Posts tagged ‘GM’

We Won't Play Politics With GM...

...except when we do.  I think everyone pretty much assumed that Obama's promise of treating GM like a real business and not as a political plaything was BS from the start, particularly when Congress started intervening in dealer-closure decisions about 5 seconds after the promise left Obama's lips.

Henry Payne has a roundup of Congressional micro-management at GM.  One example:

Chrysler and GM have moved aggressively to cut their transportation costs, effecting Teamster jobs and riling the union's political friends. Chrysler, for example, will save 25 percent of its $111 million annual hauling budget by transferring to lower-cost carriers. But Michigan reps from both sides of the aisle are unimpressed, reports the Detroit News. "Relatively minor short-term cost savings generated by shifting this work to non-unionized companies is greatly outweighed by the elimination of good-paying, union middle-class jobs," complains Michigan Republican Thaddeus McCotter.

What do "good-paying" trucking jobs have anything to do with GM's health?

Follow the Incentives

I often tell people that in failing organizations like the government or GM, most of the folks who are "part of the problem" aren't bad people, they just have bad incentives.  I have to remind myself this all the time when dealing with government bureaucrats who are making it impossible for our company to make progress in some area.  These folks did not grow up imagining a life in which they block all growth and innovation, they simply found themselves in organizations  which provide strong incentives to act in this way.  Such consequences may be unintended, but they certainly aren't unexpected when one studies incentives.

To this end, the incentives in the new Baucus health care bill do not look good.  Here is one example:

Because Baucus and the Dems apparently can't be bothered to post the bill online, the Washington Examiner had to get a copy the old fashioned way.  When they did, here is what they found on pages 80-81, "hidden amid a lot of similar legislative mumbo-jumbo":

"Beginning in 2015, payment would be reduced by five percent if an aggregation of the physician's resource use is at or above the 90th percentile of national utilization."  Translated into plain English, it means that in any year in which a particular doctor's average per-patient Medicare costs are in the top 10 percent in the nation, the feds will cut the doctor's payments by 5 percent.

This provision makes no account for the results of care, its quality or even its efficiency.  It just says that if a doctor authorizes expensive care, no matter how successfully, the government will punish him by scrimping on what already is a low reimbursement rate for treating Medicare patients. The incentive, therefore, is for the doctor always to provide less care for his patients for fear of having his payments docked. And because no doctor will know who falls in the top 10 percent until year's end, or what total average costs will break the 10 percent threshold, the pressure will be intense to withhold care, and withhold care again, and then withhold it some more.  Or at least to prescribe cheaper care, no matter how much less effective, in order to avoid the penalties.

The result can't be anything but an incentive for doctors to provide less care to those who need it most, and, when they get tired of getting their pay cut for doing their job, leaving the medical profession altogether.  The article goes on to point out that nothing is done in the bill about the worst incentive to increase medical costs doctors face, the threat of unreasonable tort actions that causes doctors to order ever test and procedure imaginable to combat future second-guessing in front of a jury.

Ezra Klein, There Is A Reason You Can't Get An Answer to Your Question

Ezra Klein writes:

For a long time, I took questions about stifling innovation very seriously. So did a lot of liberals. But then I realized that the people making those arguments wanted to do things like means-test Medicare, or increase cost-sharing across the system, and generally reduce costs in this or that way, which would cut innovation in exactly the same way that single-payer would hypothetically cut innovation: by reducing profits.

I also found that I couldn't get an answer to a very simple question: What level of spending on health care was optimal for innovation? Should we double spending? Triple it? Cut it by 10 percent? Simply give a larger portion of it to drug and device manufacturers? I'd be interested in a proposal meant to maximize medical innovation. I've not yet seen one.

The reason he could not get an answer to this very simple question is that it is stupid.  It is a non-sequitur.  It is, as Ayn Rand used to warn, a statist trying to force the argument to conform to his statist assumptions.

Let's take a different example, because medicine is so screwed up by government intervention that it can be confusing.  Let's imagine ourselves in the computer market in 1974.  The market is dominated by IBM mainframes, and innovation at the time was considered to be the penetration of mini computers (not to be confused with PCs, these were really just smaller mainframes) by DEC and HP.

Let's say that for some reason the US government decides it is fed up with the IBM "monopoly" and the high cost of mainframe computing and it wants to take over.  It feels like there is a lot of waste in mainframes as some people are using them for frivolous reasons while other companies who really need them can't afford them.  They might have created review boards to make sure that they thought each dollar spent on computing hardware and software was "worth it."

So, how much spending is needed to maintain innovation?  We know in hindsight that the PC revolution is looming in the next few years.  And in that context, Klein's question is absurd.  The answer is that spending per se, and even profits, in the mainframe computing market were irrelevant to the coming series of innovations.    The necessary preconditions were that entrepreneurs saw that new technology provided potential new value to consumers, and were allowed the freedom to launch these new products in hopes that the value these new products provided would be sufficiently high that consumers would pay enough for them to return their cost of manufacture and development and return them a profit.  Some succeeded, and some failed, but entrepreneurs were allowed to try, despite most "experts" predicting the PC was a silly toy.

