University of Maryland professor Peter Morici at a Senate hearing on the proposed auto industry bailout, Tuesday, Nov. 18, 2008. (AP Photo/Manuel Balce Ceneta)
by Frank James
It's doubtful Peter Morici will be receiving any awards any time soon from the United Auto Workers.
Morici, an international business professor at the University of Maryland was, as he noted, the only witness testifying against the Senate Banking Committee's hearing on bailing out the U.S. auto industry; the chief executives of Detroit's Big Three sat to his right.
But Morici made such a strong case against a bailout, he really didn't need any help. He was a one-man wrecking crew.
The nub of Morici's argument was that $25 billion isn't going to change the numeorus structural problems the industry has from higher costs due to its union contracts to the fact that cars are so well made now consumers can keep them longer. Add to that the foreign currency and trade issues that give foreign producers a price advantage and it's clear, at least to Morici, that $25 billion isn't the right medicine for the ailing industry.
Morici's remarks are worth reading because if he's diagnosing the situation correctly, than he presents President-elect Barack Obama and congressional Democrats who received strong backing from the UAW and organized labor generally with a real dilemma: The UAW desperately wants the bailout.
But a bailout to the tune of tens of billions of dollars may just be throwing good money after bad.
MR. MORICI: My name is Peter Morici. I'm an economist and professor at the University of Maryland. I'm the sole panelist here to speak against the bailout. I guess three CEOs and a president of a labor union, one Terrapin (the school's turtle mascot) -- I think it's a pretty fair matchup actually. I feel sort of like the mouse that stowed away on the Titanic.
The automobile industry has two major components: the Detroit Three and the Japanese, Asian and European transplants that assemble vehicles here. Both contribute vitally to our national economy. And ensuring that these companies have the means, to compete, is of the most important national interest.
The gradual erosion of the market shares, of the Detroit Three, over the last several decades, stems from higher labor costs, having origins in wages, benefits, work rules, poor management decisions and less than fully supportive government policies.
Although the government has been sympathetic, to the needs of this industry, the industry has fallen victim to currency manipulation and other forms of protectionism, predominantly in Asia, in Japan, Korea, China, India and elsewhere. The Detroit Three are rapidly running out of cash and face filing for Chapter 11 reorganization.
It's my position that it would be better to let them go through that process and reemerge with new labor agreements, reduced debt, strengthened management. That would permit these companies to produce cars at costs comparable to those enjoyed by their Japanese and other foreign competitors assembling vehicles in the United States.
Circumstances today are dramatically different than in 1979, when Chrysler received assistance from the federal government. In those days, the challenge for Chrysler was to become competitive with Ford and General Motors. And Lee Iacocca had a clear plan to achieve that objective.
Today, the Detroit Three have achieved remarkable progress in improving productivity and lowering labor costs, thanks to a new agreement with the UAW. But they still don't have costs quite as low as their Japanese transplants.
This is an industry with very thin margins. I've heard over and over again, for example, when Ford decided to locate its small-car factory in Mexico, that the UAW tried to persuade Ford that it could be competitive enough in the United States.
There is no such thing as competitive enough in the automobile industry. Either you hit the mark that Honda hits, in Indiana, or you are not competitive. The margins are too thin. There's too much excess capacity. Either the costs are the same or they're not. There's no such thing as almost as competitive.
By assisting the Detroit Three, Congress can delay one or all of them from going through Chapter 11 reorganization. But sooner or later, one of them will march down that path.
Twenty five billion dollars, to tide over firms, would create another AIG. I ask you to consider the promises that were made, to you, when that happened.
I realize that was really the Federal Reserve that did that.
If things are so dire that they have to come here and submit to a government oversight board, government ownership, is $25 billion really enough in the grand scale of things? I would suggest if you give them $25 billion this month, they will be back.
Without a new labor agreement that brings wages and benefits absolutely in line with those at the most competitive transplant factories, without reduced debt and other liabilities, the Detroit Three will continue to lag in innovation and field too few attractive vehicles because their higher cost, debt and other liabilities require them to spend less on new product development than they should. General Motors makes about the same number of cars globally as Toyota. It simply has a smaller product development budget because of the cost it bears. They have very fine engineers. They are capable of producing very good cars. The same applies at Ford.
If you have less money to develop product, you put fewer products on the street. They have a longer life. For example, the Impala was a great car, but it was left sitting out there for seven years. Camry recycles every four.
