The Unholy Union of Automakers and Financing

Time to smack the auto industry and the UAW again. From a column in yesterday’s Wall Street Journal:

The collective bargaining agreement with the UAW is a heavily negotiated document the size of a small telephone book. It is virtually identical for each of the Detroit Three, owing to “pattern” bargaining, but it doesn’t exist at all in their U.S. competition, the nonunionized transplants. Not only work rules, but fundamental business decisions to sell, close or spin-off plants are forbidden without permission. That permission may come, but only at a price, since everything that affects the workplace must be negotiated. …

In an environment of downsizing, the problem is exacerbated, as the entrenched bargaining structure causes innumerable inefficiencies. Typically each plant or warehouse is a “bargaining unit” and has a union president, who has a staff. If the company consolidates facilities, there will be no need for two presidents and two staffs. Since neither president wants to play musical chairs, they will both point to the bargaining agreement and resist consolidation. As a result, unnecessary facilities are not sold, but kept open, lit and heated, just to preserve a redundant bargaining-unit president and his team.

Not exactly a nimble, streamlined organization designed to compete effectively in the rapidly evolving 21st Century marketplace.

Fortunately, the government has a solution: On top of the $17.4 billion in loans already pledged to keep GM and Chrysler out of their rightful place in bankruptcy court, let’s invest $6 billion of taxpayer money in auto finance company GMAC. That way, customers who are less credit-worthy can “afford” vehicles that are overpriced to sustain entrenched unions.

Over to you, Mr. Obama, and good luck.

A Golden Opportunity for a Higher Gas Tax

Charles Krauthammer burnishes his credentials as a member of the Pigou Club with a cover story in the January 5, 2009 edition of Weekly Standard, titled “The Net-Zero Gas Tax: A Once-in-a-Generation Chance.” (Hat tip: Jonah Goldberg.)

The Pigou Club Manifesto was Greg Mankiw’s call in October 2006 to increase the gasoline tax significantly, thereby encouraging more fuel-efficient cars, reducing pollution, reducing oil consumption, and reducing the amount of money we send every year to oil-producing countries that hate us. His specific idea was for a $1 gas tax phased in over a decade, which seemed radical then but now sounds like it would barely get anybody’s attention.

Krauthammer dispenses with the phase-in and calls for an immediate $1 a gallon gas tax increase, offset by reducing other taxes so that the overall effect is revenue-neutral (thus the Net-Zero in his headline). The beauty of a gas tax is its simplicity, although there might need to be various offsets and exceptions to make such a system palatable. Krauthammer:

But whatever one’s assumptions and choice of initial tax, the net-zero tax swap remains flexible, adjustable, testable, and nonbureaucratic. Behavior is changed, driving is curtailed, fuel efficiency is increased, without any of the arbitrary, shifting, often mindless mandates decreed by Congress.

This is a major benefit of the gas tax that is generally overlooked. It is not just an alternative to regulation; because it is so much more efficient, it is a killer of regulation. The most egregious of these regulations are the fleet fuel efficiency (CAFE) standards forced on auto companies. Rather than creating market conditions that encourage people to voluntarily buy greener cars, the CAFE standards simply impose them. And once the regulations are written–with their arbitrary miles-per-gallon numbers and target dates–they are not easily changed. If they are changed, moreover, they cause massive dislocation, and yet more inefficiency, in the auto industry.

CAFE standards have proven devastating to Detroit. When oil prices were relatively low, they forced U.S. auto companies to produce small cars that they could only sell at a loss. They were essentially making unsellable cars to fulfill mandated quotas, like steel producers in socialist countries meeting five-year plan production targets with equal disregard for demand.

As Krauthammer notes earlier in his article, the federal gasoline tax in America is 18.4 cents per gallon, while in England and much of Europe the gas tax approaches $4 per gallon. (Hmmm… I wonder why people drive smaller cars in Europe than in the U.S.?) A higher gas tax makes sense on so many levels. But given the car lust that seems to be part of the DNA of so many Americans, I’m not holding my breath waiting for it.

Bush Punts Auto Bailout to Obama’s Team

Color me unsurprised.