Note that computer innovators were not required to trundle into some government computing board to justify the PC and its price, to justify how much, as Klein would say, needed to be spent on PC's.   If in fact they were forced to do so, if Jobs and Wozniak had to fly to Washington to justify the Apple I to the Computing Spending Decisions Board, they would have almost certainly been shot down.  Or told they could sell it but only for $200 and not their initial price of $2000.  We would have never had a PC revolution in a government single payer computing world, no matter how much, as Klein asks, was "spent" by the government.   It is possible that the government might eventually have greenlighted a PC (years later) just as the increasingly bureaucratic IBM did, but can you imagine how frail the PC revolution would would be if only IBM had ever sold PCs, without the slew of competitors that emerged, and if every innovation had to pass the scrutiny of a government review board before it could be launched?   Only a tiny percentage of PC innovation and of what we think of as a PC today, mostly in the basic architecture, ever came from IBM.

The very problem is that when government runs computers or health care, innovation is seen as a cost.  Klein, by asking the question in this way, is betraying exactly what is fundamentally wrong with a single-payer system.  The single-payer tends to think in terms of trying to deliver the current value proposition (ie the 2009 level of health care technology) as cheaply as possible.  The problem is that in 2039, it will still be focused on delivering the 2009 level of health care technology.  For the government -- a new drug, a new procedure, a new test -- these are all incremental costs, to be avoided.  Klein just wants a number he can plug into budget projections to say, "see, innovation is covered."  Its like Wesley Mouch asking John Galt near the end of Atlas Shrugged to tell him what orders to give.

I wrote about it just the other day.  You can see it in everything the Left writes -- increased spending is equated with increased costs which are therefore bad.  They all say that America's health care spending is rising and our per capita spending is higher than other nations and that this rising spending is somehow a problem to be fixed.  But there is a value side of the equation.  What are we getting from the spending?  When you leave out things the health care system can't do anything about (homicides and fatal accidents) Americans have the longest life expectancy in the world.  We are getting something for that extra money.  It is not just "cost" to be contained.  Is a year of life worth an extra $100,000 spending?  Everyone has a different answer, which is why we typically let each individual make these tradeoffs, and why people are uncomfortable having someone in the Post Office make the tradeoff for them.

But, the left will say, we will put really smart people on this board, who are angels of public service, who will make perfect decisions on the price-value tradeoffs of innovation (have you noticed that all their programs seem dependent on this assumption?)  Back to our computer example, these guys, they would argue, would have been smart enough to have given Jobs and Wozniak the green light.  This is a fantasy.  It never happens.  No matter how good the people, every such government entity is driven by its incentives, and this group's incentives will be to cut spending.  Innovations that result in a net total increase in spending are not going to be well-received.

Further, these boards get politicized, always.  Companies will quickly learn they have a better chance, say, of getting a new breast cancer treatment rather than a new prostrate cancer treatment past the board because the current administration is closely tied to women's groups.  Just look at current government R&D spending, this already happens.  AIDS was under-funded given its mortality because Conservative administrations thought it a disease mainly of groups it found distasteful; today, women's cancers get far more funding than men's due to the strong political activism of women's groups and the success of the pink ribbon campaign.  Drug companies will learn that the quickest way to board approval may not be winning over the board, but getting certain interest groups to lobby the board, or maybe lobby Congress to override the board.  Just look at the promise not to politicize ownership of GM -- that lasted about 2 days before Congress was passing legislation reversing internal GM decisions and GM was making plant closures based on political rather than economic concerns.

But even beyond these problems, there are Hayekian ones as well.  In the mid-seventies, there might have been only a few thousand people who were excited enough to buy an early microcomputer and see its potential.  What are the odds that one of those folks would be on the government review board, particularly since few of them were in the mainstream establishment of the computing field (heck, few of them were over 19 years old).  And even if one were on the board, would they have approved a technology with only a few initial adherents?  The fact is innovation often requires adoption of bleeding edge risk-takers who are willing to try a new technology and iron out its kinks before the mainstream catches on.   The iPod was not the first music player -- a few of us struggled for years before the iPod with large and sometimes hard to use early mp3 players  -- but if these early MP3 players had not existed, the iPod would not exist.

Perhaps most importantly, everyone makes different tradeoffs.  It may make perfect sense for some person in Washington that a biopsy is not required for certain kind of positive cancer test results.  This may make perfect price-value sense to the beauracrat, but I know a number of people who would lose months or years of their life to worry -- worry that could be short-circuited with an inexpensive biopsy.   Or consider a new cancer treatment -- is a year of life worth an extra $100,000 spending?  Would I prefer to extend my life through chemo or increase the quality of life of the time I have left by avoiding chemo?   Everyone has a different answer, which is why we typically let each individual make these tradeoffs, and why people are uncomfortable having someone in the Post Office make the decision for them.

One could say that all of this does not answer Klein's question.  That is because his question, built on the wrong premise, is unanswerable.  I suspect he knows this and is, as Brad Warbiany posited in the link above, just setting up a straw man.  All I can do is try to give a feel what what innovation does require, and help folks to understand that it has little if anything to do with Klein's question.

So, if I had to come up with a pithy one sentence answer, here it would be:

Klein:  What level of spending on health care is optimal for innovation?

