Auto Bailout Announced

President Bush announced $17 billion in Federal loans to Detroit, contingent on the Big Three’s adoption of reforms that will signal “a return to profitability.” The reforms generally follow Sen. Corker’s changes to the failed Senate bill — restructuring of UAW contracts and severe debt reductions — but place no strict timetable on the need for their implementation. Instead, the judgment will be left to Barack Obama.

Under the plan announced this morning, Mr. Bush essentially handed off to President-elect Obama what will become one of the first, most difficult calls of his presidency: a political and economic judgment about whether General Motors and Chrysler are financially viable.

If, by March 30, the two companies cannot meet that standard — and clearly they could not meet it today — the $13.5 billion in Treasury loans would be “called’ for immediate repayment, with the government placed in top priority, ahead of all other creditors.

“Financially viable,” at least politically, seems open to a bit of interpretation. Though as the Times points out, Obama’s team will need to present a “convincing, public case,” it doesn’t appear that will necessarily mean that only provisions outlined by Republicans will need to be fulfilled. It’s like the companies will comply with union contract restructuring and the debt-for-equity swaps, but it’s also possible that Obama will impose his own reforms (forcing Detroit to abandon lawsuits against state emission laws comes to mind).

GOP: No Government in Business, Unless It’s to Cut Union Benefits

So if you’re reading this, presumably you know the automaker bailout died in the Senate as Republicans ultimately decided that 18 months of union wages were more important that risking liquidation for Detroit.

The automakers would also have been required to cut wages and benefits to match the average hourly wage and benefits of Nissan, Toyota and Honda employees in the United States.

It was over this proposal that the talks ultimately deadlocked with Republicans demanding that the automakers meet that goal by a certain date in 2009 and Democrats and the union urging a deadline in 2011 when the U.A.W. contract expires.

I mean, really? In other news, it seems the Bush Administration is mulling the use of TARP funds to fill the breach.

On an loosely related note, this is why Congress traditionally has such low approval ratings. The headline of the New York Times piece reads “Senate Abandons Automaker Bailout Bid”, The Washington Post, “Senate Negotiations on Auto Bailout Collapse.” But that isn’t really accurate is it? It’s like reporting a football game as “Football Teams Fail to Score 100 Combined Points,” when a much better way would be to say, “Redskins Fail…Again.” At least the Los Angeles Times got it right: “Senate Republicans kill auto bailout bill.”

UPDATE: TPM has more…Reuters sez: “Car industry bailout bill fails in US Senate.”

Unions and Detroit

In reference to the auto bailout that the House passed last night and appears to be stalled in the Senate, there’s been heavy invocation by Republicans of the roughly $70 per hour that Detroit ostensibly pays UAW workers. This is drawn in contrast to the $49 per hour of labor costs that other domestic manufacturers like Toyota and Honda, the idea being that if only it weren’t for the pesky unions, America’s automakers would be in much better shape. David Leonhardt explains the fallacy in the New York Times. Read the whole thing, but basically, the calculation is made by dividing total labor costs by hours worked, which sounds reasonable until you realize that “labor costs” include the pensions and benefits paid to retired workers. Having been established for a considerably longer period of time, Detroit has amassed a significantly greater number of retirees than than the nascent foreign car makers. So much greater is this cost, that with legacy costs excluded, UAW workers make only $10 more per hour than their counterparts (which go predominately to expanded benefits). And verily, there is still a difference, but Leonhardt explains:

So here’s a little experiment. Imagine that a Congressional bailout effectively pays for $10 an hour of the retiree benefits. That’s roughly the gap between the Big Three’s retiree costs and those of the Japanese-owned plants in this country. Imagine, also, that the U.A.W. agrees to reduce pay and benefits for current workers to $45 an hour — the same as at Honda and Toyota.

Do you know how much that would reduce the cost of producing a Big Three vehicle? Only about $800.

That’s because labor costs, for all the attention they have been receiving, make up only about 10 percent of the cost of making a vehicle. An extra $800 per vehicle would certainly help Detroit, but the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies, analysts at the International Motor Vehicle Program say. Even so, many Americans no longer want to own the cars being made by General Motors, Ford and Chrysler.

So, in conclusion, higher labor costs associated with unionized employees do increase cost, but not nearly as much as anti-labor Republicans would have you believe. What’s more, roughly 50 percent of these costs go to to paying health benefits to retired workers, which underscores the importance of comprehensive health care reform. Or as a conservative might suggest, cutting the capital gains tax.