The Bush administration said it would lend $17.4 billion to General Motors Corp. and Chrysler LLC, buying them a few weeks of financial relief but leaving the biggest decisions about the industry’s future to President-elect Barack Obama.

Another WSJ article suggests, contrary to the opinion flagged by my new BFF Mickey Kaus, that Ford can share in the upside without suffering from the downside.

As the lone Big Three auto maker passing on a federal bailout, Ford Motor Co. won’t have to undergo an intrusive government review of its books and its business plans to become a viable company in order to qualify for –and keep — the low-interest loans authorized by the Bush Administration Friday.At the same time, the Dearborn, Mich. car company is likely to benefit from many of the concessions that General Motors Corp. and Chrysler LLC exact from the suppliers, unions, dealers and debt holders shared by all three companies.

I’ve written so much about the auto industry lately that I feel like I ought to have more to say about yesterday’s development. But as the first excerpt above points out, all this does is buy the companies a few weeks of grace, with any longer-term resolution to be overseen by the Obama Administration. And so I’m like, whatever.

Besides, I have to go out now and chip and shovel the snow that turned to rain late yesterday before freezing solid overnight. I suppose I could have written (or shoveled!) last night, but I had to sit on the couch and watch the original Die Hard on DVD with the Web Goddess. It’s always something.

Ford CEO Alan Mulally Enters the Twitterstream

To be precise, Mulally was Tweeting by proxy yesterday, via Scott Monty. It only lasted a few minutes, but it’s still fairly cool. No great revelations on weighty policy matters, but I learned that Mulally makes a point of driving a different auto every day, including competitor models, to stay close to the public experience of driving. Not earthshaking, but humanizing.

It’s notable that Mulally, a former Boeing exec, first started working for an auto company only two years ago. As I’ve written in previous posts, Ford is seeking to differentiate itself from the Big Other Two. It’s working for me.

Photo credit: Ford Motor Company

(Welcome, Corner readers, and thanks to Cornerite Iain Murray for his continuing support. Thanks also to Mickey Kaus for linking, with a permalink no less — sorry about the crack below about the Kausfiles template!)

In an article on Slate, Mickey Kaus explains why the Detroit automakers are in trouble:

There are some obvious culprits: shortsighted American managers, schlocky designers, an insular corporate culture. Here’s another: the very structure of Wagner Act unionism. The problem isn’t so much wages as work rules–internal strictures that make it hard for unionized competitors to constantly adapt and change production processes the way the Japanese do.Now that everyone is criticizing work rules, it’s easy to forget that they don’t represent a perversion of the collective bargaining process–they are the intended result of that process, and were once celebrated as such.

Kaus doesn’t explicitly advocate or oppose bankruptcy in the article. From what I’ve reviewed of his earlier writing, he doesn’t seem to have taken a position one way or another — rather, he has repeatedly pointed out the problems and the flaws with both bankruptcy and a bailout. (That link is to his blog homepage — his archaic “Kausfiles” template has very few permalinks, so you have to just keep scrolling or searching except when he puts up a major article.)

Legacy of the 1935 Wagner Act

But to me, his current article explains vividly why bankruptcy is the only solution for Detroit. He quotes from another writer’s 1983 article:

Under the Wagner Act, management manages. What the union does is complain, and negotiate for a rule limiting management’s right to do what the union doesn’t like. A worker protests that his job should be classified as “drilling special and heavy” instead of “drilling general.” The parties butt heads, a decision is reached, and a new rule is deposited like another layer of sediment. At some GM plants, distinct job categories evolved for each spot on the assembly line (e.g., “headlining installer”). In Japanese auto plants, where they spend their time building cars instead of creating job categories, there is only one nonsupervisory job classification: “production.”

Note that the above was written 25 years ago — the problem already was clear, and now the “layers of sediment” have had another quarter-century to accumulate. Kaus continues, describing the situation today:

Yes, faced with successful Japanese rivals, Detroit and its union have been trying to reduce the number of work rules–but the process has been slow, like pulling teeth, especially because the UAW defers to its locals.

