This is great… the ad maybe even better than the free Starbucks itself! (It was beautiful on HD when I first saw it on Saturday night.)
Nothing like economic incentives… Hey, and a first for me? My first embedded YouTube video!…
It was just yesterday when I wrote:
Call me naive, but I’m hopeful that going forward and working with the next Administration and the next Congress, that the Dean Baker-type critics of the fiscal hawks will start to realize that there’s actually a lot of common ground between us, and not so much “one side” versus “the other.”
And in an op-ed in today’s New York Times, fiscally-conservative Bob Rubin and liberal-leaning Jared Bernstein, both Democrats who support and advise Obama, together explain this common ground:
As economists and policy advisers try to sort out where we are, how we got here and where we must go for both the short term and the longer term, we are surrounded by polarizing dichotomies: Fiscal recklessness versus fiscal rectitude; capital versus labor; free trade versus protectionism.
The next president, the prevailing wisdom goes, will have to choose between these polarities. But how real are these differences? Our view — and we come from pretty different analytical perspectives — is that in many important ways, they are false, and serve as more of a distraction than a map.
Fiscal rectitude versus stimulus and public investment: The Bible got this right a long time ago (paraphrasing slightly): there’s a time to spend, a time to save; a time to build deficits up and a time to tear them down. Though one of us (Mr. Rubin) is often invoked as an advocate of fiscal discipline, we both agree that there are times for fiscal discipline and times for fiscal largess. With the current financial crisis, our joint view is that for the short term, our economy needs a large fiscal stimulus that generates substantial economic demand.
We also jointly believe that fiscal stimulus must be married to a commitment to re-establishing sound fiscal conditions with a multi-year program that includes room for critical public investment, once the economy is back on a healthy track.
One of us (Mr. Rubin) views long-term fiscal deficits — in combination with a low national savings rate, large current account deficits and foreign portfolios that are heavily over-weighted in dollar-dominated assets — as a serious threat to long-term interest rates and our currency and, therefore, to our economic future. The other views these economic relationships as much weaker.
At the same time, we both agree that our economic future also requires public investment in critical areas like education, health care, energy, worker training and much else. In our view, then, the next president needs to proceed on multiple tracks, with both the restoration of a sound fiscal regime and critical public investment.
These are themes I’ve repeated many times here on this blog, and I’ve pointed out that the Concord Coalition emphasizes them, too (see our recent issue brief). Deficit-financed economic stimulus can still be “fiscally responsible“…
[F]iscal responsibility is a much broader concept than having a goal of a balanced budget. It means prioritizing those fiscal policies that would contribute the most to economic stability and economic growth, then determining how to finance those policies in the most efficient and fair way possible. It means formulating our fiscal policies to maximize their net benefits to society. (10/18/08)
And indeed, given how we got into this “mess” in the first place, over the longer run we’ll need to do better about saving more and expanding our “means.” Now is not the time to abandon that broader notion of fiscal responsibility, but instead to make sure that we make wise choices about how we spend our money and what is worth increasing our indebtedness for:
Now is exactly the time we need to be smart about fiscal policy: any stimulus should not encourage the same bad behavior–on the part of either the government or the private sector–that got us into this trouble in the first place. Temporary, deficit-financed fiscal stimulus may be needed to simply keep the economy going–to allow us to “keep living” (consuming). But we shouldn’t enact permanent proposals that permanently encourage consumption over saving (living beyond our means); we should be moving toward policies that encourage investments in workers and new technologies that are likely to pay off in the longer run, steering more of our limited resources toward boosting human capital–in other words, increasing our means. But such investments will cost a considerable amount of up-front money. Given that our budget constraints have gotten much tighter, it’s important that the next president set clear priorities and be willing to make tradeoffs, so that we will pursue policies that over the next several years (beyond these next several weeks or months) are most likely to get us back on the path of higher national saving and a stronger economy. (10/10/08)
As Bob and Jared explain, we can pursue more public investment and be willing to pay for it, too, and have both priorities provide that winning combination that we saw in the 1990s in terms of economic growth:
We both agree that individual income tax rates and other taxes for those at the very top could be moved back to the rates of the Clinton era. It’s worth remembering that rates at this level helped finance deficit reduction and public investment that contributed to the longest economic expansion in our history.