It’s a Lonely Road

Justin Fox at Time has an interesting take on who Detroit hasn’t been shown the love.

Still, I wonder if there aren’t also some other factors at work in the relatively hostile reaction to the Detroit Three. Most Americans simply no longer identify with the domestic auto industry (or with the states of Michigan and Ohio). To the Southerners who now make up the core constituency of the Republican Party, it’s a bunch of coddled, unionized workers trying to get handouts that the South’s auto industry (Toyota, Hyundai, Nissan, Mercedes, BMW …) doesn’t need. To the coastal urbanites and suburbanites who now make up the core constituency of the Democratic Party, it’s an industry that makes crappy big cars and fights against higher fuel efficiency standards. And to the business press it’s the worst thing of all: a trio of companies that are neither exciting nor financially successful.

As sort of glib as this sounds, it’s actually a bit compelling. Obviously the reason Detroit has been denied access to TARP funds has more to do with the fact that the economy simply needs the finance sector to function than anything else, but it sure doesn’t help that the Big Three are pretty universally reviled by outsiders.

UAW Decadence?

In a prior post today, I offhandedly criticized Mitt Romney for being too quick to assign blame to the UAW for Detroit’s problems. Ezra Klein channels Jonathan Cohn to get past the myth that UAW workers have the sinecure of a lifetime.

The $70 an hour came from dividing total compensation costs by the current workforce. But of course, lots of those compensation costs are attached — or were attached, before last year’s UAW concessions — to retirees. The truth is that current workers make about $24 an hour, plus another $10 in compensation. That’s about $60,000 a year, with good benefits. It’s a solid, middle class life. A helluva lot less than Joe the Plumber pulled in. But the $70 number isn’t tossed around because it’s accurate. It’s deployed because it’s useful. It recasts the story of the American auto industry as a morality tale in which greedy unions sit as the villain.

Now, this is hardly to suggest that the UAW doesn’t complicate life for Detroit. Indeed, one of the reasons that foreign car makers based in the United States like Toyota have stayed ahead of the curve is the basing plants in Southern “Right to Work” states which make unionizing all but impossible. Whether or not you think that’s a good thing is certainly up for debate, but the UAW shouldn’t be set up as a straw man when the problem was a staid business strategy.

Let The Bodies Hit the Floor

Via Ryan Avent, we learn that the Obama team is considering my (and Ryan’s) preferred shape of any Detroit bailout:

President-Elect Barack Obama’s transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry’s financial crisis, according to a person familiar with the matter.

Obama’s team has already contacted at least one bankruptcy- law firm to say that Daniel Tarullo, a professor at Georgetown University’s law school who heads Obama’s economic policy working group, would call to discuss the workings of a so-called prepack, according to this person.

This really makes the most sense. In the first place, there’s simply no reason to believe that $25 billion would in one fell swoop transform Detroit into the forward looking companies they need to be. I’m inclined to believe Mitt Romney — even if he’s quick to finger the UAW — that this was first a crises of management and poor vision. Sure, the credit crisis had made acute Detroit’s problems, but there’s no guarantee they wouldn’t have emerged at some point later. If the government agrees to guarantee solvency during Chapter 11, it should be a cost effective solution that addresses some of the root problems directly.

Besides, I hear this Dan Tarullo guy is known to have progeny with good taste in internet reading.

Pile Up

Since I’m not paid to watch CSPAN, I really have no clue what’s happening in the hearings on an auto industry bailout other than its prospects were dimming, and that verily, the Big Three CEOs all flying separately on private jets probably wasn’t the right message to send. Anyway, if some sort of bailout does go forward — I’m a fan of some sort of government assured Chapter 11 — an op-ed in the San Francisco Chronicle irons out a few good provisions.

If Washington is going to give yet another loan-guarantee bailout to Detroit automakers, then the price should include requiring the car manufacturers to drop their four-year-long legal assault against global warming laws in California and three other states (Vermont, Rhode Island and New Mexico), as well as a requirement to develop and deliver hybrids, clean diesels and other highly fuel-efficient vehicles.

Indeed, if the Big Three intend to argue that their future security aligns with the public good, they should be happy to adopt other measures that also align with the public good. Further, it’s important that any provisions focus on these sorts of realignments rather than moralizing executive pay. The salaries of CEOs are not the cause of Detroit’s maladies.