Confessions of a Union Man

I’ve been professionally aligned with “management” for the past quarter century, but before that I briefly was an unpaid, elected union official. (It was the Newspaper Guild, an anemic junior varsity union in a dying industry, but still. I was the head of a roughly 40-person unit at The Home News, a small New Jersey daily. It’s now Home News Tribune Courier News, and the Guild unit didn’t survive the mergers.)

My point, and I do have one, is that I’ve seen enough of the behavior of highly paid top union officials to understand that their focus is not on the best interests of their members. Their focus is on protecting their lucrative jobs, and the only way they know to do that is to be perceived by the members as being willing to fight to the bitter end to protect existing contracts.

But in bankruptcy court, the contracts (theoretically, at least) can be voided. And that’s the level of change that will be required to put the U.S. auto industry on solid competitive footing with foreign automakers.

A Shout-Out to #TCOT

In the past few days, my humble blog has had a welcome flurry of attention because of a post I wrote describing the interaction between Ford’s head of social media, Scott Monty, and a new virtual organization called Top Conservatives on Twitter (TCOT). (What is Twitter, you ask? Here is a primer.) Having voted for Clinton twice I’m still not used to thinking of myself as a conservative, but I’m currently the 655th top conservative on Twitter, according to the group’s list.

I’ve been moving up the ranks as more people sign on to follow my “Tweets” because of the publicity. [Are YOU following me on Twitter?] The original post got linked to from The Corner, sending hundreds of visitors my way and spawning other threads in the conservative blogosphere. I later did a followup post expressing admiration for Monty’s grace under pressure.

The Ford Story

My BFF Scott Monty is working hard to get the public to understand that the auto bailout defeated last week in Congress was not a “Big 3″ bailout. As I said in an earlier post,

Interestingly, Ford is not seeking bailout money at this time, but supports the bailout “to address the near-term liquidity issues of GM and Chrysler, as our industry is highly interdependent and a failure of one of our competitors could affect us all.”

Monty argues, convincingly to my mind, that under CEO Alan Mulally — a former Boeing exec who never worked for a car company before two years ago — Ford has gone much further than GM and Chrysler toward adjusting its business model to the emerging realities. TCOT is racing to try to reinforce that story — dozens of volunteers (including, to some degree, me) have mobilized over the weekend for Operation Ford Motor, an effort to help differentiate Ford from the others, while striking a blow for capitalism and the principles of market discipline.

The proposed purpose of Operation Ford Motor is based on the following concepts:

- To recognize Ford Motor Company’s efforts at avoiding accepting government bailout money.

- To provide input to Ford Motor Company on why it is important to remain free-market focused, and not accept government loans.

- Partner with Ford in making its example of a market-based approach the standard for American business without relying on taxpayer dollars.

- Lay the groundwork for a market-based approach to turning around the auto industry, and the economy at large.

This nascent potential partnership is fragile on both sides. Monty has been unfailingly polite, but has cautioned that he can make no commitment on behalf of Ford. He also pointed out, in comments on a blog I just can’t find right now, that the company cannot become too closely aligned with any particular ideology. And TCOT may well bail out of this project if members come to disapprove of Ford’s actions.

I admire Monty and hope he and his company are successful in telling The Ford Story and differentiating Ford from the Big Other Two. Ford has already won some concessions from the UAW, and has refocused its business and avoided a cash crunch — it’s by far the healthiest of the three. But let’s say Chrysler and GM go bankrupt and shrink dramatically, while Ford avoids bankruptcy. Ford could end up at a competitive disadvantage because the other companies are able to put more pressure on the union.

As I said at the beginning of this adventure, way back on Friday morning: “I don’t know what if anything will come of this, but it’s fascinating.”

More Eavesdropping on Ford’s Social Media Guy

(Saturday morning update at the bottom.)

Whatever Ford is paying Scott Monty, they oughta pay him more. He’s been Tweeting all day.