In addition to restoring a sound fiscal regime, we could improve our personal savings rate and expand retirement security by establishing some kind of individualized account separate from Social Security, financed by an appropriate revenue measure…
Capital versus labor: Here again, for all their alleged friction, our dynamic and flexible capital and labor markets have combined to generate impressive productivity gains in recent years. The problem is that the benefits of this productivity growth have largely eluded working families…
Tight labor markets, the kind we saw in the 1990s, are another source of bargaining power, helping to rebalance the claims of labor and capital on growth. Sound public policy, like public investment in education, health care, energy, infrastructure and basic research, financed by progressive taxation, can also drive strong growth and business confidence to invest and hire. Moreover, the policies that are requisites for strong growth also increase wages by better equipping workers to succeed in a global marketplace and by encouraging businesses to create jobs.
And Bob and Jared seem to be asking the same question I’ve asked about the pitfalls of economic policymaking when in “crisis” or “life support” mode: are we really helping the people who need the help when we frantically throw the money out there?…
We know, too, that Wall Street and Main Street are intimately connected. The consequences of the financial market crisis are profound for Americans in terms of lost jobs, lower incomes and reduced retirement savings. Measures to reform and strengthen the financial system should be evaluated by this measure: Do they ultimately translate into improving the jobs, incomes and assets of working Americans?
In other words, an enlarged federal budget deficit is inevitable over the next couple years. The question for the next Administration and Congress is: can we make it worth it? We’re much more likely to come up with a successful policy strategy if those who support more and better government spending work together with those who still believe fiscal responsibility matters. As Bob and Jared conclude:
False choices, grounded in ideology, have kept us from effectively addressing all these issues. The next president must do his utmost to avoid being drawn into these Potemkin battles. At this critical juncture, we face both the most significant economic upheaval since the Depression and the long-term challenge of successfully competing in the global economy. We have no choice but to move beyond such false dichotomies and toward a balanced pragmatism whose goal is broadly shared prosperity and increased economic security.
I think Senator Obama gets that. And I’m therefore hopeful that the next Administration and the next Congress will recognize the need to avoid the bickering and get along–and not just “get along” but really work together (Democrats and Republicans, fiscal conservatives and bigger government types)–to start turning this economy around.
I won’t call this a “response to a response to a response to a critique”–but just call it “my two cents” on the debate over IOUSA that’s taken place here over the past few days. Having read over the initial critique and the back and forth here and in response to Dean Baker’s post on Huffington Post, I don’t want to be reflexively argumentative, but calmly observant.
Perhaps I’m being naive, but I don’t see a lot of disagreement on the substance of the issue. Without getting into the weeds, here’s what I interpret as what I think all of us actually agree on:
The bottom line is that in my view, the Dean Bakers of the world don’t dispute the facts or forecasted trends that the IOUSA folks highlight; we’re all looking at the same ones, and we often even use the same words to describe what we see. The Dean Bakers of the world are not questioning the analyses of the fiscal hawks–they’re questioning our motives….even the motives of someone like me who’s speaking as an economist mom. If they don’t trust our policy intentions, there’s no point in us fiscal hawks getting into debates with them about the details of our respective assumptions and analyses, because those details have nothing to do with why they dislike us.
Call me naive, but I’m hopeful that going forward and working with the next Administration and the next Congress, that the Dean Baker-type critics of the fiscal hawks will start to realize that there’s actually a lot of common ground between us, and not so much “one side” versus “the other.”
Having the federal government “rescue” or “stimulate” the U.S. economy isn’t an easy thing to do. In Friday’s Washington Post, Steven Pearlstein writes of “Hank Paulson’s $125 billion mistake.” That would be referring to the $125 billion in new capital provided by Treasury to the nine biggest banks, in what was billed as ”partial nationalization.” (Hard to believe that was just a couple weeks ago.) My view at the time was that having the federal government hold some sort of equity stake in these banks was at least better than having no stake at all and holding only “bad paper” (sometimes referred to, oxymoronically, as ”toxic assets”). But Steven explains why some who advocated the move now think it’s not going so well:
Now, many of the same people are shocked — shocked! — to discover that the banks aren’t using the money to make new loans to households and businesses, as they had assumed, but are using it to maintain dividend payments to shareholders, pay this year’s bonuses to executives and traders, or squirrel it away for future acquisitions.