If Chapter 11 is put off to the -- if Chapter 11 is put off, the industry will continue to shrink. And inevitably, when it happens, and we go through the process, fewer jobs will be saved, because fewer jobs will be there to be saved. Sooner or later, this industry has to go through the ultimate reorganization that brings its cost structure absolutely in line with its competition. It may not be fair, it may not be what we would want to see, but it is inevitable.
In my mind, Chapter 11 is viable. The assets of these companies are needed by the domestic automobile market. They make over 40 percent, near 50 percent, depending on which estimate you use, of the cars driven in America. They can't go out of business completely. The factories can't shut down completely and then there be adequate cars to be sold. Someone is going to run these factories.
They have creditors. To the creditors, the companies are worth more operating than they are shuttered, because the assets of the companies will be worth more if the companies continue to operate than if they are permitted to fall merely into Chapter 7. That's where the debtor-in-financing -- that's where the debtor-in-possession financing lies -- in the existing creditors.
Not enough attention has been given to that option simply because unfortunate -- we have created in America what my profession calls moral hazard. Now that AIG has been able to put a pistol to the head of the country and say, "If you don't bail us out, the credit markets will collapse," we face the same kind of issue with the Detroit Three.
When Americans buy automobiles from the Detroit Three, more is contributed to the vitality of the U.S. economy than when Americans buy cars that were assembled here by transplants or when they buy imports. These vehicles have more U.S. contents in terms of jobs, engineering and profits and so forth. And the vitality of the manufacturing to a strong American economy cannot be underestimated, and it has too long been neglected by the people who live and work in this city.
The Congress could take steps to improve the attractiveness of making cars and parts in the United States by improving the public policy environment. This would include finally addressing directly and forthrightly undervalued currencies in Asia, currencies kept cheap by massive government intervention in foreign exchange markets. In addition, assertive efforts could be made to address foreign protectionism. It is very difficult to sell a car in China that's not made there. It is very difficult to make a car there with imported parts from the United States. So General Motors is criticized for encouraging its parts manufacturers to move there. It frankly has no choice. It is high time that we take that trade policy imperative quite seriously.
Congress could provide substantial product development assistance to U.S.-based automakers and suppliers. I would say include Toyota, Nissan and Honda in that process in the interest of fairness and our WTO obligations, batterymakers and suppliers to accelerate the production of high-mileage cars. I would condition that assistance, though, on all the participants sharing what patents they developed with one another -- (inaudible) -- the Japanese model that was employed in the '70s and '80s.
In addition, we could have a clunker rebate program. Bring a Tahoe, trade it in for a Volt and we'll give you a big rebate. Bring is a small Chevette that's 30 years old, you get a small rebate. The newer the car, the more miles you save -- the only part of the deal has to be it's got to go through the crusher. It's gotta go through -- it can't be recycled and put on the street.
There are things that we can do to provide incentives for Americans to drive fuel efficient cars that we have not done, and there are things that we could do to improve the environment in the United States. But I don't think giving these guys $25 billion right now is a smart idea. Thank you for your time.
SEN. (CHRIS) DODD: I'd call you the mouse that roared here. (Laughter.) You did pretty well, Mr. Morici. Well, thank you all, very very much and --
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Mitt Romney, the former Massachusetts governor and Republican presidential candidate, makes similar and additional points in a New York Times op-ed.
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Comments
Auto workers need, almost, the same kind of love , President Bush gave Wall Street and the Bankers, a bailout, in their cases. The Atuo workers are asking for a loan. The same kind of loan that was given to the Chrysler Corp, 34 years ago. That loan actually made money for the taxpayers, who lent Chrysler the money.
So, stop with the doomsday scenario and get on with helping President-elect Obama with restoring this economy, the one that President Bush and his cronies, fixed, real good !! Union-busting is not an option, if America is going to regain it's stature in the world, both economically and in statesmanship !!! Life is difficult enough in this country, if you are a blue-collar worker, don't make it tougher !! Support a loan to the Auto Industry !!
SUPPORT OUR TROOPS, BRING THEM HOME, ALIVE AND WHOLE. NOW.