Earlier today I described how Scott, the head of social media for Ford Motor Company, had his feet held to the fire by a recently formed virtual organization called Top Conservatives on Twitter. His day actually started well before the exchange I posted then. Around 9 a.m. he started trying to correct the “Big 3 Bailout” meme by pointing out that Ford, comparatively healthy, was not included in the failed bailout legislation. A Tweeter named 64 had quipped, “Can’t believe Daily News missed chance to run DC TO FORD: DROP DEAD this morning.” Scott replied, “@64 Ford wasn’t part of the proposed bill. See http://tinyurl.com/6hms95″. Then he was off to the races, and well into the evening he’s still Tweeting — he’s posted more than 140 Tweets today, all while serving as the public face of Ford Motor Company in the Tweetstream.

Some of the conversations might try the patience of a lesser man. Here he explains and defends his practice for handling “DMs” — direct messages, which unlike normal Tweets are private communications between two Tweeple:

Scott (I call him Scott ’cause he’s my BFF, we follow each other on Twitter) has attracted a lot of attention for his pioneering efforts in representing Ford in the world of social media. Just the other day, blogger Noah Mallin at Reprise Media described how Scott defused a mini-controversy:

Ford today sent fansite TheRangerStation.com (dedicated to lovers of their small pick-up trucks) a lawyer’s letter over copyright violations. This sent the dozens of other Ford fan sites, many of which use Ford branded names, into a tizzy over fears that they too would be asked to stop using Ford names in their URL’s and site materials. By the time the story surfaced on major car blogs like Jalopnik and Autoblog the story had been boiled down to Ford’s lawyers asking for $5,000 or the site gets shut down.

It sounds like a clueless corporation alienating its fans, but the reality is more complicated. It turns out the site was offering counterfeit Ford paraphernalia for sale, and that (not the URL) was the reason for the lawyer letter. Scott sent the site owner a polite message of explanation, which is now proudly posted on the site’s forum.

If you’re still craving more information about my BFF Scott Monty, here’s a recent post on his personal blog about his work, which he likens to “fighting a forest fire with a squirt gun.”

Meanwhile, TCOT is gearing up for Operation Ford Motor, along with other Action Projects. Watch this space for more updates in the days ahead.

Update (Saturday, noonish): I notified Scott by DM when I posted the above last night, and joked that I’m trying to get him a raise. He has given me permission to print his DM back to me:

ScottMonty Thanks. But no raises in 2009. Search for “merit pay” on http://media.ford.com/article_download.cfm?article_id=29265

He points out that the announcement of no merit pay in the release he links is from Nov. 7, before there was any widespread discussion of an auto bailout.

In re-reading this and my other post from yesterday, I don’t think think I’ve made it clear enough why Scott Monty’s efforts are such a big deal. I spent nearly 20 years working in PR/communications for huge companies, either as an employee or a consultant. Huge companies are risk-averse by nature, and communications pros at big companies tend to be even MORE risk-averse — having had their heads handed to them multiple times for small or imaginary gaffes.

Scott is a breath of fresh air — and a braver man than I. After I posted last night saying he had Tweeted 140 times that day, he came back on with 20 more Tweets after midnight, and he’s made another 50 this (Saturday) morning. Virtually all of his messages are in response to individuals, some of whom are unfriendly — but what he says is out there for anyone to see. I’m amazed not so much by the sheer volume as by the fact that he clearly has a corporate mandate to fly solo. More than 200 Tweets in the last 28 hours — ain’t no way he’s running them by the Legal department, Government Relations, two EVPs, etc.

Welcome, Twitterers, Diggers, Cornerites, readers from Social Media Today, Dalton’s Briefs, Northwest Indiana Politics, Kicking Over My Traces and others. If you enjoy this post, I hope you’ll take a look around the site. In addition to the auto bailout, I post a lot about the adventures of a red voter in a blue state, and on Iraq, the financial crisis, capitalism and more. Original post follows, more updates at the bottom.

——————————————-

I don’t know what if anything will come of this, but it’s fascinating — beginning at about 10:30 a.m. today, Scott Monty, the head of social media for Ford (yes, there is such a function now), began a Twitter conversation with Michael P. Leahy, head of a new Twitter-powered conservative group called Top Conservatives on Twitter (#TCOT).

