Free Markets, Free People
A little humor sometimes does the best job of illustrating absurdity, especially when we’re talking absurd government programs:
Gallup has a new indicator poll out that shows the nation’s national priorities according to its citizens. It’s interesting in many ways, but primarily because one of the highest calls for action is to address “corruption”.
(As an aside, notice the bottom two “priorities).
Notice carefully how the corruption question is phrased – “Reducing corruption in the federal government”. What sort of corruption? Well, one type, that most fair minded people would identify, is that which we call cronyism. As we listen to the uniformed continue to say we’ve been ravaged by the “free market” system, one can only shake their head in wonder that anyone would identify what we have as a “free market system”. Rarely, if ever, are markets allowed to function as they should in this country (or any others for that matter).
What we have is a system of cronyism (I’m removing “capitalist” from the description since there’s nothing “capitalist” about such a system) that is part of what is killing us economically. David Henderson gives us a good description of the system under which we must operate.
What is the difference between free markets and cronyism? In free markets, buyers and sellers are free to agree on price; no government agency restricts who can buy or sell, and no one is told how or what to produce. In contrast, under cronyism the government rigs the market for the benefit of government officials’ cronies. This takes various forms. Governments sometimes grant monopolies to one firm or limit the number of firms that can compete. For example, most U.S. municipalities allow only one cable company to operate in their area even though there is no technological reason more could not exist. The same is true for most other utilities.
Governments sometimes use quotas or tariffs to limit imports with the goal of protecting the wealth and jobs of domestic producers who compete with those imports. President George W. Bush did this in 2002, for example, when he imposed tariffs ranging from 8 to 30 percent on some types of imported steel. Governments sometimes subsidize favored producers, as the Obama administration did with the politically connected solar-energy firm Solyndra. Governments may use antitrust laws to prevent companies from cutting prices so that other, less-efficient companies can prosper: For example, beginning in 1958, the U.S. government prevented Safeway from cutting prices for a quarter of a century.
The entities governments help with special regulations or subsidies are not always businesses; sometimes they are unions. The federal government’s National Labor Relations Board’s (NLRB) complained against Boeing in April 2011, for example. In response to a complaint from the International Association of Machinists and Aerospace Workers (IAM), the NLRB sought to require Boeing to produce its 787 Dreamliner in Washington State rather than in Boeing’s chosen location of South Carolina. According to the NLRB, by saying that “it would remove or had removed work from the [Puget Sound and Portland] Unit because employees had struck” and by threatening that “the Unit would lose additional work in the event of future strikes,” Boeing was making “coercive” statements to its employees. As a matter of fact, it was not. Boeing was simply telling the employees some likely consequences of the union’s actions.
The Boeing-IAM case is not as simple as most of the press implied. It turns out there was a prior case of cronyism. The government of South Carolina promised Boeing “$900 million in tax relief and other incentives” in exchange for moving production to South Carolina. Such is the tangled world of cronyism.
As we discussed on the podcast last night, we have given, or at least allowed government to amass, power to do what it is doing. We have, over the years, allowed them to use tax exemptions and other favors, etc. to lure businesses to our states (and we’re then thankful for the jobs created) not understanding that by doing so, we empower politicians to be the decision makers in areas that should be the function of markets. And what does that foster? A culture that is incentivized to seek out politicians to grant such favors. To ask for, and receive, subsidies. To allow politicians to leverage that power into favoring businesses that fit their political agendas. They become the focus because we have given them the power necessary to grant those favors.
We see the same sort of game played at a national level as described by Henderson. That has nothing to do with capitalism folks. It has nothing at all to do with “free markets”. In fact, it is the antithesis of both.
Probably the most blatant and disturbing example of cronyism came in the auto bailout:
Of course, a much larger instance of cronyism under the Obama administration, one that makes the Solyndra case tiny by comparison, is the bailout of General Motors (GM) and Chrysler. Bush and Obama together diverted $77 billion in TARP funds to GM and Chrysler. In organizing their bailouts and bankruptcies, Obama violated the rights of Chrysler’s creditors and gave a sweetheart deal to the United Auto Workers union.
Law professor Todd Zywicki provides the details:
In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the “absolute priority” rule— since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company’s secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers—unsecured creditors, but possessed of better political connections—received more than 40 cents on the dollar.