I hate to say it, but I told you so. Sprinkling money around a highly fragmented banking system when markets were panicked and everyone was scrambling to reduce leverage was always akin to shoveling sand against the tide…
[M]aking modest investments in dozens of banks, whether they needed it or not, produces little for the public beyond the small profit for the Treasury. What it does do, however, is open the door for every politician and populist to second-guess every decision and expenditure the banks make, based on the false assumption that everything they do is with “our money.”
In other words, it is still just partial nationalization, and market prices and private profit-seeking are still the major forces at work. Just because the government is effectively a shareholder now, doesn’t mean the government can actually control how these banks choose to run their businesses.
Then Steven goes on in a way that leads my mind to wander past the banks and the government’s $125 billion “mistake”…
[I]n trying to persuade banks that don’t need the money to take it, the Treasury has wound up offering everyone the same sweetheart deal that gives the government little say in how the money is used or how the banks are run. That’s particularly dangerous in the case of weaker banks, which might be tempted to take big risks in the hope of recouping past losses or to divert money to shareholders and executives before the inevitable government takeover.
In the case of some of the stronger banks, however, much of the carping about bonuses and dividends and refusal to lend are a bit overblown…
…and which leads me to wonder: if we’re worried that the $125 billion “partial nationalization” of the biggest banks could turn out to be a “mistake”–because the government has little control over how the money gets used by the assisted industry–then might this be just the first of many mistakes to come? Gee, look at that story in the paper right next to the continuation of Steven’s column on page D6, “Government Urged to Help Auto Industry“… and the story in today’s Washington Post about how Michigan voters have been unusually sympathetic to the $700 billion rescue plan, “in large part because voters think the auto industry needs a similar boost.”
Steven seems to think the worries about the lack of new lending are overblown. He reminds us that the banking industry has not really been nationalized (not fully, and maybe that means not really at all–like a woman can’t be partially or sort of pregnant?), and that what we’re really worrying about here is that some of the money is being saved rather than lent out:
[B]anks like J.P. Morgan, Wells Fargo, State Street and the newly chartered Goldman Sachs remain highly profitable and well-capitalized. It ought to be up to them to decide whether to use those profits to add to capital reserves or pay them out in dividends and executive bonuses. We might not like their choices, or their values, but this is still a market economy, and these are still shareholder-owned companies. The industry hasn’t been nationalized just yet.
It is also useful to remember that the way banks make money is to lend it out, not hold it in the vault or invest it in low-yielding Treasury bonds. Hoarding is not generally a winning strategy for maximizing share prices or executive bonuses. It is also useful to remember what got us into this mess in the first place. If banks are using their new capital to reduce their own leverage, or are more cautious about whom they lend to, that’s probably a good thing.
Yes, there’s what I’ve talked about a lot before–the really tricky thing about immediately “stimulating” the economy (boosting consumption) given what brought us to the more fundamental and longer-lasting “mess” in the economy as a whole (too much consumption/too little saving). It’s a very general challenge in the current economic climate: how can we ”rescue” and “stimulate” the economy without encouraging the “living beyond our means” mentality that is so harmful to the longer-term health of our economy? (The Concord Coalition suggested some ways to think about it in our recent issue brief.) It’s interesting that a Business section story in today’s Washington Post on stimulus ideas highlights the contrary short-term versus long-term prescriptions, in listing the “downsides” of many of the stimulus proposals as they might decrease national saving! (…which is actually what we want it to do, at least in the short run.)
