The Auto Bailout: A Christmas Carol Edition

It is the best of times (Obama won!) and it is the worst of times (pretty much everything else). It is the age of wisdom (again, go Obama), it is the age of foolishness (sub-prime mortgages, Iraq, the Big 3 automakers, Sarah Palin, etc.). So now, as we enter our winter of despair - month 12 of the recession and counting! - can we look forward to a spring of hope? Yes, yes we can. We just need some creative solutions, and I have one straight out of Dickens.

Obviously, there are a number of problems facing our nation today. With the economy tanking, families are running short on cash and are consequently racking up huge amounts of debt they can't foreseeably pay off. At the same time, America is losing its competitive edge in the world marketplace - due in no small part to the abysmal state of education and the indolence of the nation's youth. So pathetic is the state of education that schools are now resorting to flat-out bribery to increase grades and test scores: DC Public Schools are now offering cash bonuses for better grades; Baylor University is offering scholarship money for matriculated students to retake the SATs.

Thus, as our middle class falls into ever more dire financial straits and our future workforce falls ever further behind its peers, it becomes clear that we must take action. "But what can we do?" you ask.

Repeal child labor laws.

It's perfect. Now, I'm not suggesting that we pull kids out of school and stick them in factories. Rather, just take the underperformers and troublemakers and put them in the factories. Such a policy has a number of clear advantages.

First, it incentivizes academic performance. I don't want my tax dollars going to some little shit-for-brains that has to get paid to get A's. If kids don't want good grades for the sheer merit of having good grades, well, academia just isn't for them. But if they want to get paid for their work, they should produce something worth getting paid for. Like automobiles. Under my plan, no child will be left behind, but a goodly number of them will be working sheet metal presses in Detroit.

That brings me to the second part of my plan - we'll fix the auto industry. No need for an expensive bailout when we can simply slash production costs. Detroit keeps whingeing about the expense of its labor force - the high hourly wages, the cost of health insurance and pension benefits, whine, whine, whine. "It adds $2000 to the price of every car," they complain, and with that kind of overhead, they can't compete with foreign manufacturers. Simple solution - we'll use child labor to build our cars.

Kids don't need health insurance - they'll be covered under Mummy and Daddy's plan. They don't need a high wage because they're just kids - no families to support. And they don't need pension benefits because once we eliminate occupational safety regulations, they won't live that long.

Furthermore, children have extraordinary manual dexterity, what with all that video game playing. Their little fingers can reach into the smallest of places. But rather than replacing Victorian-era bobbins, they'll be installing 21st Century brake lines. Thus, we can replace all those expensive robots that Detroit uses with 5-7 year-olds. This will further slash overhead - no robot maintenance costs, and, heck, they'll barely need electricity. Give each tot a miner's helmet with a light on it, and you don't even need to light the factory floor. That's thousands of dollars a month in energy savings alone.

Finally, this plan will save the environment. With all these kids going to work, parents don't need giant SUVs to shuttle Madison and Adrian to soccer practice and ballet. Mom and Dad can buy smaller, more fuel-efficient cars with lower emissions. They might even get a family discount if they buy from their kids' company.

I don't think such a modest proposal can fail, can it? Merry Christmas, every one! The end.
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Too Big To Fail: Auto Industry Edition II

I recently posted my thoughts on bailing out the auto industry. In brief summary, I said that a well-tailored government solution would best serve all parties. However, I feared that no such government solution was possible, and it might therefore be better just to let the market take its course.

In today's NY Times, the author of "The World is Flat" and "Hot, Flat and Crowded", Thomas L. Friedman, agreed with me. Nothing like validation by a Pulitzer-Prize-winning journalist to make one smile. Here's what we said:


Just as I pointed out that the automotive industry was pushing dead technology via an outmoded business model, Friedman similarly stated that both automobiles and the automobile industry are "un-innovative." He went on to highlight GM's resistance to innovation on all fronts: a GM executive said hybrids made "'no economic sense,'"; this exec also referred to global warming as a "'total crock of [expletive]'". Additionally, GM gave no support to a national health care program, even though it cited rising health care costs as a major source of its economic troubles. Finally, GM chose to make money by selling "gas-guzzling SUVs and trucks" rather than "innovating around fuel efficiency, productivity, and design."

Given this institutional bias against innovation, Friedman was stunned to hear that Bob Nardelli, CEO of Chrysler, wanted $25 billion of taxpayer money to "retool for innovation." Indeed, this is stunning to hear. Since when does a worthwhile business need outside stimulation to innovate? Isn't that the driving force behind a capitalist economy - the need to find the next big thing? That is precisely the point Friedman and I made: the auto-industry is not a worthwhile business.

He counsels (as did I) against issuing a blank check to the auto industry, and instead called for stringent limitations on any government assistance. Specifically, he wants automakers to develop that next step in transportation technology that I spoke of - something more efficient (and not just in terms of fuel economy) than the cars we have now.

We did differ on one point. If a suitable government bailout can't be put together, I recommended just letting Porsche come in and take over, given their extraordinary automotive and business credentials. Friedman recommended calling Steve Jobs, the king of innovators, so he could develop the iCar. Either way, it's a win-win: we all get Porsches, or we all get iCars. What a bright morning in America that will be, don't you think?