Pure cronyism. The bankruptcy rules were thrown out by government in order to pay a favored constituency – labor. Henderson explains:
Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a “deficiency claim”—the terms of which keep the bankrupt company liable for a portion of the unpaid debt. In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the creditors. Were bankruptcy experts to comb through American history, they would be hard-pressed to identify any bankruptcy case with similar terms.20
Why did the Chrysler bondholders not object? Many did. But, Zywicki notes, the federal government (in this case, the U.S. treasury secretary) had enormous power over financial institutions through TARP, and these institutions owned much of Chrysler’s secured debt.
While this has been going on for quite some time, never has it been as blatant as with this administration. And that blatancy is what has pushed the corruption priority up the list to where it stands second to job creation in this horrific economy.
What can be done to remedy this cronyism “corruption”. Only one thing, and unfortunately, those enjoying the power are where the remedy must come:
There is only one way to end, or at least to reduce, the amount of cronyism, and that is to reduce government power. To reduce cronyism, we must abolish regulations and cut or abolish special government subsidies. That way, there is nothing to fight about. For example, the government should not bail out companies or give special subsidies and low-interest loans to companies like Solyndra that use technologies or produce products that the government favors. It should have unilateral free trade rather than tariffs, import quotas, and other restrictions on imports.
Will it happen? No. Those who tout the power of markets and demand they be given priority are now considered “radicals”. Just listen to President Obama talk about the former administration and try to convince you “we tried their way before and look where it led”. Spinning a regime prior to his that was as wrapped up in cronyism as is his and claiming it represented free markets is standard, disingenuous, leftist boilerplate with nary a leg to be found standing in reality. It is pure, fatuous BS.
The “corruption in the federal government” isn’t lobbyists. They’re a symptom of that corruption. The problem resides under the Capital dome and within the offices of the executive branch. They have the power that is sought by the lobbyists. No power and there would be no petitioners. Instead, we see the number of petitioners for favorable treatment by government (usually at the detriment to their competitors) continuing to expand.
So while the public has finally identified a major problem (thanks to the blatancy of this administration) it has a long way to go before it realizes the means by which it must be fixed. Stripping the federal government of its power to grant favors to its cronies is almost an impossible task, given we have the fox in charge of the hen house.
I see nothing in the future that says those who must fix this are willing to divest themselves of the power to grant favors (see recent farm bill, an orgy of subsidies and pay offs (earmarks), for a perfect example). Show me when they’ve ever divested themselves of any meaningful power they’ve accrued.
And so cronyism will continue and we will continue to circle the drain of economic collapse. Meanwhile, Coke and Pepsi will fight about the marginal nonsense that won’t make a significant difference and make all the usual promises about being the panacea for all our ills that voters have been pining for so long.
Or it is “kick the can down the road” politics as usual.
E. J. Dionne, naturally, makes an effort today in the WaPo to do exactly that. Speaking of Obama and Democrats in Ohio and Colorado, he talks indirectly about the auto bailout:
None of this surprises Sen. Brown, a proud pro-union liberal who campaigned with Obama in Ohio last week. Brown notes that Obama has gained ground in his state both by being tough in enforcing trade rules on behalf of American companies and by pursuing a “high-end manufacturing strategy” that appeals to the nation’s “historical pride in manufacturing, and in making things.”
For Brown, who faces reelection this year, one of the voters he keeps in mind is the “guy in Zanesville who made big things with his hands and now has gone from $17 an hour to $11 an hour.”
The candidate who speaks to voters like Brown’s Zanesville worker — and to his white-collar equivalent in Colorado — is likely to win the election. Mitt Romney hopes the national unemployment rate will get them to vote Republican. Obama’s challenge is to offer an economics of national pride and renewal that answers the sense of betrayal these voters began feeling long before he took office.
That outlines some of the problem the Obama record has. Of course, unspoken here is the auto bailout and how that effected workers. The implication is the bailout was a net positive. Of course Obama, et al, think that workers will reward him for that move.
But the entire record of the auto bailout on the left has been one of spin. And most of that spin has been about as disingenuous as one can imagine. Even Dionne creeps around it by mentioning that the workers took a haircut in average salary (well, at least for new workers).
However, the assumption is that’s the worst that happened (hey, at least they still have a job) and workers will be grateful. Or, business as usual, a politician used taxpayer money and debt to buy votes, you have a problem with that?
Well yes, I do.