Then Steven wraps up his column as if he’s known all along where my thinking was going, especially with my recent preoccupation with the auto industry:
Perhaps the worst part of this misguided effort to recapitalize the banking system is that it has prompted other industries to line up for similar sweetheart deals. Automakers, insurers, auto finance companies and local governments are already besieging the Treasury, and you can be sure that others are refining their pitch. One can only hope that the terms of future deals will be sufficiently onerous that going to the Treasury will be become a last resort, not a first instinct, for industries in trouble.
That’s the basic (and tough) challenge facing policymakers (when they come back for the lame duck session after the election): how to get federal support out there in our economy where it will make a difference and where it will turn out to have been “worth it” to current and future taxpayers.
I’m the Ph.D. economist, but I learned something about economic policy this week from my “laid off” friend from Chrysler. He’s not really “laid off”–not yet, at least. What he is right now is an employee being “bought out.” The distinction, in theory and on paper, is supposed to be this: a “laid off” worker is one who has been involuntarily fired from his job; a “bought out” worker is one who is voluntarily quitting his job. In practice, particularly in the case of the GM-Chrysler merger, there’s very little difference: the bottom line is that my friend will almost surely lose his Chrysler job within a couple of months, either way. (This story on the Wall Street Journal’s economics blog says that “30,000 to 40,000 of Chrysler’s 67,000 employees would lose their jobs” if the GM-Chrysler merger goes through.) And his losing his job will be far from “voluntary.”
Seeing so little practical difference between losing one’s job by being bought out versus laid off, I did not realize until yesterday that if my friend chooses to accept the buyout Chrysler has offered him, he would not be eligible for unemployment benefits. That’s supposed to be OK, because he would be walking away with $50,000 (gross of tax, by the way), a $25,000 car voucher, and six months of health coverage. But let’s face it: that may be better than being pushed out with nothing, but it really amounts to hardly anything relative to what he’s “walking away” from. Doing the math it’s easy to figure out he’ll be far from “held harmless.” Like the vast majority of his colleagues at the truck plant, my friend has worked in the auto industry for most of his career and lived in the Detroit area for most (all) of his life. He’s not just losing his job at Chrysler; he’s being displaced from his industry and his entire line of work. For someone like him, being “bought out” doesn’t feel like a golden opportunity to take that better job offer that’s just waiting for him; it feels like being handed a tiny suitcase (the buyout package) wearing just the clothes on his back and being booted out the factory door. That suitcase seems pathetically small when one has a long, uncertain path to travel.
(Here’s a couple years old AP story on the tough decisions autoworkers face when being offered a buyout package. The only difference now: the buyout packages are less generous, and the job prospects for employees who choose to take the buyouts fewer.)
And here I sit inside the Beltway, working on federal fiscal policy issues, and suddenly my world collides with my friend’s as federal policymakers contemplate the terms of a possible $10 billion loan to GM and Chrysler for their possible merger–a loan and a merger which to me no longer seem just “possible” but more and more inevitable. (We learned this morning that discussions about the federal loan are now on hold until after the election.) And I keep hearing that if the federal government does decide to assist in the GM-Chrysler merger, they would want it to be under the condition that the auto companies “spare as many jobs as possible.” But I don’t know if it’s possible, or desirable, for federal aid to reduce the number of jobs lost, if the goal is to “save” the Detroit auto industry. The auto industry needs to pare down, consolidate, get more efficient in how they produce and what they’re producing, in order to ultimately survive. They shouldn’t be encouraged to artificially keep up the number of workers who would just be producing more and more vehicles that aren’t being bought.
I’ve said before that I see a lot of promise in some of the ideas Senator Obama has to help Detroit “transform” into a vibrant, cutting-edge, center of manufacturing for energy-efficient vehicles and technologies. I hope they will be pursued by the next Administration and Congress. But the transformation will take time and involve a painful purging of sorts on the way there. And that purging involves a massive loss of jobs from the Detroit area, and perhaps a substantial (at least temporary) loss of population to the extent that the displaced workers are fortunate enough to be able to move where jobs are more plentiful.