Me:  The very fact that you intend to control spending centrally, at any level high or low, is what kills innovation.

Postscript: For a totally different reason, I was reading this article on the Russian T-34 tank, probably the best all-around tank for its time ever made when considering its production volume (the Panther was theoretically a better tank but volume production of the scale of the T-34, not to mention mechanical reliability, eluded the Germans).  Apropos of government boards and innovation was this:

The L-11 gun did not live up to expectations, so the Grabin design bureau at Gorky Factory No. 92 designed a superior F-34 76.2 mm gun. No bureaucrat would approve production, but Gorky and KhPZ started producing the gun anyway; official permission only came from Stalin's State Defense Committee after troops in the field sent back praise for the gun's performance.

Changing Face of Patronage

I was listening to a lecture on the politics of reconstruction when I encountered something that seemed quite quaint.   By 1877, a lot of the country was tiring of reconstruction, and was ready to move on.  Southern Democrats were taking the opportunity to re-take control of their states (through voter intimidation and outright murder) and, unfortunately, institute a race-based social system that would be enforced by government officials for almost a hundred years.

In this background, enter the contested Presidential election between Republican Hayes and Democrat Tilden.  The electoral college vote turned on three close southern races that no one to this day probably knows who really won, particularly if one factors in the voter intimidation in those states.  Never-the-less, Republicans found themselves in control of the vote counting and later the special committee to investigate and certify the election, and predictably Republican Hayes was certified the winner.

Southern Democrats were ticked off, and threatened to throw every wrench they could into seating the new government.  So, in a back room compromise, Democrats exchanged agreement on accepting Hayes as President for agreement by Republicans to pull troops out of the South and effectively allow Southern Democrats leeway to do whatever they liked with blacks in the South.

This is all grossly simplified, but what caught my attention was one side-bargain of the deal.  The Southern Democrats wanted a cabinet position under Hayes.  What did they want?  State, maybe War?  No, they wanted the Postmaster position.  The reason was that the Postmaster had by far the most patronage positions to award of any of the Cabinet positions, because it employed so many civil service positions.

Doesn't handing out a few jobs as rewards to your political supporters seem such a quaint form of political corruption today?  Now, of course, with the power to tax or regulate whole industries out of business, or to step on one group of competitors in favor of another set in a high-stakes market, this seems so benign.  I wish that were all we had to worry about today.  Instead, we have a President who can, without any enabling legislation, take two of the largest corporations in American (GM and Chrysler), cancel the debts owed to their secured creditors, and then hand control of these companies to his strongest political supporters (the UAW) -- an act of political patronage that makes a joke of selling a few postmaster positions.

Update: Don Boudreaux discusses the rise of government-controlled fire fighting in the context of political patronage.

Doomed to Repeat

Via Carpe Diem:

Pro-labor policies pushed by President Herbert Hoover after the stock market crash of 1929 accounted for close to two-thirds of the drop in the nation's gross domestic product over the two years that followed, causing what might otherwise have been a bad recession to slip into the Great Depression, a UCLA economist concludes in a new study.

"These findings suggest that the recession was three times worse "” at a minimum "” than it would otherwise have been, because of Hoover," said Lee E. Ohanian, a UCLA professor of economics.

The policies, which included both propping up wages and encouraging job-sharing, also accounted for more than two-thirds of the precipitous decline in hours worked in the manufacturing sector, which was much harder hit initially than the agricultural sector, according to Ohanian.

"By keeping industrial wages too high, Hoover sharply depressed employment beyond where it otherwise would have been, and that act drove down the overall gross national product," Ohanian said. "His policy was the single most important event in precipitating the Great Depression."

After the stock market crash, Hoover met with major leaders of industry and cut a deal with them to either maintain or raise wages and institute job-sharing to keep workers employed, at least to some degree, Ohanian found. In response, General Motors, Ford, U.S. Steel, Dupont, International Harvester and many other large firms fell in line, even publicly underscoring their compliance with Hoover's program. Reluctant to lower wages due to Hoover's entreaties, employers in the manufacturing sector responded by reducing the work week and laying off workers. By September 1931, the manufacturing sector was already hurting: Hours clocked by workers had fallen by 20% (see chart above) and employment by 35%.

Wow, its sure lucky we don't have a President today reacting to a recession with profoundly pro-labor policies. Otherwise we might be doing something stupid, like screwing secured creditors in favor of routing value to unions or protecting union health benefits at the cost of everyone else's health care.

Being Slower and More Beauracratic Than GM Can't Be Good

One of the reasons GM entered bankrupcy was that its slow and ponderous beauracracy couldn't handle the pace of the modern marketplace.  But one thing even than beauracracy could do was produce dealer rebate checks in a timely manner.  When many of your dealers are running on only a thin cash flow margin, even GM knew it was important to get rebate checks to dealers quickly.

So it is a bad sign that the government, who wants to run the auto industry, the banking industry and soon the health care industry, can't seem to process checks in a timely manner:

Some New Mexico auto dealers have backed out of the cash-for-clunkers program and more may do so as the federal government takes its time providing cash reimbursements.

Dealers across the state are owed more than $3.6 million, according to a dealers' group which says that so far Uncle Sam has only written three checks totaling about $14,000....