In fact, the auto bailout is a case study in crony capitalism. It is a situation where government interfered and overruled normal bankruptcy procedures, reorganized the payback priorities so debt holders were stiffed, bought up the majority of the stock in the new company (GM) and handed much of the control to a favored constituency (labor).
Then they told an absolute lie (GM has paid back its debt) and have consistently pretended that all is well with the company when it is not. This is the real result of the bailout:
General Motors (GM) shares fell to a fresh 2012 closing low of 19.57 on Monday. The stock hit 19 in mid-December, the lowest since the auto giant came public at $33 in November 2010 following its June 2009 bankruptcy.
Normally you might say, tough luck investors. But this is Government Motors. The Treasury still owns 26.5% of GM, or 500 million shares. Taxpayers are still out $26.4 billion in direct aid. Shares would have to hit $53 for the government to break even.
Those shares were worth about $9.8 billion as of Monday. That would leave taxpayers with a loss of $16.6 billion.
But that’s not the full tally. Obama let GM keep $45 billion in past losses to offset future profits. Those are usually wiped out or slashed, along with debts, in bankruptcy. But the administration essentially gifted $45 billion in write-offs (book value $18 billion) to GM. So when GM earned a $7.6 billion profit in 2011 (more on that below), it paid no taxes.
Include that $18 billion gift, and taxpayers’ true loss climbs to nearly $35 billion.
So that’s ground truth on where GM stands today. But that’s not helpful to Obama, is it? So how can Obama and company make this picture seem a little brighter? Well good old crony capitalism, that’s how. We have the end of the 2nd quarter nearing and it is critical to the spin of how well GM is doing to see good 2nd quarter results, no?
The upcoming earnings announcement by GM is, politically, the most important to date. The pressure is on Government Motors to appear financially strong as this may be the last earnings report before November elections and sets the stage for how "successful" GM is.
Well guess who is buying GM vehicles in huge quantities (HT: Steve)?
We now learn that government purchases of GM vehicles rose a whopping 79% in June.
The discovery of the pick-up in government fleet purchases at the taxpayers’ expense comes just weeks before GM announces its second quarter earnings. Overall fleet sales (which are typically less profitable than retail sales) at Government Motors rose a full 36% for the month, helping to drive decent sales improvements year over year.
Wow. What a surprise. Add a few accounting gimmicks:
One of GM’s past tricks to help fudge earnings numbers has been to stuff truck inventory channels. Old habits die hard at GM. According to a Bloomberg report, "GM said inventory of its full-size pickups, which will be refreshed next year, climbed to 238,194 at the end of June, a 135 days supply, up from 116 days at the end of May." 135 days supply is huge, the accepted norm is a 60 day supply. The trick here is that GM records revenue when vehicles go into dealership inventories, not when actually sold to consumers.
And you’re likely to see a “good” earnings report even when the stock is at an all time low, inventories are huge and crony capitalism instead of real sales is the means of spinning the news in a positive direction.
Remember that when you hear the GM “success story”.
From the Vice President at a fundraiser in New Jersey, these quotes have come out of pool reports:
You can go back 500 years. You cannot find a more audacious plan. Never knowing for certain. We never had more than a 48 percent probability that he was there.
With all due respect to our SEAL brethren, I only had to go back a few decades to the Son Tay raid. So I’ll write the VP’s remark off as the typical hubris and hyperbole of politics and the usual historic ignorance (see Rutherford B. Hayes) this crew displays fairly routinely(“D-day? No biggie”). No real surprise there.
But, then this – and by the way, this is what all the hubris and hyperbole were leading up too:
Do any one of you have a doubt that if that raid failed that this guy would be a one-term president?
That’s right … politics. This is an attempt to equate saying “yes” to the raid while sitting in a room in DC to the courage necessary to execute the raid. That supposedly risking your political future is akin to actually risking your life in the raid. This is an attempt to frame a decision that really wasn’t very tough at all into an agonizing, courageous and risky choice.
This guy is willing to do the right thing and risk losing.
Two points. “This guy” didn’t risk anything. My guess is had the raid failed, we’d never have heard about it in terms of an attempt to get ‘bin Laden’. In fact, we’d likely have only heard of it as an attempt to get a “high level” al Qaeda operative, if that. And, there was no real decision to be made and most Americans know it. The only bad choice he could have made was to not go after him, learn later he was there and have that information go public.