So if the federal government does decide to provide aid to the automakers, the first installment likely to assist the GM-Chrysler merger, I think all of us (since we’re paying for it) ought to be asking: who exactly will be helped by this intervention? Are we trying to help the owners, investors, and top executives of the auto industry, or are we trying to help the much broader class of people who work for the industry? And if there’s a desire to help the workers, how best to do that? Working out the “terms” of the federal agreement to minimize job losses is probably fruitless–those jobs will be gone no matter what. Shouldn’t the federal government instead be doing more to help the displaced autoworkers themselves, who when you get right down to it are losing their jobs and really their entire livelihood involuntarily?
I’m no expert on the unemployment compensation system, but it seems one place to start is to not be so cheap about whether “bought out” Chrysler autoworkers, the real victims of the federally-assisted GM-Chrysler merger, should be entitled to unemployment benefits. The federal government is supposed to be getting involved in this in the name of “economic stimulus” or “emergency” spending. That “fiscal stimulus” might lead to further job losses is certainly sad and ironic, yes. So if federal intervention can’t really save the jobs, can we at least make sure we adequately help those who are losing them?
Today The Economist magazine endorsed Barack Obama for president. From their “leader” in their print edition:
IT IS impossible to forecast how important any presidency will be. Back in 2000 America stood tall as the undisputed superpower, at peace with a generally admiring world. The main argument was over what to do with the federal government’s huge budget surplus. Nobody foresaw the seismic events of the next eight years. When Americans go to the polls next week the mood will be very different. The United States is unhappy, divided and foundering both at home and abroad. Its self-belief and values are under attack.
For all the shortcomings of the campaign, both John McCain and Barack Obama offer hope of national redemption. Now America has to choose between them. The Economist does not have a vote, but if it did, it would cast it for Mr Obama. We do so wholeheartedly: the Democratic candidate has clearly shown that he offers the better chance of restoring America’s self-confidence. But we acknowledge it is a gamble. Given Mr Obama’s inexperience, the lack of clarity about some of his beliefs and the prospect of a stridently Democratic Congress, voting for him is a risk. Yet it is one America should take, given the steep road ahead.
Why not McCain? Some of their reasoning:
[T]he Candidate McCain of the past six months has too often seemed the victim of political sorcery, his good features magically inverted, his bad ones exaggerated. The fiscal conservative who once tackled Mr Bush over his unaffordable tax cuts now proposes not just to keep the cuts, but to deepen them. The man who denounced the religious right as “agents of intolerance” now embraces theocratic culture warriors. The campaigner against ethanol subsidies (who had a better record on global warming than most Democrats) came out in favour of a petrol-tax holiday. It has not all disappeared: his support for free trade has never wavered. Yet rather than heading towards the centre after he won the nomination, Mr McCain moved to the right.
Meanwhile his temperament, always perhaps his weak spot, has been found wanting… on the great issue of the campaign, the financial crisis, he has seemed all at sea, emitting panic and indecision. Mr McCain has never been particularly interested in economics, but, unlike Mr Obama, he has made little effort to catch up or to bring in good advisers (Doug Holtz-Eakin being the impressive exception).
The choice of Sarah Palin epitomised the sloppiness…
Ironically, given that he first won over so many independents by speaking his mind, the case for Mr McCain comes down to a piece of artifice: vote for him on the assumption that he does not believe a word of what he has been saying. Once he reaches the White House, runs this argument, he will put Mrs Palin back in her box, throw away his unrealistic tax plan and begin negotiations with the Democratic Congress. That is plausible; but it is a long way from the convincing case that Mr McCain could have made. Had he become president in 2000 instead of Mr Bush, the world might have had fewer problems. But this time it is beset by problems, and Mr McCain has not proved that he knows how to deal with them.
And why Obama, although they have their worries about him?:
Mr Obama’s star quality will be useful to him as president. But that alone is not enough to earn him the job. Charisma will not fix Medicare nor deal with Iran. Can he govern well?…
There is no getting around the fact that Mr Obama’s résumé is thin for the world’s biggest job. But the exceptionally assured way in which he has run his campaign is a considerable comfort. It is not just that he has more than held his own against Mr McCain in the debates. A man who started with no money and few supporters has out-thought, out-organised and out-fought the two mightiest machines in American politics—the Clintons and the conservative right.