Thanks for agreeing with me Mr. Friedman, and please call if you need help on your next book.

The end.

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Too Big To Fail: Auto Industry Edition

Hi again. Since all I do everyday is apply to jobs, watch news, and read the NY Times, I have a lot of time on my hands. I also spend a lot of time thinking about the news. Recent news has focused on the Democrats' plan to bailout the auto industry. No doubt this comes at the urging of the auto workers' unions, who are probably looking for payback for their support of Obama.

I am of two minds about the auto bailout, but leaning toward permitting car manufacturers to fall on their faces and let the market sort things out. The other side of me says that there's no need for such draconian measures, and a thoughtful, well-crafted government intervention could stave off many problems. Thanks to our two-party system of republican government, we'll get neither a pure market solution nor a well-crafted government solution.

Instead, we'll get a bill that spews money at a dying industry, and this bill will temporarily breathe some life back into U.S. auto manufacturers, but that will only delay the inevitable. I think it's is a bad idea. Here's why:


Throwing money at car manufacturers is akin to administering flu shots to dinosaurs at the same time as the asteroid enters the upper atmosphere. Sure, the dinosaurs won't get the flu, but, really, there are bigger concerns on the horizon. Same for the car companies: lack of money isn't the problem, and giving them a revenue injection won't fix the real problem. The real problem is they are going extinct.

Now, I'm not raising the global warming flag, and talking about banning cars for the good of mankind. We're too tied to cars to give them up entirely. But the modern auto industry itself is doomed. Let's look at some facts: cars operate via an internal combustion engine, which is 19th century technology. They are assembled and sold based on Ford's business model, which is an early 20th century invention. Both the product and the methods by which it is manufactured and sold are outdated.

The product - the car - is outdated because it's efficiency is rapidly becoming less than its cost. When measuring the total cost of cars' existence - product price, insurance, maintenance, accident-related litigation, environmental impact, loss of life, etc. - it becomes clear that the benefit of the automobile will soon be outweighed by the cost, if that is not already the case.

The business model is outdated too. There's nothing wrong with assembly-line production - that's not the issue. The problem is that the business model for building cars was originally predicated on abundant supplies of steel and energy, each of which is shrinking and/or disappearing and driving up the cost of production. Similarly, cars were originally designed to be almost disposable, and American cars are still nearly disposable. It's an inherent part of the system - if you build cars that never break down, eventually no one will buy new cars. You need people to need new cars to keep up your business. But again, as resources shrink, that model becomes less viable.

So, what we have is an industry that is croaking its last breaths, because the world is moving on without it. But in the name of protecting jobs and American industry, the government is seriously considering propping up this industry, thereby perpetuating rather than solving the underlying problems driving auto manufacturers into the ground.

But if there's no bailout, what will we do? What will happen to all those jobs, not just in auto manufacture, but in parts manufacture, mechanics shops, tire places, auto accessories, and all the thousands of other jobs that these jobs support? And don't forget the oil industry, what will happen to them? Surely the auto industry is too big to fail? We can't let this big a chunk of the economy collapse, can we?

Well, that's why I'm of two minds. One part says yes, let it fail. It might not be so bad. Let's say GM collapses, totally and completely. What will happen? Well, a lot of people will be out of work. But GM owns lots of assets: factories, r&d labs, offices, raw materials, a trained labor force, etc. If GM breathed its last, it's almost certain that another company would swoop in and buy up these assets, open another car company, and put those employees back to work. I nominate Porsche. They just raked in a billion dollars by cornering the market on Volkswagen stock and then short-selling it. Clearly, Porsche knows how to run a business, and they make a good car too.

And if it isn't Porsche, it would be someone else that buys up GM (or Dodge, or Ford, or whoever) and takes it over. This wouldn't solve the long term problem of the automobile's looming demise, but it would at least mitigate some of the short-term harm. It would also have the added benefit of putting people that know how to build good cars and run a profitable company in charge, and a rising tide raises all ships. Domestic competition would increase, automobiles would evolve into the next step in transportation technology, and we'd all live happily ever after.

However, the collapse of an American auto giant is likely to be painful, even if only in the short-term. So that's where the other side of my indecision comes in: if we can see this collapse coming, and we know that our goal is to move to the next step of transportation technology, why endure such pain? Let's skip the middle man and put our own companies on that path now.

I guess the short answer is that it's really, really hard to do that. First of all, there's no ready-made technology to shift to. We stopped using horses because the car was invented. There's no parallel here - we still need someone to come up with the next big idea to replace the car. Second, it costs a lot of money to shift paths from one way of doing business to another. New designs must be made, new materials procured, factories must be refitted or new ones must be built, and the new cars have to actually be better than the old ones. That is all costly and hard to achieve. Plus, because a bailout will have to come from the government, it will necessarily be full of compromises, attached strings, and pork, all of which may throw off the whole program.

So, which is it? Both options are jagged little pills. I can't decide. Thankfully, I don't have to. That's why we hire smart people like politicians to do the thinking for us. They'll make sure it's all ok. The end.