THEN he’d have been a one-term president. THEN he would have actually risked something.
Oh and finally:
“Osama bin Laden is dead and General Motors is alive,” he said, according to the pool report. “Think about it.”
I have. Trust me.
Trying to justify the unjustifiable with a pep-rally like political speech to the UAW, Obama points to what he contends are the favorable results of his decision to intrude into the auto market and rearrange the bankruptcy process to favor his cronies.
I know our bet was a good one because I had seen it pay off firsthand. But here’s the thing. You don’t have to take my word for it. Ask the Chrysler workers near Kokomo — (applause) — who were brought on to make sure the newest high-tech transmissions and fuel-efficient engines are made in America. Or ask the GM workers in Spring Hill, Tennessee, whose jobs were saved from being sent abroad. (Applause.) Ask the Ford workers in Kansas City coming on to make the F-150 — America’s best-selling truck, a more fuel-efficient truck. (Applause.) And you ask all the suppliers who are expanding and hiring, and the communities that rely on them, if America’s investment in you was a good bet. They’ll tell you the right answer.
Of course Chrysler is now owned by a foreign auto company, courtesy of the Obama administration, Ford took no federal money and, had normal bankruptcy proceeded, taxpayers wouldn’t be out $80 billion dollars (still unpaid despite claims to the contrary) and a leaner, more competitive GM would be in existence. Those suppliers would still be supplying and after the shakeout a more viable corporation would have come into existence.
Speaking of those GM workers in Spring Hill, TN, Kaus lays out another reality that the president doesn’t present:
Toyota and Honda are coming back online after the tsunami and Southeast Asia floods crippled production. VW is building roomy American-style cars in Tennessee using $14.50/hour non-union workers instead of $28/hour UAW workers. Hyundai is expanding rapidly. Competition is going to be vicious–it’s widely believed there’s still overcapacity in the industry. A new oil price spike could crimp sales of high-profit trucks. Will GM still be making money in 5 years? Or, I should say, will GM still be making money building cars in the U.S. (as opposed to importing them from China) in 5 years? I’m skeptical. I don’t think deficient corporate cultures change that easily. Normally we rely on the market to simply kill them off.
The two points to be made here are important. One, GM’s current “success” is a result of huge infusion of taxpayer money. Its problem was/is its corporate culture and its unions. Neither problem have been addressed or fixed. Instead, like Solyndra, they’ve simply been given an extension via the taxpayer that will eventually run out. Secondly, as competing auto companies using non-union labor continue to locate in right to work states and pay a competitive wage (but not the high end union wage), they will continue to take market share from GM, who is still stuck with that toxic corporate culture and grasping unions.
But, of course, Obama won’t care because he’ll be out of office. This is the usual short term vote buying, just on a grander scale than we’ve ever seen it before. Crony capitalism at its worst.
Long term viability?
Who cares? Certainly not President Obama.
And there is more. Shikha Dalmia details it at Reason:
The Treasury Department yesterday revised its loss estimate for the Government Motors bailout from $14.33 billion to $23.6 billion, thanks to the company’s sinking stock price. GM’s Sept. 30 closing price, on which the new estimate is based, was $20.18, about $13 less than its December IPO price and $35 less than what is needed for taxpayers to break even.
The $23.6 billion represents a 25 percent loss on the feds $60 billion direct “investment” in GM. But that’s not all that taxpayers are on the hook for. As I explained previously, Uncle Sam’s special GM bankruptcy package allowed the company to write off $45 billion in previous losses going forward. This could work out to as much as $15 billion in tax savings that GM wouldn’t have had had it gone through a normal bankruptcy. Why? Because after bankruptcy, the tax liabilities of companies increase since they have no more losses to write off.
This means that the total hit to taxpayers, who still own about a quarter of the company, could add up to $38.6 billion. That’s even more that the $34 billion on the outside I had predicted in May.
You’ll remember we were vociferously against the bailout, saying the company should proceed through normal bankruptcy despite the absurd nonsense being spread about the effect of bankruptcy on jobs and the like. Had that been done, a much more stable and lean GM would have emerged. And taxpayers, meaning government, wouldn’t still own 25% of the company – in fact the government wouldn’t own any of it. Nor would unions.