Even if you don’t have a Twitter account, I believe you should be able to follow this search link, which currently shows the “Tweet” below as the first result:


If you click “Show Conversation” at the bottom of the Tweet, you’ll get a screen that looks in part like this:


Leahy has appointed a #TCOT Project Servant-Leader (defined here) to review what Monty described as Ford’s “well thought-out plan” for the future of Ford in the American auto industry. Since all of this is happening in Internet time, Leahy promises to finish the review today, and report back, “then u and i talk with CEO.” Monty says he can’t promise the CEO will take advice from #TCOT — “We have a board.”

Interestingly, Ford is not seeking bailout money at this time, but supports the bailout “to address the near-term liquidity issues of GM and Chrysler, as our industry is highly interdependent and a failure of one of our competitors could affect us all.”

As I said, I’m not sure anything will come of it, but I’ll report back when I know more. For now it looks like the bailout is dead in Congress, but the Bush administration is looking at repurposing some of the $700 billion financial bailout for the auto industry.

Update: Operation Ford Motor now has its own hash tag, #OFM, if you want to follow the action today.

1:50 pm – The Corner post was the traffic champ until a few minutes ago, sending about five readers per minute. Now all of a sudden Digg has taken control. Scott Monty, good sport that he is, asked his followers to Diggit.

Saturday: Follow-up post is here

You go, Mitch McConnell! Here’s hoping enough GOP Senators stay in line to filibuster the auto industry bailout. From another MM:

The so-called “Wall Street bailout” was different — rather than being focused on particular companies, it actually was a rescue of the entire economy. (Ask somebody from Lehman Brothers if they feel “bailed out.”) Somebody aptly described the financial system as being like a utility — and the government would never allow the electric grid to go down because ConEd or PSE&G ran out of money.

But the problems with the auto industry are tailor-made for a bankruptcy workout. The McConnell speech I linked to above describes why, and is worth reading in full, if you have any interest in the topic. (And hey, a month ago nobody would have suspected that I even cared about the auto industry.)

Congress May Have a Spine on Auto Bailout


Here’s why Congress ought to hold the line and refuse to bail out the automakers (emphasis added):

Requiring car companies to meet corporate average fuel economy (CAFE) standards forces them to lose money on small cars that people don’t want so they can sell big cars that people do want, at least until gas prices soar out of sight. Proof positive came last month, when the Toyota Sequoia and Honda Pilot SUVs posted big gains while sales of most other cars plunged. The obvious reason: gasoline prices plunged too.

The reason Europe has fuel-efficient cars is high gas prices, not CAFE laws. What’s more, the only times that Americans have switched to smaller cars is 1973, 1979 and the spring of 2008, when gas prices here were high. So the time has come for Congress to stop pretending that fuel-economy can be legislated and to put market forces to work. That means raising gasoline taxes — offset by cuts in income taxes and by gas vouchers for needy people. These measures would succeed at raising fuel economy and in reducing automotive emissions where the CAFE law has failed.

The Rube Goldberg system of intricate, loophole-ridden fuel efficiency standards has been tried (in the U.S.) and failed. The simple expedient of high gas taxes has been tried (in Europe) and succeeded. Q.E.D.

What do the CAFE standards have to do with the bailout? In the Rube Goldberg link above. Holman Jenkins describes how the CAFE standards help entrench the unions. Refusing to bail out the automakers would address the union issue from the other direction — by giving automakers the ability to renegotiate existing labor (and dealer) contracts in bankruptcy court.

But the more powerful link between the two is reliance on the magic of capitalism. Market forces are more powerful and more reliable than complicated legislation, but the market forces have to be allowed to do their job, and the proper incentives have to be in place. That means that companies that make bad decisions over a period of decades have to be allowed to fail.

There is reason to hope that Congress may do the right thing — because they’re hearing from their constituents (emphasis added):

Congressional leaders are concerned that public opinion has turned strongly against help for the automakers. A CNN/Opinion Research Corp. poll of nearly 1,100 Americans conducted earlier this week found 61% oppose a bailout, while only 36% support it. Even in the Midwest, home to most of the automakers’ remaining plants, 53% of those polled opposed federal help.

That was a stunning reversal of polls taken before the CEOs last trip to Capitol Hill. A poll Nov. 11 and 12 conducted by Peter D. Hart Research Associates found 55% supported federal assistance for automakers at that time, and only 30% who believed they should not get federal help.