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The Tax Man Cometh

Um, if you're not interested in tax policy, you just may want to move on to a different post. Go ahead, I won't mind. If you are interested in hearing my questions about Obama's tax plan, click "read more."



Ok, so for those of you still with me, here's the basic issue. Obama wants to increase taxes on the upper levels of the tax bracket. Fine.

However, I suspect that when Obama's tax plan goes into place, companies will merely increase the salary of management and executives so that their after-tax dollars are the same as before the tax revision took effect. In turn, this increase in salary would be paid for by increasing prices for consumers and/or cutting jobs. This would, in effect, set the tax burden firmly back on the shoulders of the middle and working classes. This is because the lower income earners would have to pay more or lose their jobs, thereby undermining the purpose of the tax plan - namely to shift a greater share of the burden to the upper levels of the tax bracket and alleviate financial strain on the lower brackets.

So here's my question: what safeguards are available to prevent that from happening? Surely there must be some combination of carrots and sticks available to prevent my hypothetical from happening. Otherwise, we're basically asking wealthy people to make a charitable donation - please pay more taxes out of your own pocket, and don't shift the cost to the lower classes. Please. Pretty please.

The only solution I can think of is indirectly tying the corporate tax system to the personal income tax system. Here's the idea: increase personal taxes on the upper tax bracket as planned. Simultaneously, increase corporate taxes, but offer a tax break for those companies that maintain upper bracket salaries at previous levels, adjusted for inflation. This tax break has to be big enough to make it fiscally viable enough to keep salaries as-is. By that I mean that the corporate tax break must be sufficiently large that foregoing the tax break and increasing upper bracket salaries would equate to an irresponsible waste of profits, which would hurt shareholder value.

Thus, by offering greater profits, we incentivize companies to freeze upper bracket salaries. In turn, this hopefully minimizes the transfer of the cost of increased taxes from upper brackets to lower brackets.

Doing the mathematic modeling on this is beyond my skill level. I don't know at what rate to set the upper bracket tax hike and the corresponding corporate tax increase/tax break. At the bottom line, the new rates must be sufficient to actually raise revenue. That is, the corporate tax breaks can't offset the revenue increase from upper level tax hikes. Similarly, some percentage of companies will probably raise salaries anyway, and that must be factored in. There also has to be a tightening of loopholes that would permit corporations and upper bracket earners to hide income in tax shelters.

There's also the problem of selling this idea. It is redistributionist, no two ways about that. I'm hoping that the idea of letting corporations increase profit margins would make it easier to swallow. However, letting corporations make more money is seldom popular with voters.

Finally, there's another consideration: state and local taxes. State and local governments are also suffering under budget strains, and need to increase revenue as well. If state and local governments hike sales tax, property tax, excise tax, and state income tax, then all the work done to keep money in the hands of middle class earners will be undone because they'd be paying more in state and local tax.

This is starting to make my head hurt, and I'm sure I've committed an egregious error somewhere in my modest proposal. If you have any thoughts, feel free to comment.

In closing, I don't know how Obama sleeps at night. In fact, I think he doesn't sleep. This morning CNN ran footage of him from 2006, and he looked great. Now, he's already grayer, his face more lined, and he hasn't even raised his right hand and taken office yet. I suppose it must be hard work when one takes seriously the job of carrying the weight of the world. The end.
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My Government Bailout

I cannot wait for my bailout check to arrive in the mail. I expect it to be here any day. Any moment, in fact, because it is probably being couriered directly from the Treasury to my DC residence. I have a serious problem, and taxpayers need to fix it now, or the whole house of cards is coming down with me.

I need this bailout, you see, because I am just like the financial system. Three years ago, I made imprudent financial decisions. Like Wall Street investors sinking millions into real estate that was "guaranteed" to "appreciate," I pumped all my borrowed thousands into a similarly surefire investment - a law degree.



The problem is that I based my investment on what was essentially a lie. Just as Wall Street bet that housing prices would miraculously never come down, I bet that a law degree would actually make me rich. Why make this bet? My law school published in US News and World Report that its graduates were 96% employed at graduation, and making an average starting salary of $135,000. In 2005 dollars, no less. [FN 1] Well. Who wouldn't want a piece of that action?

As it turns out, housing prices don't defy gravity, and that $135,000 average wasn't even a little bit true. Now, despite the fact that I based my investment on the sunniest possible outcome, rather than sober "facts," I'm facing a credit crunch, rising costs, growing unemployment, decreasing income, and a tumbling stock market. Additionally, if I go down, the innumerable bartenders, baristas, video game purveyors, and cable tv providers that I support will go down too. The ripple effect will be completely immeasurable. Clearly, I cannot be allowed to fail. The government needs to buy up my bad debt and sell it to someone responsible - the Chinese. Then, having safely unloaded all that toxic debt onto the Chinese, the US government can default on its debt, simultaneously ruining the Chinese economy and ensuring American economic dominance for generations.

Bailout, please.

FN 1: $135,000 is roughly $1,000,000 in 2008, or 6 Euros.

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