The effect of government intrusion has been to worsen the company’s outlook. Again Dalmia explains the reason that the political priorities of the Obama administration will lead the company into even more troubled financial waters:
Although GM will never, ever make taxpayers whole, taxpayer losses could be mitigated if GM’s stock price rises before the Treasury sells its remaining equity, something it was supposed to do by year-end but has postponed under the circumstances. But right now at least the prospects of a serious upward move in GM’s stock don’t look too good for reasons at least partly beyond GM’s control.
GM actually has been doing quite well in North America and China with profit margins of 10 percent, among the best in the industry. How long that will last is an open question. That’s because GM’s new competitors are not Toyota and Honda that share its cost structure but Hyndai and Kia that have a far leaner one. These companies concentrate on the small car market and don’t offer a full product line so GM and Ford’s most profitable vehicles—those evil, gas-guzzling, greenhouse-gas emitting SUV’s and pickup trucks—are somewhat insulated from the downward price pressure. But the greens and Obama administration want GM to reorient its product mix away from big cars and toward money-losing hybrids and electrics, something that could well put GM back in a hole.
But that’s part of the administration’s long-term strategy for ruining GM. The company’s big weak spot right now is Europe for two reasons: One, thanks to political pressure and labor resistance, it hasn’t been able to address its bloated cost structure there. Two, Europe’s economy is imploding, weakening car sales.
That’s right, government is steering the company in which it owns 25% of the stock, to orient in a direction that is bad business, but as far as the administration is concerned, good politics.
There’s a reason central planning always fails. It’s because it ignores market demand. Central planning’s core belief is it can anticipate accurately the public’s demand and produce products it will buy. See the Chevy Volt. Then see the Chevy Tahoe.
As Dalmia points out, the market for small cars is very competitive. But the sector that GM has an advantage in is politically unpopular with the party the administration represents (note again the party ideology running the agenda and not what is good for the company or the country). So the government attempts to focus the company in a direction away from its most profitable business and toward the politically acceptable but unprofitable small car sector.
Another in a long line of lessons on how central planning always fails. This particular example also points out that when ideology is left to dictate the direction of a business instead of the market the likelihood of failure goes up exponentially.
And when the strategy fails it will not be a “market failure”. It will again be government doing its usual lousy job of picking winners and losers. We, of course, end up being the ultimate losers when it makes its picks.
Despite denials, it appears the Obama administration had a hand in cutting the pensions of non-union GM workers. Another “unexpected” event from the transparent administration:
New emails obtained by The Daily Caller contradict claims by the Obama administration that the Treasury Department would avoid “intervening in the day-to-day management” of General Motors post-auto bailout.
These messages reveal that Treasury officials were involved in decision-making that led to more than 20,000 non-union workers losing their pensions.
Remember, this is the same administration that perverted the bankruptcy system to favor unions and essentially screw investors. This is more evidence of the administrations concerted effort to save their prime constituency by treating non-union workers differently and using their benefits as a means of cutting costs while mostly preserving union benefits.
This came to light in Congressional hearings yesterday:
At a Wednesday hearing, the House Oversight Committee’s Subcommittee on Regulatory Affairs, Stimulus Oversight and Government Spending started pushing the Treasury Department for answers on the effects of the bailout and on how much of a role the department played in picking winners and losers.
The key point of the Wednesday hearing was to show that the Obama administration advised GM on how to eliminate the Delphi workers’ pensions. The evidence suggests Geithner’s team played a significant role in that process, despite claims to the contrary.
This despite administration testimony previously claimed no involvement:
In 2009 congressional testimony, senior Obama administration official Ron Bloom said the president told the Treasury Department to stay out of the management of these companies and downplayed any administration intervention.
“From the beginning of this process, the President gave the Auto Task Force two clear directions regarding its approach to the auto restructurings,” Bloom said then. “The first was to behave in a commercial manner by ensuring that all stakeholders were treated fairly and received neither more nor less than they would have simply because the government was involved. The second was to refrain from intervening in the day-to-day management of these companies.”
But the emails TheDC obtained show high-ranking Treasury Department officials, including Matthew Feldman of Treasury’s Auto Task Force, corresponding with senior GM officials on how to make certain decisions regarding who was going to win and who was going to lose.
You can’t put it any clearer than the Daily Caller does – this is government picking winners and losers. Not only that, it is clear that the administration has favorites and no qualms whatsoever about throwing unfavored constituencies under the bus to ensure their constituency benefits.