Dealerships put up the cash for the rebates after being told by the Obama administration they would be paid back within 10 days of the sale.

And here:

Hundreds of auto dealers in the New York area have withdrawn from the government's Cash for Clunkers program, citing delays in getting reimbursed by the government, a dealership group said Wednesday.The Greater New York Automobile Dealers Association, which represents dealerships in the New York metro area, said about half its 425 members have left the program because they cannot afford to offer more rebates. They're also worried about getting repaid....

Schienberg said the group's dealers have been repaid for only about 2 percent of the clunkers deals they've made so far.

Many dealers have said they are worried they won't get repaid at all, while others have waited so long to get reimburse

The problems cited in other analyses are two that I see all the time in dealing with the government:

  1. Obsession with minute paperwork errors, and rejection of applications for the smallest errors.  For a variety of reasons, government clerks in this kind of program seldom have the knowledge, the incentives, or even the ability to parse between errors and omissions that matter and errors and omissions that are irrelevant.   In fact, if the same application comes back 5 times, that's just more job security.  I have discussed this a number of times, as state liquor license boards have rejected our applications repeatedly for ridiculously small, meaningless errors (here and here, for example)

    Here is my prediction:  You will soon see someone inside the government blaming the dealers, saying it is all because they are not following the 300-page process correctly or not filling out the forms correctly.

  2. Absolute unwillingness to write a check.  Some of you know that I am in the odd position of being a libertarian who does a lot of business with the government, a result of my effort to privatize the operation of public recreation.  I am in the position of sometimes paying the government money (I typically don't get paid to operate a facility, I operate it for profit and pay the government a rent or concession fee) and sometime in the position of getting paid.  The government always demands all of its money owed to it well in advance (think of withholding, where you pay the government your taxes months before the true April 15 deadline).  The government only pays in arrears, and sometimes well in arrears.  Last winter, my funding troubles (when my bank holding my line of credit went bust) were aggravated by the fact that the government took 15 months to pay us $175,000 they owed us, at the same time it demanded an additional $500,000 in advance rent payments on the next year.

By the way, since every post related to the government this month must be related to health care in some way, what they government is doing on cash for clunkers is highly related to the difference in overhead costs between Medicare and private insurance companies.

The cash for clunkers processing is taking a long time in part because the government is worried about fraud and wants to make sure every car it pays out on was really qualifying and destroyed properly.  This takes time and manpower and overhead.  But this is exactly what private medical insurance companies spend their overhead on -- making sure that claims are real and justified and are not padded.  Medicare has lower overhead costs, in part because of government accounting hides some overhead, but in part because Medicare does not do any due diligence before it cuts a check.  It gets a form, it sends out a check.  It does little checking to see if the claim is real.

Cash for Clunkers: $416 Per Ton of CO2 Reduction

Christopher R. Knittel of UC Davis has  a paper (pdf)  looking at likely CO2 reductions from cash-for-clunkers under a variety of assumptions.  The $416 figure per ton of CO2 avoided may actually be low, as it does not include the well-documented rebound effect of people with higher MPG cars driving more miles**.  Also, he admittedly assumes that cars being turned in will have average future driving miles for a car of similar age, though there is anecdotal evidence that in fact the cars being turned in are driven less than average.   Under these assumptions, the cost may be as high as $600-$1000 per ton.

The analysis looks pretty thoughtful, with the proviso (which the author is the first to make) that data on the program and cars bought/turned-in is still sketchy.  The interesting part was that there were no reasonable assumptions that even got the price within an order of magnitude of the $28 per ton clearing price the CBO estimates under cap-and-trade.

As a CO2 reduction program, this is the equivalent of the military's $700 toilet seats.  But of course we all know that no one ever really considered this an environmental or even stimulus bill.   This was always first and foremost 1) another Easter egg subsidy for the middle class and 2) a back door way to subsidize GM and Chrysler to try to make the Administration's investment in them look better.

** This is straight supply and demand -- reduce the cost of miles driven, and people will drive more miles.

230 MPG?

Update:  230 MPG turns out to be, as I suspected, total BS.  Make sure to check out update at bottom

Apparently under new methodology, the Chevy Volt got an MPG rating of 230.

we're told that the Volt has snagged a staggering 230 MPG rating in the city, but we should caution you that it's not as cut and dry as GM would have you believe. The EPA has released "a new methodology for determining a draft fuel economy standard for extended-range EVs like the Volt," and it's that murky measurement system that has blessed Chevy's wonder child with a triple digit MPG rating.


Forget for the fact that the whole terminology is meaningless, as the vehicle only burns liquid fuel for a portion of its energy needs, so "miles per gallon" is an odd concept.  But one could imagine that one could look at the miles per electrical charge, and then look at the equivalent gallons of gasoline-equivalent BTU's it took to deliver that electricity, and create an equivalent MPG.  In fact, that's the only approach that makes any sense to me.

If so, these numbers imply that it is 10x more efficient to burn hydrocarbons in a large utility plant boiler or gas turbine, convert the combustion energy to electricity, transmit that electricity hundreds of miles, charge up a set of car batteries, and then drive an electric traction motor from the batteries than it is to burn hydrocarbons directly in an internal combustion engine in the vehicle.