Political fire, far from rattling Mr Obama, seems to bring out the best in him: the furore about his (admittedly ghastly) preacher prompted one of the most thoughtful speeches of the campaign. On the financial crisis his performance has been as assured as Mr McCain’s has been febrile. He seems a quick learner and has built up an impressive team of advisers, drawing in seasoned hands like Paul Volcker, Robert Rubin and Larry Summers. Of course, Mr Obama will make mistakes; but this is a man who listens, learns and manages well…
Our main doubts about Mr Obama have to do with the damage a muddle-headed Democratic Congress might try to do to the economy…Worryingly, he has a poor record of defying his party’s baronies, especially the unions… His advisers insist that Mr Obama is too clever to usher in a new age of over-regulation, that he will stop such nonsense getting out of Congress, that he is a political chameleon who would move to the centre in Washington. But the risk remains that on economic matters the centre that Mr Obama moves to would be that of his party, not that of the country as a whole…
[T]his cannot be another election where the choice is based merely on fear. In terms of painting a brighter future for America and the world, Mr Obama has produced the more compelling and detailed portrait. He has campaigned with more style, intelligence and discipline than his opponent. Whether he can fulfil his immense potential remains to be seen. But Mr Obama deserves the presidency.
Oh, and “The EconomistMom” endorses Obama, too–speaking only for herself, of course. But you readers have surely figured that out by now.
In today’s GDP report we learned that the economy contracted in the 3rd quarter–its weakest performance in seven years (CNN-Money story here). It’s another sign–as if we hadn’t had enough of these already–that the economy is in a recession.
How bad is it?
So bad that even supply-sider Martin Feldstein is acknowledging (in today’s Washington Post) what the GDP report shows: were it not for the strength of federal government spending –which increased by 13.8 percent (annualized rate) in the third quarter–the economy would be in much worse shape. So Marty’s now calling for more deficit-financed, demand-side government spending–and get this, on infrastructure projects:
The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well underway. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending…
The increased government spending should include not only money for infrastructure such as bridges and roads but also for a wide range of equipment. Rebuilding some of the military capacity that has been depleted by the wars in Iraq and Afghanistan could be done relatively quickly and should be part of the overall package…
I wonder how quickly these infrastructure projects could create new jobs, which is what we really need to be doing triage on right now. Might they have a job for my laid-off friend from Chrysler?…
And how much new government spending? Marty suggests probably a lot more than last time:
A fiscal package of $100 billion is not likely to be large enough to revive the economy. The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more.
…and no more tax rebates, even though Marty had recommended them in the last round of stimulus, because Marty understands that if we were disappointed by the stimulative effect on consumer spending the last time, we’re bound to be only more disappointed this time:
Another round of one-time tax rebates won’t do the job. The rebates that Congress enacted this spring failed to stimulate consumer spending: More than 80 percent of tax rebate dollars were saved or used to pay down existing debt.
(Not that any of us have a problem with households using at least some of their extra income to pay down debt/save more, for their own longer-run sustainability.)
So, Marty Feldstein appears to have come a long way from his old supply-sider claims that permanent extension of the Bush tax cuts would be the most effective “stimulus” for the economy. His current recommendation is clearly for good ol’ demand-side, Keynesian government spending. Yet he can’t resist getting in a last dig at Obama and any tax increases–including those that might be used to even later offset the cost of today’s stimulus initiatives (emphasis added):
The president-elect should focus on developing a mechanism for identifying and funding spending initiatives that can occur quickly and that would otherwise not be done. While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand. Any plan to finance this spending by raising taxes, even if postponed, as Sen. Barack Obama has suggested, would hurt the recovery by causing affected taxpayers to cut their spending now.
Wait a minute now, Marty: let’s not abandon all of your neo-classical growth principles just because we’re a little freaked out right now about the current state of the economy. Over the longer run, I think you’d agree that we have to start looking at ways to increase, not decrease, national saving, because as you hint above in mentioning ”long-term productivity”, it would be good to not just “flail about” throwing money at the current crisis, but act swiftly yet thoughtfully–with a wise eye to the future. What matters for the health of our economy is not just what the government decides to spend money on today, but on how the government expects to be able to pay for such spending going forward. Eventually, we’ll still have to get back to ”living within our means.”
