "destroyed" even though it suffered the aquatic equivalent of a fingernail cut too short. A Congress with large majorities in each house, and a president of the same party is in a "lame-duck" session. A bunch of football players from across the nation happen to get drafted by, traded to, or signed as free agents by the one NFL team that plays in a sub-littoral zone, and those players win sufficient games to "save" that city and turn it into a magical Utopia free of crime and graft.

And so to the auto bailout, which has "saved a million jobs." If you're skeptical, which presumably means you're betting against the American people, you want to see those jobs quantified.

Unedited, from an Agence France-Presse story:

"In the year before the bankruptcies, these companies lost almost 340,000 jobs," said Ron Bloom, a senior advisor to Treasury Secretary Timothy Geithner.

"In the year since then, 55,000 jobs have been added into these companies; if we hadn't stepped in when we did, most observers believe at least a million jobs would have been lost."

Bloom appeared to be referring not just to Chrysler and GM, but to the large web of suppliers which manufacture components for the plants, which would also likely have gone under if the big auto giants had collapsed.

That quote is provably nonsense. Considering it was uttered by an economic advisor, it shows a powerful misunderstanding, intentional or otherwise, of fundamentals.

Let's say the man in the White House "“ whether the incumbent or his predecessor "“ had done the humane thing, preserved sacred taxpayer money, and stood by as General Motors and Chrysler went the way of Packard, American Motors, Studebaker, and Pierce-Arrow. What would have happened?

Suppliers disappearing (for any reason other than reduced demand) doesn't have the slightest effect on demand. Last year, about 10 million Americans bought new cars. Had GM's total unit sales gone from 2 million to 0, viable car manufacturers would have picked up the slack: specifically, the efficient market players who didn't sign masochistic union contracts and had enough economies of scale to make things work.

One of the most dangerous and foolish assumptions you can make is that jobs, or any other component of an economy, are static. Sure, GM and Chrysler folding would have meant a few thousand people would have been temporarily displaced. But their skills and experience would still have had tremendous value for someone, somewhere; maybe the Honda plant in Marysville, Ohio, or the Toyota plant in Princeton, Indiana. The auto bailout didn't save one job "“ it merely preserved some at the expense of other, more dynamic ones with greater potential for growth. For every Band-Aid placed on GM's debilitated carcass, its competitors forwent expansion that we'll never see.

Keeping decrepit automakers alive doesn't do a thing for the ancillary companies who are one step removed from the bailout, either. Were Chrysler to go under, Interstate would still need to sate America's demand for batteries. Why is it inherently bad that those batteries be installed in more Fords and fewer Chevys?

How viable is a job when taxpayers have to subsidize it, anyway? Autoworkers aren't soldiers, providing a service that requires a national monopoly and doesn't cotton to multiple market players. General Motors proved itself incapable of selling cars at sufficient price and quantity to satisfy shareholders, customers and employees. Only under the fallacy of composition does it stand to reason that no one else can, either.

What does this have to do with you? Everything. When you patronize a business that sells its wares less efficiently than someone else does "“ which usually means for a higher price "“ not only are you not doing yourself a favor, you're not helping out the economy at large, either. That applies to your own position as a salesperson in the labor market, when you sell yourself to the highest or most promising bidder. When you work merely to preserve your job, acting defensively, you're not growing. You're not making yourself adaptable, and you're setting yourself up for failure should your employer ever go under. Working 45 years leading to a gold watch was nonsensical then, and nonexistent now.

If you enjoyed this post I encourage you to buy Control Your Cash here (physical) or here (Kindle).

Posted on December 3, 2010.

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12 Responses to “Geriatric Monolith Getting Money, Giving Misery”

  1. I. Michelle says:

    According to the U3 numbers, almost ten percent of Americans are out there waiting to be picked up by some viable company.

    If there is a dynamic industry right now which has the potential for growth, there appears to be a workforce out there who is ready to meet it.

    Bring it on!

  2. Contrarian says:

    The GM bailout and subsequent IPO represents all that is wrong with a country on the fast track to socialism.

    I don’t blame the the greedy auto workers union for extorting billions from the company, or the incompetent management who drove the GM into the ditch, I blame the us … the ignorant populous, who continue to elect ambitious politicians who continue to undermine our liberty and prosperity by implementing disastrous schemes such as these.

    Interrupting the law of cause and effect by rescuing failure with our hard-earned $ is not a sustainable long term policy.

    Thank you for your pithy and well written piece. I look forward to following your blog.

  3. Back when the crisis was nearing a fever pitch, I gave a rare stock tip – buy Ford. There’s a substantial segment of the population that insist on buying cars with an American nameplate (regardless of where it was contructed or the origin of the parts) – and of the three US auto makers, Ford was in by far the best shape (not that it was in wondeful shape, but it was in much better shape than the others).