If this is really the case, then I have been selling electric cars short and we will all soon be buying them (I prefer the performance of an electric engine so this kind of fuel savings is just icing on the cake).  However, I have my doubts.  While certainly a large power station is much more efficient in using all the BTU's in a fuel than is an internal combustion engine, when one considers losses in the electrical generation and line losses, I find it very very hard to believe the difference is 10x.

But I am sure there is no conflict of interest here, and that it is pure coincidence that GM is owned by the same people who created the new methodology and did the testing, and given that the new methodology was created by the same people who have been pushing electric cars as a policy alternative.

Update: The 230 MPG figure is even more BS than I thought.  Apparently, MPG while running on batteries is treated as infinite!  In other words, electricity is treated as "free" and not costing anthing in terms of fuel. Check out how the math is done

When gasoline is providing the power, the Volt might get as much as 50 mpg.

But that mpg figure would not take into account that the car has already gone 40 miles with no gas at all.

So let's say the car is driven 50 miles in a day. For the first 40 miles, no gas is used and during the last 10 miles, 0.2 gallons are used. That's the equivalent of 250 miles per gallon. But, if the driver continues on to 80 miles, total fuel economy would drop to about 100 mpg. And if the driver goes 300 miles, the fuel economy would be a just 62.5 mpg.

This is entirely consistent with the bizarre way electric cars have always been treated by environmentalists and politicians, as if the electricity is free and they have no  hydrocarbon use or CO2 production.  Which is weird, since we get harangued for our incandescent light bulbs destroying the world when we plug them in but plugging in a whole car does not?

That being said, if one really wanted to move away from hydrocarbon fuels, the smart approach is probably to go with electric cars and then attack electricity generation rather than transportation.  I will feel good plugging in my car because the juice will come from a big honking zero-emissions nuclear plant.


Dan Rather says:

"A democracy and free people cannot thrive without a fiercely independent press"

How does he want to achieve this independent press?  He wants the Obama Administration to appoint a czar or something.  Because we all know how independent GM's decision making has been since Obama dived in there.  And don't forget the fiercely independent EPA, which suppresses any internal dissent to Obama's positions.  Or the fiercely independent inspector generals who get fired when they look into Obama's friends.  And don't forget the fiercely independent John Woo, who was willing to write that just about anything the last Administration wanted to do was legal.

GM, At Least Temporarily, Emerges From Bankruptcy

GM is apparently emerging from bankruptcy.  It will have the same (though fewer) managers, employees, and assembly plants.  It will have the same product designers, marketers, strategists, and planners.  It will have roughly the same organization systems, the same culture, and the same history.   Though it was able to shed some plants and employees, it will have most of the same stifling work rules on the shop floor.  It did, however,  manage to shed a lot of interest payments to creditors who entrusted their money to GM in return for claims on GM assets, only to be given the shaft by the Obama administration,

The main difference in the new GM is that it will have an ownership group whose primary concerns are NOT the financial success of the company.  The UAW will be primarily concerned with keeping union members employed and happy and not shifting any manufacturing to lower-cost venues.  The US Government will be primarily concerned with making sure the UAW is happy and promoting a number of its own goals, like "sustainable" plants and smaller cars, irrespective of whether these goals make business sense.  It will be a company more concerned with whether plants have recycling programs and workers with American passports rather than cost or quality.  Both the UAW and the US government can pursue such non-business goals secure in the knowledge that financial success is virtually irrelevant, as the US taxpayer can be counted on to make up any shortfalls.

Another Fear-Mongering Claim Proved to be Total BS

The scare story, from November 2008:

Advocates for the nation's automakers are warning that the collapse of the Big Three - or even just General Motors - could set off a catastrophic chain reaction in the economy, eliminating up to 3 million jobs and depriving governments of more than $150 billion in tax revenue.

Industry supporters are offering such grim predictions as Congress weighs whether to bail out the nation's largest automakers, which are struggling to survive the steepest economic slide in decades.

Even if just GM collapsed, the failure could bring down the other two companies - and even the U.S. operations of foreign automakers - as parts suppliers run out of money and shut down"¦.

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles.

I called BS on this at the time.  Turns out it was yet another made-up scare story to justify government coercion and more unthinking expenditure of taxpayer dollars:

One of the biggest fears of a GM bankruptcy filing -- a collapse of revenue -- appears to not be as prominent an issue as originally thought.

Car buyers appear undaunted by GM's bankruptcy, assuaging one of the auto maker's biggest fears heading into Chapter 11. Early signs point to stable demand for GM cars and trucks since the company filed for Chapter 11.

Mr. Henderson said June retail sales are tracking higher than May. "June sales are moving along just fine," Mr. Henderson told reporters at a summit in Detroit. Sales to rental and other fleets are down from last month, he said. "We're very gratified for the support of dealers and customers that we've received through this."

Today's Quiz

In our new corporate state, does anyone think this decision was made purely on the business merits?  Note that the only people mentioned or commenting in the article (other than a GM and UAW PR flack) are politicians of the various states.

Another Michael Moore Howler

I was listening to NPR in a cab a week ago Sunday and heard an interview with Michael Moore on the [then] impending bankruptcy of GM.  It is perfectly logical to interview Moore on such a topic, as he has been a long-time critic of GM's management, and I was curious to see what he would say.