Is that the purpose of government?
Ron Klain, former Chief of Staff for Joe Biden (and a Bloomberg View columnist) gives you a peek at the plan. Klain has a piece in Bloomberg where he puts the outline of what the administration needs to do to spin the car bailout properly if it hopes to make it a campaign positive. Klain’s suggestions are offered to form the basis of a narrative which will be polished and become a center-piece of the record of Barack Obama. The reason for beginning now is obviously an attempt to condition the public, which was very much against the bailout (and mostly remain so), to the supposed positive aspects of the takeover by government.
Of all the policy challenges I saw Obama tackle in my two years in the White House, none was more complex than turning around the U.S. auto industry. When the president took office, the industry was in free fall. Sales of cars and trucks, which had topped 17 million in 2006, fell to 10.6 million in 2009. Two of America’s three major automakers were insolvent, kept alive by weekly inflows of federal cash. U.S. automakers had an unsustainable cost structure, were badly trailing their foreign competitors in the production of fuel-efficient and electric vehicles, and seemed unable to make the hard choices needed to arrest their downward spiral.
The course the president chose was unexpected and risky. Most Americans remember that the administration decided to "bail out" the car companies — and indeed, the president did extend more loans and support to the industry. But he attached to the aid a series of controversial and painful conditions that ended business as usual in Detroit.
Call it “gutsy call II” if you will, but in reality, it is far from the picture that Klain ends up painting. Both the car companies were headed toward bankruptcy – a financial condition they had earned by their poor practices and sellouts to unions. Obama’s bailouts certainly ended “business as usual” for those two companies but not in a positive way.
One of the consistent memes is that had Obama not acted, GM and Chrysler would have gotten the equivalent of a death sentence by having to go into bankruptcy. By death sentence I mean the administration and its bailout supporters imply millions would have been thrown out of work and those two companies would have forever disappeared.
Uh, no. As Jim Manzi at NRO explains:
First, in the event of a bankruptcy, you don’t burn down the factories, erase all the source code on all the hard disks, make it illegal to use the brand name Chevrolet, and execute all of the employees. Others take ownership of the assets, and the employees go on with their lives. Some of these assets will be put to use generating revenues, profits, and taxes, and some of these former employees will get jobs or start businesses, and generate revenues, profits, and taxes. In order to measure the effect of the bailout over, say, five or ten years, you have to compare the actual taxes collected to what would happened over this same period in the counterfactual case where the bankruptcy was allowed to proceed. What owners would have bought the factories and IP assets, and what would they have done with them? What businesses would the former employees have started? Who would have moved to Arizona and retired? What new industry clusters will evolve in Arizona because of this transfer of people?
And what would have come out of the bankruptcy? Leaner companies better equipped to address the market and turn a profit. What wouldn’t have come out of the bankruptcy are the level of union pensions and benefits the administration preserved. Obama, through his bailout and modified bankruptcy made sure those were weren’t destroyed. Consequently you have pretty much the same conditions that existed prior to the bailout still in existence today with the added twist of more union control.
GM, for instance, just before it announced it had “paid off” its government loans, lost 3.4 billion dollars. Hans Bader, of the Competitive Enterprise Institute destroys the myth of GM’s loan payback with an extensive investigation into the real story. It is a story of known falsehoods being tacitly approved by the White House and the Treasury Department because the administration was desperate for some good news at the time. The Chrysler loan payback, as I noted recently, is of the same stripe. More smoke and mirrors from the “transparent” administration.
But back to the bailouts and the reasons. The defense offered for the bailout is this:
The White House report said the money invested in GM and Chrysler ultimately saved the government tens of billions of dollars in direct and indirect costs, including the cost of unemployment insurance and lost tax receipts that the government would have incurred had the big Detroit auto makers collapsed.
Again, that assumes nothing comes out of any bankruptcy proceedings. Nothing. And, as Jim Manzi of NRO explains above, that’s simply not how it works. It is an assumption without any real world foundation. We’re talking a zero sum assumption by the administration where no assets are bought, no one goes back to work, everyone is unemployed and no one can find a job. That’s just not the way bankruptcies (or the real world) work.
Second, some of the profit GM makes today would have been made by other companies that picked up some of the slack if the company lost market share after a bankruptcy. They would pay taxes on these profits, and as far as government receipts are concerned, money is money. How would auto industry structure evolve over time given whatever changes happened to the assets currently owned by the legal entity GM, or the employees currently paid by it?
