Coyote Blog

I missed this in the original discussion of the stimulus.  I was one of the first to point out that most of the stimulus was earmarked for maintenance of state government budgets rather than the infrastructure projects people thought they were getting  (here and here).  But I missed this part of the law, which basically made acceptance of these funds a suicide pact for many states:

Worst of all, at the behest of the public employee unions, Congress imposed "maintenance of effort" spending requirements on states. These federal laws prohibit state legislatures from cutting spending on 15 programs, from road building to welfare, if the state took even a dollar of stimulus cash for these purposes.

One provision prohibits states from cutting Medicaid benefits or eligibility below levels in effect on July 1, 2008. That date, not coincidentally, was the peak of the last economic cycle when states were awash in revenue. State spending soared at a nearly 8% annual rate from 2004-2008, far faster than inflation and population growth, and liberals want to keep funding at that level.

A study by the Evergreen Freedom Foundation in Seattle found that "because Washington state lawmakers accepted $820 million in education stimulus dollars, only 9 percent of the state's $6.8 billion K-12 budget is eligible for reductions in fiscal year 2010 or 2011." More than 85% of Washington state's Medicaid budget is exempt from cuts and nearly 75% of college funding is off the table. It's bad enough that Congress can't balance its own budget, but now it is making it nearly impossible for states to balance theirs.

These spending requirements come when state revenues are on a downward spiral. State revenues declined by more than 10% in 2009, and tax collections are expected to be flat at best in 2010. In Indiana, nominal revenues in 2011 may be lower than in 2006. Arizona's revenues are expected to be lower this year than they were in 2004. Some states don't expect to regain their 2007 revenue peak until 2012.

So when states should be reducing outlays to match a new normal of lower revenue collections, federal stimulus rules mean many states will have little choice but to raise taxes to meet their constitutional balanced budget requirements. Thank you, Nancy Pelosi.

Apparently a couple of states (no surprise, Texas is among them) were smart enough to turn down some of the money.

Great article in the SF Weekly on San Francisco:  The Worst Run Big City in the US.  The article is lengthy and packed full of government fail.  Just one example:

You can't get San Francisco running efficiently, because that would require large numbers of unionized city workers to willingly admit their redundancy and wastefulness. Inefficiency pays their salaries. "It's been going on for decades," Peskin says.

This problem comes up almost every time the city negotiates labor contracts, which is part of the reason San Francisco is constantly on the brink of fiscal ruin. Politically powerful unions "” the progressives are beholden to the service unions; moderates cater to police, firefighters, and building trades; and Republicans ... what's a Republican? "” negotiate contracts the city knows it can't afford. Politicians approve them, despite needing to balance the budget every year, because the budget impact of proposed contracts is examined by the Board of Supervisors only for the following year, no matter how long contracts run. According to former city controller Ed Harrington, it has become common practice not to schedule any raises for the first year of a contract, but to provide extensive raises in later years.

The result is a contract that looks affordable one year out, then blows up in the city's face. City employees receive up to 90 percent of their already generous salaries in pensions and many also receive lifetime health care "” meaning that as they retire, labor costs soar.

Sounds like the health care bill in Congress, no?  The bit near the beginning on the problem in the parks department - overstaffing, no one showing up for work, lost money, poor controls, no process - particularly resonate with me.  My business is the privatization of public parks.  I can't tell you how many public parks agencies I know to be providing terrible service (service levels that I would be ashamed of) with grossly inflated budgets tell me face-to-face that they can't privatize because that would jeopardize the quality of the parks.  Well, that and the fact that the public employees unions would not allow it.

I always laugh when folks tell me that government intervention is needed because private industry is too short term oriented.  But no one is more short term oriented than politicians looking to the next election or closing this year's budget hole.  In particular, capital maintenance is always ignored until infrastructure is literally falling apart.   We see it in parks, transit systems, roads, schools, etc.  It is the same phenomenon that causes third world state-run oil companies to have their production fall off - instead of reinvesting their profits into upgrades and maintenace of their fields and infrastructure (as those short-term focused American oil companies do) they transfer the money into social giveaways that cement their political power.  Here is a great example from San Francisco:

In 2002, the San Francisco Chronicle revealed that the city had, for decades, been siphoning nearly $700 million from its Hetch Hetchy water system into the San Francisco General Fund instead of maintaining the aging aqueduct. Several mayors and boards of supervisors used that money to fund pet causes, and the Public Utilities Commission didn't say no. Unfortunately, spending maintenance money elsewhere doesn't diminish the need for maintenance. By 2002, the water system was in such desperate condition that voters were asked to pass a $3.6 billion bond measure to make overdue fixes. Obligingly, they did "” who doesn't like water? Since then, the projected costs have swelled by $1 billion. So far.