In the interview, Moore was asked why GM failed.  I wish I had a transcript to ge the exact words, but in effect he said that 1) GM failed because it did not pay its workers enough and 2) GM failed because the US has not promoted enough mass transit.

Huh?  This is certainly a unique perspective, that GM with some of the highest manufacturing labor costs in the world, failed because its labor costs were not high enough.  His "logic" seems to have been that by not paying its workers enough, GM caused real middle class income to stagnate for decades which therefore reduced demand for its cars.   And don't even get me started on the proposition that GM was worse off because the government did not subsidize competitive transit modes enough.   I guess it does not really surprise me that Moore, who wants the US medical care system to emulate Cuba, would be so illogical.  But how does a seasoned journalist just let this stuff pass in an interview?  Incredible.

On Running GM

It strikes me GM has at least four problems that led to its bankruptcy:

  • Tendency to give too much away to the UAW, both in $ and work rules concessions
  • Uninspired design largely out of contact with consumers
  • Operational processes that produce way too many errors
  • Bloated, expensive, and slow bureaucracy

It is astoundingly hard to see how federal government ownership of GM will fix any of these.   The Obama intervention in the bankruptcy has been one long giveaway to the UAW, and it is already clear that any radical or painful restructuring steps will be muddled in the political process.  What we really needed were innovative radicals swooping in a picking up assets in bankruptcy, to be run in totally new ways.  What we get instead are 31-year-old grad students with no experience in automobiles or any other business enterprise calling the shots:

It is not every 31-year-old who, in a first government job, finds himself dismantling General Motors and rewriting the rules of American capitalism.

But that, in short, is the job description for Brian Deese, a not-quite graduate of Yale Law School who had never set foot in an automotive assembly plant until he took on his nearly unseen role in remaking the American automotive industry."¦

But now, according to those who joined him in the middle of his crash course about the automakers' downward spiral, he has emerged as one of the most influential voices in what may become President Obama's biggest experiment yet in federal economic intervention.

While far more prominent members of the administration are making the big decisions about Detroit, it is Mr. Deese who is often narrowing their options.

I can say this will end poorly with some confidence, as I too at 31 found myself to be a smart but inexperienced guy advising Fortune 50 CEOs for McKinsey & Co.  I am embarrassed to this day at the solutions we used to push that blinded us with their elegance but turned out to make no sense in the real world.

The Obama administration reminds me of nothing so much as a grad school policy seminar suddenly finding itself running a government.   All that naive technocratic hubris we once kept safely bottled away in Cambridge and New Haven has been released to wreck havok on the real world.

For more, read my previous work on why GM should fail, and try to see if anything proposed to day gets at the issues discussed.  At the end of the day, what those in the Obama Administration and their many supporters fail to understand is the very basic concept of how wealth and value get created, and how this relates to the deployment of assets.  I won't go into depth on this topic today, but suffice it to say that pumping a trillion dollars or so of government borrowing into the least well-managed institutions in the country is not a recipe for growth.

Update: George Will has more.

But one reason Amtrak runs on red ink is that legislators treat it as their toy train set, preventing it from cutting egregiously unprofitable routes. Will Congress passively accept auto plant-closing decisions? Rattner says that Washington's demure vow is: "No plant decisions, no dealer decisions, no color-of-the-car decisions." He is one-third right. Last week, under the headline "Senators Blast Automakers Over Dealer Closings," The Post reported, "Because the federal government is slated to own most of General Motors and 8 percent of Chrysler, some of the senators said they have a responsibility, as major shareholders do, to review company decisions."

With the help of the California legislature, we can make it three out of three, as California is mulling legislation to ban certain car colors to stop global warming (lol).

Update #2:  More on the Chrysler shotgun wedding with Fiat.

GM = Chrysler Redux

I have not blogged much in the last week on the Obama takeover of GM, but you can take all my old Chrysler posts and just substitute "GM" for "Chrysler" and you will have it pretty much straight.   Having gotten away with hammering secured creditors in favor of the UAW at Chrysler, Obama is setting the same course at GM.  Via Q&O:

The United Auto Workers retiree health fund is set to own as much as 39 percent of the restructured GM, in exchange for giving up its claim to at least $10 billion that the company owes it....

The chief obstacle to an out-of-court settlement for GM remains: There has been no agreement between the company and the investors who hold $27 billion worth of GM bonds.

Under orders from the Obama administration, GM has offered to give the bondholders a 10 percent equity stake in the restructured company in exchange for giving up their bonds.

Hmmm...  let's give unsecured creditor the UAW a 10x better deal than the secured creditors.  No wonder Obama wants to keep this out of bankruptcy court -- laws and contracts and stuff actually would have to be applied there.   But the company will be set for the future -- the US and Canadian governments will control a majority of the board seats, with the rest presumably controlled by the UAW.  Does everybody believe me now when I say we are heading toward a European-style corporate state?

The only thing standing in the way, of course, is those pesky secured creditors, who are actually holding out for what they are legally and contractually due.   Obama's got a bit more difficulty here at GM than at Chrysler because a smaller percentage of the secured creditors are TARP recipients, and therefore he has less leverage to make them give up their rights  (at Chrysler, the TARP majority was pressured successfully into selling out their non-TARP brethren among the creditors).

