Republicans cut off our nose to spite unions and clean air

In case you didn’t notice, the loan package that GM and Chrysler requested from the Government collapsed in negotiations last night. The reason: Republicans in the Senate objected to Union workers not immediately taking pay cuts more than they wanted to (ahead of contract negotiations) and because there were requirements to clean up tailpipe emissions. Even the current President was in favor of this loan package.

And no, I won’t call it a “bailout package.” This was a loan package. What the financial sector got was a bailout package—money without strings attached or a need to repay any of it. I am against a bailout of the auto companies. I am not against a loan to them. There is a big difference.

As a devotee of Paul Krugman (economics editorial columnist at The New York Times,) when he mentioned an article at The New Republic titled “Panic in Detroit,” I went over there and read it. Here is (to me) the most important section of that article:

One reason for the casual support for letting GM fail is the assumption that bankruptcy would be no big deal: As USA Today editorialized recently, "Bankruptcy need not mean that the company disappears." But, while it's worked out that way for the airlines, among others, it's unlikely a GM business failure would play out in the same fashion. In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM's business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation's assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money.

Now do you understand why it is such a bad idea to let GM and Chrysler go bankrupt? Local economies would also feel the pinch of this kind of bankruptcy as auto dealerships immediately went out of business. Other, related industries would also feel the pinch, as local auto parts stores become unable to replenish their stores of parts, restaurants and entertainment venues start seeing fewer customers, stores and shopping malls make fewer sales, and all of them start going bankrupt. Some estimates for unemployment go as high as 5 million people just for the big three going out of business.

Why? Because Republicans want to crush the Unions, and you bloody well don’t have the right to breathe clean air, dammit! Nothing personal, it’s just business if you can’t work or breathe.

The Republicans keep saying that it’s to get the pay of the Union Auto Workers at domestic manufacturers here in the U.S. down to the same level that they are being paid at foreign owned plants in the U.S., but they aren’t mentioning the massive subsidies that they gave those foreign companies to locate those plants here.

Now that I’ve made all of that clear, do you feel any better about Republicans? I sure don’t. All they’re doing is making sure I never vote for a Republican again. It’s clear that you can’t trust them to make the right decision—even if the right choice is very clear.

And last night, was a very clear night.

Sources:

“Panic in Detroit”, by Jonathan Cohn, published by The New Republic, 11-14-2008. http://www.tnr.com/politics/story.html?id=a4893b49-36df-4784-9859-2dfa3a3211bf

“$14B auto bailout dies in Senate”, by Julie Hirschfeld Davis and Ken Thomas, published by Associated Press, 12-12-2008. http://news.yahoo.com/s/ap/20081212/ap_on_go_co/congress_autos

Or: http://hosted.ap.org/dynamic/stories/C/CONGRESS_AUTOS?SITE=MOJOP&SECTION=HOME&TEMPLATE=DEFAULT

Economics and the Auto Industry Bailout

Folks-
In case you weren't aware (and since I haven't mentioned this on my blog, why would you be?) I am becoming a devotee of Nobel Prize winning economist Paul Krugman. He writes a column over at The New York Times several times a week, and has written several books. He is a self-labeled liberal, as am I, which is somewhat rare amongst high-profile economists, ([Edited 11-21-08: as I am not.]

In addition to his column at the New York Times, he also has a blog over there that I check out several times a week. He usually posts short entries there daily, including links to other sites with good information. That is where the first of two topics I'm going to mention come from.

Johnathan Cohen over at The New Republic has published an article titled Panic in Detroit arguing that we should bail out the big three automakers. His arguments are persuasive: The big three aren't the dinosaurs they used to be--the Chevy Volt, slated to come out in 2010 is a good example. Nothing like it is scheduled to come out of Japan, or any other country on any timescale. He also argues that the big three are coming up with cars of better quality than they have in decades, and according to Consumer Reports, better than the Japanese. In addition he argues that allowing GM to go under means not that they would reorganize, that is unlikely considering their position, but rather that they would be liquidated, meaning a loss of jobs not less than 500 thousand, but probably closer to 1.5-2.5 million, increasing the jobless rate by about a third immediately, and forcing the other two automakers to go to sources outside the U.S. for parts. That's only counting the economic hit for GM and it's parts suppliers, not the surrounding businesses, such as restaurants, hospitals, etc.

I've gone on too long about the article. Check it out for yourself and see if it changes your mind about letting GM go down.

The second topic here is also from the New York Times. It seems that for the first time in recorded history, the U.S. is looking at deflation instead of inflation happening. Jack Healy writes a report titled "Consumer Price Decline Prompts Fear of Deflation." This article is shy of some background information, which I'll try to provide here.

Economists of all stripes consider deflation, the increased value of money, to be more damaging than inflation, the devaluation of a currency. In our case it means that the value of a dollar is increasing, rather than decreasing, as it usually does. Why would this be a problem? If you have a whole lot of dollars stuck in a mattress, it isn't much of one. However, if you are working for a living, or have your money saved in any kind of interest paying instrument, such as a savings account or bonds, it means you will be getting no interest paid on your money, and you are likely to take a pay cut. It also means that there is less investment in the economy. In fact, deflation usually means that the economy is shrinking significantly. In most situations the Federal Reserve could stop deflation by decreasing interest rates and loaning more money, but at this moment the interest rates are already as low as possible. Doubt me? About a month ago yields on U.S. government bonds actually went negative for a short while (interest rates of less than 0%.) An example of negative interest would be buying a bond for $100 that was only worth $97 (these numbers are illustrative only.) That might seem an odd thing to invest in, something you know is going to lose money over the long term, but investors were so worried about the money they were losing anyway that they were willing to lose a small amount over the long term instead of losing their entire fortune immediately.

Now you're ready to read the article. Go ahead and check it out.

-Edly