I’m still not a movie star like my boss, Bob Bixby, and the Peterson Foundation’s Dave Walker, but today I just did my first-ever documentary, interviewed by Forrest Sawyer (no less!) for a PBS Frontline documentary to air in February. (Thanks to producers Thomas Beckner and David Schisgall for snapping some photos for me after the two-hour interview, which I thoroughly enjoyed!) The Frontline show will focus on the economy, the fiscal legacies (good and bad) left by the Clinton and Bush (43) Administrations, and the economic policy challenges facing the next President.
How great is that?!! 
If you haven’t heard, the Treasury Department is currently considering a plan to provide $5 billion to $10 billion in aid, ASAP, to GM to help finance its possible merger with Chrysler. And yesterday, my high school sweetheart was offered $50,000, a car, and 6 months health coverage, to leave Chrysler and his management position at the Detroit-area (Warren) truck assembly plant. (That would be some of his colleagues pictured above.)
Liz Wolgemuth on the U.S. News and World Report blog (”The Inside Job”), insightfully asks: doesn’t this mean we’re using “tax dollars to fund layoffs?”
Well, being someone who’s constantly got the “fiscal responsibility” angle on things, I’d edit that slightly to say yes, we’re using future taxpayer dollars to fund layoffs–because we’re talking about another deficit-financed rescue, after all.
There’s something quite ironic and sad about “rescuing” an industry by providing it the cash flow that’s needed to shrink it–for the federal government to effectively say they’ll help these companies eliminate jobs, in the name of “fiscal stimulus” and for the cause of keeping the economy “alive.”
This is an auto industry being forced to “live within its means”–with a little help from the government–by consolidating, downsizing, reprioritizing. Because the industry for too long catered to our entire nation’s living-beyond-our-means mentality, the “transformation” Detroit needs to survive in the longer run (and grow again) will come too late for many thousands of workers who are now losing their jobs.
A Wall Street Journal article by Jeffrey McCracken and John Stoll describes the ironically devastating “human toll” of this ”rescue” and how the auto companies got so cash constrained–leaving the federal government as the only lender willing to fund a merger and the associated layoffs:
GM and Chrysler estimate that a combined entity would need $10 billion in new equity to lay off workers, close plants, integrate the two companies and provide liquidity, according to several people involved in the talks or briefed on them.
“Without external intervention, from consolidation or government assistance, we expect GM to reach its minimum cash position in under 12 months,” Deutsche Bank auto analyst Rod Lache wrote last week. In an interview, Mr. Lache added that Chrysler is also running dangerously low on funds. “We believe Chrysler is in the same position. It’s either August 2009 or December 2009 they run out. Both have a limited runway.”…
The human toll of such a move could be high. The companies would slash duplicated functions from engineering to marketing. One internal estimate predicts at least 40,000 jobs could be cut from the roughly 166,000 people employed by the two companies in the U.S., Canada and Mexico.
GM’s cash cushion has been eroding for some time. Each month, the company spends $1 billion more than it brings in. At that burn rate, GM could effectively run short of cash next summer, without even taking into account further sales declines.
The 100-year-old company has about $20 billion on hand today, but needs at least $11 billion to $14 billion of working capital at all times so it can keep paying its bills, GM has said. The company has been trying for months, without success, to raise at least $5 billion by selling assets, such as its Hummer brand, and by pledging unencumbered assets…
But lenders are reluctant to invest. GM debt, once considered the highest investment grade, has tumbled to low-rated, junk status. Many lenders approached to invest in a combined GM-Chrysler have also balked…
When Cerberus purchased Chrysler in the spring of 2007, the capital markets were at full throttle. The firm basically bought Chrysler for free, in exchange for taking on its considerable debt. Cerberus expected that once Chrysler was private, the fund could build a smaller, stronger company with the ready help of debt investors.