Of course, Obama has the advantage of Chrysler as a precedent, which makes it pretty clear why he set Chrysler up as the first to be intimidated, as he had the most leverage over them with TARP recipients in the creditor group.  Interestingly, this is very similar to how the UAW has always dealt with the Big 3, targeting the most vulnerable for pressure in contract talks, and then using that settlement as a precedent in the rest of industry.  One wonders if the UAW hasn't been whispering in his ear through this whole process.

What the Hell Where They Thinking?

I couldn't believe this when I read it:

General Motors is open to considering moving its headquarters from Detroit, selling off U.S. plants and even renegotiating parts of its restructuring plan with its major union, the new chief executive said Monday....

A move by GM to leave Detroit would represent another blow for the economy of a region already reeling from the bankruptcy of Chrysler and the sharp downturn in auto manufacturing.

GM purchased its glass-towered headquarter building known as Detroit's Renaissance Center last year for $625 million.

The article moves on to other topics, but I was struck by this:  A year ago, when bankruptcy was only months away (delayed only by injections of taxpayer money), with the real estate market teetering at its peak and just starting to fall off, with GM hemorraging cash, GM decides to ... spend $625 million on Detroit commercial real estate.

This is outrageous.  All the more so because GM's fortunes and the value of downtown Detroit real estate have a beta coefficient that is probably well above 1.  In other words, if GM decides it wants to sell the building, Detroit commercial real estate is going to tank on the news that GM is leaving Detroit, making the real estate virtually worthless.  It is very dangerous to buy an asset for which you are the only possible buyer if there is any possibility you might want to sell it some day.

I understand that companies that have losing business models often find it more profitable to invest outside of their business**, but GM seems to have found the only investment on the planet worse than their own stock.

** Postscript: I am not a huge Roger Smith fan, but this was essentially his strategy -- GM sucks as an investment, so I am going to invest outside of the auto industry.  Though he caught a lot of grief for it, most of his investments outside of GM turned out to have a substantially higher return for shareholders than his (or his successors') investments inside of GM.   Wikipedia writes:

Smith's purchases of EDS and Hughes were criticized as unwise diversions of resources at a time when GM could have invested more in its core automotive divisions.

But what if investments in your core business are even more unwise?

The Demagoguery Moves to GM

From a reader, via Bloomberg

GM's offer is "grossly unfair to the point of abusive," Glenn Reynolds, chief executive officer of CreditSights Inc. in New York, wrote in a report this week. "Politics remains an overriding factor in the equation and has been decidedly unfriendly to the interest of bondholders in a contest with the disproportionately outsized power of organized labor and other Washington-heavy constituencies and interest groups."...

"The attack on institutional investors by the administration in this process is a very strange approach and borders on demagoguery," CreditSights' Reynolds wrote in the report. "The bondholders are being painted into a corner and will have no chance but to stand and fight. You can call them names as long as they get treated fairly. Offer them virtually nothing and then call them names? Now that's just cold."

And here is Cliff Asness, a hedge fund manager not involved with Chrysler:

  • "Let's be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients' money to share in the "sacrifice", they are stealing."
  • "The President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along."
  • "The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power."

GM's Design Problems in a Nutshell

Despite years and hundreds of millions of dollars of effort on electric vehicles, competitors are coming out of the woodwork to beat it to market with an all-electric sedan -- and, from the specs, seem to be beating it on price and features as well.

Miles Electric has confirmed that it's working on a family sedan-sized all electric car for release in North America sometime next year. The car -- which will be released under a different, unknown brandname -- will be a first for the company, which specializes in neighborhood cars that only go up to about 25 miles per hour. The sedan will have a top speed of around 80 miles per hour, and a 100 mile range. It will also require 8-12 hours to fully recharge its dead lithium-ion battery. Miles is currently running the vehicle though crash tests, and expects to see about 300 of them on the road in California sometime next year. The going rate for one of these? About $45,000.

Radical shifts in technology often obsolete first mover and scale advantages.  The winners in the market for diesel electric locomotives (GM and GE) were totally different players from those who dominated the steam locomotive market (Alco, Baldwin, Lima and others).  It will be interesting to see if such a change occurs in the auto market.

I Don't Think It Will Work This Way

From the Economist via TJIC:

the United Automobile Workers "¦ can own half of Chrysler's stock and a third of General Motors' stock if everything goes through"¦

anti-labour activists might also feel a bit of cheer. As Conor Clarke points out, today's events can only have one of two consequences:

It will change the incentives of the unions"”such that they realize their demands were bad for the company"”or it will run the company (further) into the ground and leave the union to pick up the pieces.

Worker ownership rarely works the way it's expected, so it's entirely possible that the UAW has sped up its own demise by cutting this deal.

I don't have any hope that it will work out this way.  The only incentive alignment that will exist is that union ownership of GM will align Congressional incentives to issue GM a near infinite stream of subsidies, bailouts, tax breaks, import restrictions, consumer incentives, etc.