Posted by: Don Fitzgerald, Chicago | November 19, 2008 10:46 AM
I'm tired of bailing out mis-managed companies. GM placed a gun to the head of the public in OK threatening that no bail out means millions of jobs lost. Fact is $25 billion dollars will do nothing for companies who rake the public and provide fat cats their fat bonuses. Mr. Morici is correct. Contact your Congressmen and Senators and demand they do not support the bailout. It's time to grow up and learn how to compete!
Posted by: Fed Up | November 19, 2008 12:48 PM
The potential bailout of Detroit is a legitimate ethical conundrum. The CEO's say their problem is not because of poor decision making - but because of the general economy. ...........
http://thefiresidepost.com/2008/11/19/detroit-bailout-an-ethical-conundrum/
Posted by: Ohg Rea Tone | November 19, 2008 1:25 PM
UAW workers' compensation amounts to $75 per hour--much more than compensation in non-union auto plants, and far more than the average American worker.
What Detroit and the UAW want is for American taxpayers making say $20 per hour to pay money to people making $75 per hour.
Posted by: Change you can believe in | November 19, 2008 2:14 PM
I agree a bailout will only prolong what will inevitably happen. While I don't wish anyone to suffer, some union people that worked long and hard will lose benefits, some that aren't as good as those who are anti-union would lead you to believe. I am tired of bailing out people who can't or won't manage their finances correctly. Least of all the CEO's who made the poor business decisions. All they were doing during the SUV boon was to sell a car so they could make money investing the dollar you gave them for that vehicle. They did not put it back into engineering a better vehicle.Strike while the iron is hot and worry about the consequences later. The fact is, they now are facing the consequences and they don't like what they see. Maybe big government will put a band-aid over it but the bleeding will seep out eventually.
Posted by: lochnessmonster | November 19, 2008 2:28 PM
Where does it end? What industry is next? And who is paying for this? We have a safety net for failed, unprofitable companies - bankruptcy. They can reorganize free from the pressure of creditors and actually establish a business plan that works. Let's not pretend that things were going great for the Big Three prior to the credit crunch. They were getting their lunch eaten by the Japanese. Throwing govt money at these companies to keep them afloat for another year or two makes no sense.
Posted by: Herbie H. | November 19, 2008 3:00 PM
I notice today that the banking index went to a new low today. It had been doing better than the S&P for the past several months. Maybe there will be a new government emphasis on the rest of the economy. If there can be a reduction in big three expences negotiated with labor and lenders, then it would seem prudent to lend them money. If not then I guess I favor no money to the car companies.
Those conservatives who sound like they want to punish the car companies, seem to me to be talking from ignorance. At least Ford has been well managed since the new guy came in and although previous management mistakes were profound and prolonged that is not the case in more recent years. I too am angry at the car companies but not so angry that I have abandoned logic. The effect on our economy will be tremendous if the big three go belly up. After all what would a five year warrantee be worth if you bought a new American made car.
The Republican leaning economists have been wrong since 2001 and I hesitate to agree with them now since they seem to have been wrong as recently as the time of this presidential election.
So far I don't see the kind of changes occurring that need to preceed lending them money but if such changes occur then I think that the government should step in. For those who are opposed to government intervention, just suck it in. The illusion of a market based economy has already been shattered. Right now we need to right the economy and then get the government out of the market.
In the future we won't have a fed chairman who was under the illusions that Greenspan was. Markets only work when people are rational. That is not the case now.
Posted by: Ron M | November 19, 2008 3:03 PM
All we hear is how unions are to blame for the woes of the Big Three. Well, how about the obscene compensation packages for the heads of those companies? How many cars and trucks does Ford have to sell to cover the $28 million that it's top guy gets paid. Let's stop blaming the workers and make the CEOs accountable and pay them a realistic salary with realistic incentives.
Posted by: Quippy | November 19, 2008 3:36 PM
[quote]
UAW workers' compensation amounts to $75 per hour--much more than compensation in non-union auto plants, and far more than the average American worker.
Posted by: Change you can believe in | November 19, 2008 2:14 PM
[/quote]
Not any more, they don't:
"The current veteran UAW member at GM today has an average base wage of $28.12 an hour, but the cost of benefits, including pension and future retiree health care costs, nearly triples the cost to GM to $78.21, according to the Center for Automotive Research.