Anybody who tells you they can answer all of these questions reliably is full of it.
Indeed. Again, the White House and its cronies must push the black and white version of this to make it saleable. If they can’t make you believe in their “either/or” scenario, then they can’t sell the lie. They’re banking on a large degree of economic ignorance to sell this. But they know that if they rely on the fact and figures they’re going to end up on the wrong side of the argument. So Klain says, break out the smoke and mirrors once again – sell it on emotion:
First, tell the story with fewer numbers and more emotion; less prose and more poetry. Rescuing the auto industry isn’t just a matter of saving jobs and factories — it means preserving a uniquely American manufacturing tradition. Cars are more American than apple pie or hot dogs (which, unlike the automobile, were both invented in Europe). We couldn’t have won World War II without this "arsenal of democracy"; as Walter Reuther famously said, "England’s battles were won on the playing fields of Eton, but America’s were won on the assembly lines of Detroit." The president needs to jujitsu Republican critics who accuse him of failing to understand American exceptionalism by pointing out his success in saving this exceptionally American industry.
You have to love the fact that even Klain doesn’t believe his own nonsense, but has no problem advising the president to use it. Note too that Klain seems not to remember that one of the reasons that GM and Chrysler were on the ropes had to do with the American public choosing competitive foreign cars over the American cars from those two companies (and with the VOLT, we see GM again in the same condition. But he feels if he wraps it all in emotions and not facts (a variation on “hope an change” that worked so well in 2008), they can fool enough voters into accepting the narrative or at least, not caring about it.
Second, equally emphasize the pain that was imposed as a condition of support, and the hard and unpopular choices the president made. It was a plan of “shared sacrifice,” in which executives were fired, workers lost jobs, benefits and pay were cut, and dealers were shut down. The story of the tough choices the president made along the way must be told to convince the public that this wasn’t a handout.
Of course, this plays into the part of the narrative in which you must believe their “either/or” scenario – that is had the government not acted, millions of jobs would have just vaporized. Of course, what Klain describes above would most likely have been the result of normal bankruptcy proceedings minus the $50 plus billion government money injected into GM. They don’t what that known though. And, naturally, they don’t want any speculation about what would have emerged, how many jobs would that would have entailed, etc.
If you start down that road and use the history of bankruptcies and the emergence of companies from that situation as a basis, you’ll have a very difficult time swallowing the administration’s story. So avoid those facts at all costs and concentrate on “emotion” and “pain”.
Finally – Klain advises the White House to crank up the propaganda:
Third, let the people of the auto communities tell their own stories — encouraging homegrown viral videos and other uses of social and new media. This is a lesson I learned the hard way during the 18 months I was part of the White House team that struggled to explain the benefits of the Recovery Act. We used visits by the president and vice president, videos posted on WhiteHouse.gov, as well as endless statistics and charts and maps and graphics on Recovery.gov — and yet nothing got the job done. Finally, two ice-cream shop owners made an iPhone video that told the story better than we ever had, by showing how a single small business loan rippled across their area to create jobs in countless other businesses.
The White House needs a similar personal narrative to tell the auto rescue story, or it will risk being denied a return to Victory Lane in 2012.
So there is the plan – “emotion, pain and propaganda” – that Klain claims the administration should use to sell something that is about as un-American as the internment of Japanese/American civilians during WWII. The most interesting part, of course, is Klain understands that if they get into the specifics of this “deal” and the facts come out, it ends up looking like a very poor decision. And Klain knows that the opposition, once it finally settles on a candidate and its own narrative, is going to seize on this subject as a part of their attack on the Obama record.
He instinctively knows that any chance of blunting that, or making it a non-issue, requires that the administration’s narrative be out there actively being pushed now and that it has to be spun properly for it to work.
How do you counter this? With facts. And the facts are aplenty. There is no shortage of factual information that can gut these arguments and show them for what they are – emotion and propaganda. The opposition also has to use “American exceptionalism” in its proper way and point to the fact that the administration misusing “exceptionalism” in its version.
And that doesn’t even start to get to the really long-run considerations of what effects this has on rule of law and moral hazard (or if you want to make the case for the bailout, social solidarity and degradation of the working class).