We are switching ownership of GM from a politically fragmented and unorganized group (ie current GM shareholders) to a single organization that already has political clout and massive political lobbying infrastructure  (UAW).  Just look at the large corporate states of France and Germany.  Union involvement in corporate management doesn't change union practices, it changes government practices.

Update from Q&O:

There's some interesting stuff out there to read about the Chrysler bankruptcy, like people asking "why wasn't this done in the beginning"?

Simple answer - in the beginning there was no way to secure the UAW a majority stake in the company. Now, as Felix Salmon points out, that's been accomplished

We'll Take Our Chances on the Judge

Given the deal Obama is trying to foist on them, it is no surprise bondholders are ready to take their chances with bankruptcy court.  I makes me sick to see Obama piously calling out these bondholders as if they are somehow corrupt and evil, when in fact their only crime is not to take the hosing Obama is trying to give them:

According the Treasury-GM debt-for-equity swap announced Monday, GM has $27.2 billion in unsecured bonds owned by the public. These are owned by mutual funds, pension funds, hedge funds and retail investors who bought them directly through their brokers. Under Monday's offer, they would exchange their $27.2 billion in bonds for 10% of the stock of the restructured GM. This could amount to less than five cents on the dollar.

The Treasury, which is owed $16.2 billion, would receive 50% of the stock and $8.1 billion in debt -- as much as 87 cents on the dollar. The union's retiree health-care benefit trust would receive half of the $20 billion it is owed in stock, giving it 40% ownership of GM, plus another $10 billion in cash over time. That's worth about 76 cents on the dollar, according to some estimates.

In a genuine Chapter 11 bankruptcy, these three groups of creditors would all be similarly situated -- because all three are, for the most part, unsecured creditors of GM. And yet according to the formula presented Monday, those with the largest claim -- the bondholders -- get the smallest piece of the restructured company by a huge margin.

This seems to be by political design

From the WSJ via Reason

Bankruptcy Query

Megan McArdle outlines some of the latest terms of a GM creditor settlment.  The interesting facts for me were:

  • Creditors get 10% of equity in exchange for $27 billion in concessions  ($2.7B per percentage point)
  • Employees get 39% of equity in exchange for $10 billion in concessions ($0.26B per percentage point)

McArdle argues that there are good reasons bankruptcy courts tend to give labor a good deal, and having argued all along to allow bankrupcy courts to sort this mess out following the usual rules, I am not going to reverse myself.

But is it really the case that, push come to shove, bondholders get a deal 10 times worse than employees?  If this is the case, I am surprised people ever buy bonds in a company with a large employee retirement overhang.

The New Government Motors

The following actually seems real, though I had to check the date three times to make sure it wasn't April 1.  However, it appears that having cut R&D for most new vehicles and concept cars, GM is doubling down on this vehicle for the New York auto show:


No word yet on Federal crash test results, though I guess since the Feds own the company now they can waive whatever requirements they wish.

Postscript: Its probably a pretty cool technology, and I am sure it would be fun to scoot around in.   But the company is hemorrhaging billions of dollars of cash a month and someone is still funding this?  This can't be made in any of its plants, and can't reasonably be sold in any of its dealerships.   GM would have to sell millions of these to have any kind of impact on its financials, and it is highly unlikely there is any such market.  I therefore am waiting for someone in the Obama administration to say "this is exactly the type of thing GM should be doing."

Why Electric Cars Are Not Really The Answer

Look, I would love to have a good all-electric vehicle with a 100-mile range.  I love the torque of electric motors, and have had a blast every time I have driven a Prius.  But to get over-focused on all this mess is to miss the real problem American auto manufacturers have failed to deal with (via Carpe Diem)


If went back in time and showed US auto makers this chart in 1995, they would have said "holy cr*p!  We're screwed!"  And they were.  American auto makers still made cars like they were in the 1950's auto industry.  Asian manufacturers made cars like they were in the modern PC industry.

Only 3-1/2 More Years Until We Go To The Polls To Select A New GM CEO

Russel Roberts deconstructs Obama's auto speech.  Well worth the read.

I have worked with folks in the government for years.  One of the common syndromes I see in government officials of all levels is something I call "arrogant ignorance."  I see a lot of it in this administration.

An Enormous Blunder

It is becoming increasingly clear that Obama has made an enormous blunder, driven in part by his best-and-the-brightest-style hubris, in taking personal ownership of GM.  Not because it will be an enormous waste of taxpayer money, because I don't think he cares about a few tens of billions of our money.  It is a blunder because GM may not be fixable, and if it is salvageable in some smaller format, it will require painful compromises by politically powerful groups Obama really does not want to square off with.

Obama's stepping forward and claiming ownership for GM's success strikes me as roughly equivalent to someone stepping forward in March of 1945 to take ownership of the German war effort.   The decision is all the dumber because there was a perfectly good alternative -- ie the bankrupcy courts -- with far more experience (not to mention authority and legislative mandate) to handle these type of situations.

Megan McArdle has a good roundup of what challenges face GM and the Obamacrats.

Update: Obama seems to be hinting that a bankruptcy may still be in the cards.  The key challenge for him will be to deal with the obvious accusation of why he didn't allow this before spending $20 billion or so of taxpayer money.  Expect the administration to be focus-grouping and trial-ballooning various euphamisms for chapter 11 to disguise this problem.