By comparison, new hires will be paid between $14 and $16.23 an hour. And even as they start to accumulate raises tied to seniority, the far less lucrative benefit package will limit GM's cost for those employees to $25.65 an hour."
source: http://money.cnn.com/2008/02/12/news/companies/gm/index.htm?cnn=yes
Posted by: BC | November 19, 2008 8:52 PM
The only deal worth making is one that produces electric cars by the end of the year. Small electric cars. No more SUV's. No more gas guzzlers. If all these decades later the Big Three can't make an electric car they ought to go bankrupt. With everything going on they still don't have a 60 mpg car. And it is way too late to raise the average fleet mileage to 40 or 50 mpg. What a failure of leadership. Nobody wants a $40,000 hybrid that gets 30 mpg. Take the two-seater Mercedes smart car and convert it to pure electric. If the Big Three want a second bailout they can put a hydrogen car on the road. It is amazing that there are so few public demands in return for the incredible public loans we are making. Smog free or die.
Posted by: Dr. Dan 2000 | November 19, 2008 9:21 PM
The banks and Paulson needed tough love, too. Instead they were given 850 billion with no strings. When Paulson pulled his bait and switch (lie) with our money, not a damn thing happened. Paulson should be fired. Interesting how junk loans needed to be bought up--right away--or else the sky would have fallen. Big lie. They weren't bought up. The House and Senate basically have contempt for working class Americans. And, Bush has shown that same contempt for eight years. Punish the lazy and stupid fat cats at the top--not those who labor. Keep the Big Three plants and labor--get rid of the Big Three executives who didn't catch on sooner to increased MPG or hybrids. They knew what was needed, yet kept giving us more garbage. When the world misbehaves, we pay. When our own executives in corporations and banks misbehave, we pay. The lowest man on the pole always pays the most. It's a crock. Congratulations George W. Bush.
Posted by: Vivian | November 19, 2008 10:06 PM
Actually the demise of the big three was caused by the subsidies that Japan gave to their auto industry. The bail out of the financials were a direct cause of greed, corruption and lack of regulation. This guy better go back to school. whiteagle38
Posted by: R. Juneau | November 19, 2008 10:35 PM
NO, JUNEAU. NO.
The big 3 died because they refused to retool and do what the rest of the world's auto industries did
Posted by: produce a non-gas guzzling car | November 20, 2008 2:08 PM
United Airlines filed for bankruptcy without interrupting their flight schedule - the automakers should be able to do the same without shutting down production.
Bankruptcy should allow firing of the execs that mismanaged their companies into this mess as well as renegotiation of bloated union wages and benefits.
As a result, each companiy would emerge leaner and more competitive - all without wasting taxpayer money on maintaining the unsustainable status quo.
Posted by: Fred Schuster | November 21, 2008 7:55 AM
For professor Morici to say out of the one side of his mouth, "the industry has fallen victim to currency manipulation and other forms of protectionism," then claim, "it would be better to let them go through [Chapter 11 reorganization] and reemerge with new labor agreements, reduced debt, strengthened management," demonstrates the sort of moral depravity possibly qualifying him for becoming the "new Hjalmar Schacht" the City of London is looking for.
The issue -- the only issue -- is "less than fully supportive government policies" over the last several decades.
This government of ours simply has become a whore of the very ideology this nation's founders revolted against. Any so-called "economist" lacking historical insight into the unique role our government constitutionally is made to play in fostering productive industry, who would admit to this government's failing, then claim solution to what's threatening the Big Three lies in the industry playing within the confines of the corrupt rules of the game, and in so doing, declare bankruptcy, lacks simple courage to do the one right thing: petition a government, of, by, and for the people, and seek proper redress.
The last thing the nation needs right now is a coward like this. The ineptness of professor Morici's position lies in his will to attack foreign governments rather than play a productive part in formulating credible policies exercising the constitutional power of one's own government (something amply demonstrated as being weakly pursued by such remarks as Sen. Dodd made in response to professor Morici's testimony).
Foreign governments do what they must to protect the interests of those whom they govern. It is high time our government did the same, and without so much arrogance to impose a will the rest of the world finds repulsive. Indeed, such trade posture as this government of ours has imposed upon the world over the entire duration of my lifetime simply is not what we were made to represent.
Posted by: Tom Chechatka | November 23, 2008 9:07 PM
Morici, you got it right!!! beside3s a lot of companies have filed bankruptcy and came out stronger and better for it. Sure it will take some time, but isn't that better that better than the continual rape of the American taxpayer?
Posted by: jimmy learn | December 13, 2008 4:26 PM