One of the things America prides itself on is “rule of law”. That is a large part of our exceptionalism. We also founded a country that attempts to avoid the moral hazards that abound in this sort of a situation. We are and for the most part always have been a meritocracy. You get what you earn. We don’t buy into exceptions because they’re “too big to fail”. We understand that freedom means the freedom to fail and we don’t bail out –selectively- failures. We don’t throw good money after bad, and we certainly don’t expect our government to interfere in that process.
You probably remember when GM made the big announcement that it had paid off its loans from the bailout? You most likely also remember that subsequent investigation found that GM was simply using borrowed money from a government extended line of credit to “pay back” part of what was loaned under the bailout? In other words it took taxpayer money extended under the LOC and gave it to the government as a payment of “debt”. Overall, though, it’s debt remained the same.
This week Chrysler went through the same sort of shenanigans as Conn Carroll reports:
American taxpayers have already spent more than $13 billion bailing out Chrysler. The Obama administration already forgave more than $4 billion of that debt when the company filed for bankruptcy in 2009. Taxpayers are never getting that money back. But how is Chrysler now paying off the rest of the $7.6 billion they owe the Treasury Department?
The Obama administration’s bailout agreement with Fiat gave the Italian car company a “Incremental Call Option” that allows it to buy up to 16% of Chrysler stock at a reduced price. But in order to exercise the option, Fiat had to first pay back at least $3.5 billion of its loan to the Treasury Department. But Fiat was having trouble getting private banks to lend it the money. Enter Obama Energy Secretary Steven Chu who has signaled that he will approve a fuel-efficient vehicle loan to Chrysler for … wait for it … $3.5 billion.
This is simply more smoke and mirrors from the “Smoke and Mirrors” administration, now engaged in pre-election image burnishing. In fact, the payback (someone call Debbie Wasserman Shultz) involves allowing a foreign auto company to take more control of Chrysler and then tossing a loan for 3.5 billion from government on top of the Fiat purchase of Chrysler stock at a reduced price.
They want you to believe this signals a stronger and profitable Chrysler. In fact, it is a pathetic attempt to fool the public.
But it is even worse than that:
So, to recap, the Obama Energy Department is loaning a foreign car company $3.5 billion so that it can pay the Treasury Department $7.6 billion even though American taxpayers spent $13 billion to save an American car company that is currently only worth $5 billion.
Oh, and Obama plans to make this “success” a centerpiece of his 2012 campaign.
Again, don’t forget the $4 billion in loans the Obama administration has “forgiven” that taxpayers will never get back – all in an effort to make this truly horrendous deal for taxpayers seem better than it is so he can claim credit for “saving the US auto industry” during the coming political re-election campaign.
One of the basic laws of politics, which even the kid running for class president should know, is if you’re going to bash your opponent on an issue, you’d better have your ducks in a row on that issue or it is you who will come out looking idiotic.
Debbie Wasserman Shultz, the chairwoman of the DNC, recently tore into the GOP presidential contenders who were opposed to the bailouts for GM and Chrysler.
"If it were up to the candidates for president on the Republican side, we would be driving foreign cars; they would have let the auto industry in America go down the tubes," she said at a breakfast for reporters organized by The Christian Science Monitor.
As you’ve probably already guessed Wasserman Shultz doesn’t drive an American car, and certainly not a GM or Chrysler model. Nope – she drives an Infinity. It’s up to the little people, apparently, to “buy American”.
There are several ways Wasserman Shultz could have approached this issue without inserting “foreign cars” into the mix. But she didn’t. Apparently she didn’t think about her words at all before she spoke out. She comes from the “blurt and backpedal” school of politics which makes for great blogging fodder for those of us out here in the blogosphere.
Of course, the fact is the federal government shouldn’t have been involved in the bailouts and had the two car companies gone into bankruptcy, they’d have most likely emerged by now, leaner, meaner and more fiscally sound. As it stands now, we simply don’t know if they have the long range fiscal soundness they need to compete and make a consistent profit because, that process was interrupted and we ended up subsidizing failure and discouraged future investors with the way the previous investors were treated (compensated) and how ownership was then divided.
"They can try to distract from the issue if they want," said DNC spokesman Hari Sevugan. "But if Republican opposition researchers are snooping around garages, they should know that if Republicans — who said that we should let the U.S. auto industry go bankrupt — had their way, they wouldn’t find a single American made car anywhere."
Uh, hello in there – Ford?