It hasn’t turned out that way. In two years, Chrysler has fallen from third to fifth in U.S. auto sales. J.P. Morgan estimates it has $11 billion on hand. It uses $3 billion to $5 billion of that as working capital to meet payroll, pay vendors and pay other bills. Its monthly cash burn is estimated at $300 million to $400 million. That figure may grow as vehicle sales slow, suggesting that it could run out of money by late 2009. To conserve cash, Chrysler has halted certain new-product plans, a sign that it sees a deal with GM as the only path out.
The auto makers’ huge obligations, meanwhile, are only growing as revenues and profits shrink. For decades, Detroit’s Big Three have funded generous programs to take care of former workers and surviving spouses…
Obligations growing and revenues shrinking, needs rising and means falling…In this way the auto industry’s woes are just another manifestation of the overextension of the entire U.S. economy.
And thus it is “depressing” (pun inadvertant) to think that if the federal government goes through with this “rescue,” that it will immediately result in more lost jobs, not saved jobs (contrary to what we think short-term “fiscal stimulus” ought to do), and that at the same time being deficit financed, it will also shrink national saving (contrary as well to what we think we should do to encourage longer-term economic growth).
And how will we stimulate the economy in the short term this time around? More “depressing” news today: consumer sentiment is at an “all-time” (in 41-year history) low. We’re no longer talking about encouraging folks to shop; that sounds almost ridiculous. We’re now talking about keeping folks from drowning by helping them hold onto their jobs. How to keep up that short-term economic activity is a lot tougher to figure out, now juxtaposed with the longer-term economic forces that seem to be telling us–all over the place in our economy–to downsize rather than up-size.
Here is a post by DirectorDad in response to a Dean Baker critique of the movie “I.O.U.S.A.” that recently appeared on Huffington Post:
After reading Dean Baker’s critique of our documentary “I.O.U.S.A.”, I am left pondering one important question: How could Mr. Baker have possibly come to the conclusion that our film is “one-sided”?
When we started making the film in December of 2006 we set out to find people who are highly knowledgeable and respected in their fields and also who have had a “front-row seat” on matters regarding our federal government and national economy. The true hero — or “star” — of our film is David Walker, the former Comptroller General of the United States. Mr. Walker is a registered independent and has been called “the most respected man in Washington”. As Comptroller General Walker arguably knew more about the financial health of our federal government than any other person in the country.
But we also wanted to speak to people from the business community, the Treasury Department, Congress, and the Federal Reserve. We were very fortunate to get the following people to participate: Warren Buffett and Peter G. Peterson are both interviewed in the film (a Democrat and a Republican, respectively), as are former Treasury Secretaries Robert Rubin and Paul O’Neill (a Democrat and a Republican), the two heads of the Senate Budget Committee Chairman Kent Conrad and Ranking Member Judd Gregg (one from each party, both of whom have called the film “excellent” and have commented that if more people saw this film it would make fixing our nation’s fiscal problems a lot easier), and former Federal Reserve Chairmen Paul Volcker and Alan Greenspan (a Democrat and a Republican). Congressman Ron Paul also appears offering his unique viewpoints. Though these individuals often disagree on different issues, every single one of them agrees that our country — both our individual citizens and our federal government — is living a lifestyle we cannot afford and that doing so will create serious problems for future generations. If we choose to continue to live our lives this way we are going see a financial crisis in the not-too-distant future that will make today’s economic crisis seem small by comparison.
We had three main goals when we started making “I.O.U.S.A.” almost two years ago: we wanted it to be accurate, educational and most importantly non-partisan. When our film opened nationally in August of 2008 it was praised by dozens of film critics for being balanced. The New York Times called our film “resolutely non-partisan.”
In my opinion, the only thing that’s been one-sided about “I.O.U.S.A.” is Dean Baker’s analysis of it.
Patrick Creadon is the director and co-screenwriter of “I.O.U.S.A.” The film has been called “the most important film of 2008″ by more than a dozen critics from across the country and was invited to be screened at both the Democratic and Republican national conventions. For more information about where you can see “I.O.U.S.A.” please visit the film’s website at www.iousathemovie.com and click on “Events” to find a screening in your community. You can also set up a free screening of “I.O.U.S.A.” at your school or community group by writing to press@pgpf.org.
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