On the last trip to DC, of course, the auto executives caught a lot of heat for arriving on their separate corporate jets, and presumably that symbolism is fueling the shift in public opinion. (This time, they arrived in hybrid cars and vehicles.) The cost of the corporate jets are a round-off error compared to the automakers’ overall expenses. But populist indignation may help Congress do the right thing on the bailout, because they can be seen as “punishing” the executives as well as the unions.

Mr. Obama: Declare War on Rube Goldberg

In today’s Wall Street Journal, Holman Jenkins identifies the key culprit in the current economic woes. It’s not Hank Paulson or Hank Greenberg or Stan O’Neal or even George Bush. The most formidable enemy of the American economy is Rube Goldberg.

Jenkins starts by discussing the complex set of rules that have enabled autoworkers to win the contracts that have crippled the American auto industry:

… the single biggest factor in preserving the UAW’s monopolistic power has not been labor law but Congress’s fuel-economy rules. These effectively have required the Big Three to lose tens of billions making small cars at a loss in UAW factories. Not only were the companies obliged to forgo profits they might have earned importing such cars, but CAFE deprived them of crucial leverage to control labor costs by threatening to move jobs to a factory in Spain or Taiwan or Poland.

The CAFE standards — a Rube Goldberg system known formally as Corporate Average Fuel Economy standards — distort the automobile marketplace while dismally failing at their fundamental reason for existence, which is to reduce carbon emissions. Jenkins then ties the proposed auto bailout to the financial meltdown and other issues (emphasis added):

A whole lot of Rube Goldbergism is coming home to roost, in the auto business, in the mortgage market, in the health-care market, in farm policy. We need to simple-down. The economy has a giant adjustment ahead, paying off debts, going from a heavy absorber of foreign capital and goods to a rebalanced relationship with the world.

The good news is that we have a natively resilient, flexible economy capable of making these adjustments — unless bound up in Rube Goldbergian mandates. Barack Obama, bless his heart, may or may not be ready for what’s coming his way. Yet his objectives are perfectly amenable to the simple-down approach.

He asked on Monday for Detroit to deliver a “plan” somehow to reconcile, at long last, the fantasy life of Washington, with nobody losing a job, with super energy-efficient cars, and yet somehow all this being done at a profit to Detroit.

Here’s a plan, but it requires Mr. Obama to play a role too, finally relinquishing such chronic free-lunchism where autos are concerned. He should simply get rid of the CAFE rules and impose a gasoline tax to move the country to a “new energy economy,” if he really believes in panicky climate predictions and/or that “energy independence” would be a net improver of American welfare. And be prepared for Detroit to shift jobs offshore if the UAW won’t concede competitive labor agreements.

Economist Greg Mankiw has been a champion of a gasoline tax for years, periodically welcoming new members in the Pigou Club, a collection of economists and pundits who favor Pigouvian taxes, which Wikipedia describes as “a tax levied to correct the negative externalities of a market activity.” Mankiw does a thorough job of advocating for a gas tax in his Pigou Club Manifesto. Here’s my shorthand version: Raising the gas tax substantially would automagically lead to more fuel-efficient cars, and the tax revenues raised could be used for good purposes such as reducing other taxes and remediating carbon emissions.

Having already established my credentials to offer “improvements” to Mankiw’s ideas, I want to point out that his specific proposal, which seemed bold when he unveiled it two years ago, now looks quaint:

I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade.

After watching gas prices go from $2 to $4 and back to $2 in a matter of months, it now seems clear that a series of annual 10-cent increases would go virtually unnoticed, thereby reducing the desired effect. But that’s a quibble — maybe it should be 50 cents annually for four years, or whatever.

Today’s WSJ also has a tantalizing hint that Mr. Obama might be amenable to taking on Rube Goldberg:

As part of his plan to kill government programs “that have outlived their usefulness,” the President-elect singled out farm subsidies for the rich. If he really means it, this would be big news.

Indeed it would — especially if it were a first step toward eliminating the Goldbergian farm subsidies altogether, along with the negative externalities they entail.

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