    Too bad I don’t invest in inividual stocks myself :)

  4. StL reflections says:

    I strongly disagree-
    the economic turmoil of 2008 meant that many companies which were viable in normal economic times would go under, punished for no fault of their own (OK, maybe Chrysler deserves to die). Demand was sinking nationally, because of economic worries and tightened credit. In the face of this decreasing demand, companies became unprofitable. If they had been allowed to go bankrupt without the bailout, there would have been millions of jobs lost, further reducing demand (since, after all, people laid off from GM can’t buy cars-demand is VERY elastic in times economic trouble) and would continue a vicious cycle of job loss.
    The role of the government in difficult economic times like the great recession and the great depression is to provide a backstop, breaking this vicious cycle.
    The government actually made money on the TARP bailouts, because stopping bank runs and the vicious cycle is good for everyone. Suppliers absolutely should be allowed to go bankrupt in healthy times. Allowing everyone to go out of business in times of crisis is national self-destruction. (Oh, And I. Michelle is completely correct.)

  5. I’m still pretty bitter about the GM fiasco, because I got BK’ed out of 400 shares of GM stock. The bankruptcy by iteself didn’t bother me nearly as much as the way they gave 30% of the company to the union. They should have forced a lot more union concessions, so our auto industry can remain viable in the future.

    As for letting GM and Chrysler fail, that’s ridiculously short-sighted. They saved Chrysler back in the ’80s and it paid off. I predict it will pay off again. We can’t allow our backbone industries to fail, but we also shouldn’t give them a bailout without requiring some changes.

    Kosmo, I did buy 1,000 shares of Ford and I am so glad that I did. I only wish I had of bought more shares of Ford and less GM.

  6. “the economic turmoil of 2008 meant that many companies which were viable in normal economic times would go under, punished for no fault of their own (OK, maybe Chrysler deserves to die). ”

    Sure, you certainly have a point.

    However, GM was spewing red ink all over the place long before 2008. The recession might have put the nail in the coffin, but the corpse was already embalmed.

  7. Thanks for your comments. (The commentariat on this site is way too articulate. Where are your all-caps profane diatribes telling me to have sex with myself?)

    @Bret:
    Well, what circumstances would warrant letting GM and Chrysler go under, if not the recent ones? It seems that Chrysler’s business model requires it to become a ward of the state every 30 years.

    You’re right that the executive branch decided that it was going to stand centuries of corporate law on its head and rerank the hierarchy of creditors. Last I checked, bondholders were supposed to get paid first, followed by preferred shareholders and common shareholders. There’s no mention of employee unions anywhere in there.

    With a few months to sit and churn on this, it’s still nauseating that the American taxpayers were forced to pay for the mistakes of Chrysler, LLC, a wholly-owned subsidiary of Cerberus Capital Management – which is a private corporation whose shareholders are all billionaires.

    @Stlreflections:

    I posit that the Keynesian argument (“In a recession, better the government build pyramids than do nothing”) prolonged the Great Depression the first time it was tried. Artificially increasing aggregate demand still requires a transfer of wealth from some parties to others. If economic growth is defined as the movement of labor and capital from lower-valued to higher-valued uses, this is the opposite.

  8. I. Michelle says:

    How is it the opposite? You’re taking people who are unproductive and collecting unemployment and putting them to work earning a wage.

    How is paying people to create some sort of tangible output equal to or less valued than unproductive labor and transfer payments?

  9. @I. Michelle:

    It’s a free-flow-of-labor argument. Products and services whose markets are expanding can’t help but hire more workers. Government wards (Chrysler, Bank of America to some extent, Amtrak, the Bureau of Reclamation) can artificially increase employment at the will of the White House and Congress, whether there’s a demand for what they’re selling or not. The tangible output that those employees create is only worthwhile if someone’s willing to exchange money for it.
    There’s always SOME sector of the economy that’s burgeoning, at least relative to the others. Pretending otherwise, which is what governments so often do, leads to overproduction in unwelcome areas.

  10. I. Michelle says:

    What private sector is currently hurting for employees? Ten percent of the American work force is currently being paid to stay home, and many more are underemployed (U6 numbers have been hovering around 17% for a year and a half). Why aren’t these people being encouraged to seek employment in this enigmatic sector?

    Until some evidence appears that this sector even exists, I’m going to have some difficulty believing that we are experiencing a structural unemployment problem.

  11. StL reflections says:

    We tried Hoover economics, and the great depression got worse. We tried Keynesian Economics, and the great depression got better. We tried employing everyone to beat the snot out of Hitler, and the economy got better really fast. It seems like a pretty simple equation-giving people money increases demand. Increased demand means more business growth. More business growth means a better economy, rinse and repeat.

    And I Michelle makes more sense to me-there are millions upon millions of people in this country who want jobs. Any companies who need more labor can have it, right now! My wife is a hiring manager, and she’s been getting 10x the normal number of resumes over the last couple of years (and more qualified ones too). Companies have much greater labor choice right now than they did 2 years ago, and the government is a long way from changing that reality. Plus, Government paying for something is demand-ask the military industrial complex.

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