My favorite line:

"San Francisco is Disneyland for adults, or a place people go until they grow up."

I hope JD is wrong:

Further complicating this picture is that Sheriff Joe Arpaio, despite erratic and confrontational conduct that has repeatedly put him at the wrong end of lawsuits and press coverage, is immensely popular with Maricopa County voters. In fact, recent polling suggests that the governor's office is his for the asking. He's a favorite for the Republican nod and an apparent shoe-in in the general election.

I was under the impression that the Repub's cut Arpaio loose in the last election, but I don't really follow the politics stuff much.  JD has an update on the latest Arpaio shenanigans, as does Radley Balko:

• The Maricopa County Sheriff's Office announced on Tuesday that Stoddard would surrender to jail ahead of his midnight deadline to aplogize. But when Stoddard showed up, the jail refused to book him, citing a "clerical error." Stoddard insisted on spending the night in jail anyway.
• Maricopa County Sheriff Joe Arpaio announced he has filed a federal lawsuit against the county and its judges, alleging a "widespread conspiracy" against Arpaio and his officers. Arpaio remarkably and apparently with no self-awareness whatsoever called the county a "good ole boys network," and commented that he had "never seen these kinds of things occur in the justice system." Arpaio also called Donahoe's contempt finding against Stoddard a "vendetta," and said, "For political reasons, [Stoddard's] been thrown to the wolves."
• Yesterday, the day after Stoddard spent a night in jail, 19 sheriff's deputies scheduled to work security at the courthouse called in sick, throwing the day's court proceedings into disarray. The building also had to be evacuated after a phone-in bomb threat.
• As crowds returned after the bomb threat was cleared, the law enforcement unions commenced with a conveniently-timed rally in front of the courthouse, calling Stoddard a "victim" and demanding that he be released from jail.

Wow, it sure is a real coincidence when a bomb threat against the public defenders (it was a public defender the deputy originally stole the document from) at the exact same moment the sheriff's were trying to disrupt the courthouse over a dispute involving the public defenders office.

Those who don't live here would be appalled and disgusted by how such a large segment of the local population absolutely revere this man.  He's like the right-wing Obama, living off a manufactured image.

Unfortunately don't have the time to comment much on this absurd comment, but I am not sure it is even deserving of comment

Andy Stern, president of one of the nations biggest labor unions, said today that America is failing, and many entrepreneurs arent loyal to the U.S.

I think the country is in a mess, Stern, president of the 2.1 million-member Service Employees International Union, said at the Wall Street Journal CEO Council, a conference in Washington. I think America is failing.

Stern, the most frequent guest to the White House this year, said the U.S. economy has created a system in which the entrepreneurial class is not loyal to America. Its not wrong for the government to distribute wealth to people who need it, and labor unions can help the country do that, Stern said.

Couldn't have illustrated the new corporate state that Obama is building better than this -- at state where large corporations, unions, and government officials conspire to use government power to enrich their contituencies to the detriment of smaller businesses, consumers, and taxpayers.  WSJ via Tad DeHaven:

The government has taken on a giant role in the U.S. economy over the past year, penetrating further into the private sector than anytime since the 1930s. Some companies are treating the government's growing reach "” and ample purse "” as a giant opportunity, and are tailoring their strategies accordingly. For GE, once a symbol of boom-time capitalism, the changed landscape has left it trawling for government dollars on four continents.

"˜The government has moved in next door, and it ain't leaving,' Mr. [GE CEO Jeffrey] Immelt said at the International Economic Forum of the Americas in Montreal in June. "You could fight it if you want, but society wants change. And government is not going away.'

A close look at GE's campaign to harvest stimulus money shows Mr. Immelt to be its driving force"¦ Inside GE, he pushed his managers hard to devise plans for capturing government money.

By January, Mr. Immelt had become a leading corporate voice in favor of the $787 billion stimulus bill, supporting it in op-ed pieces and speeches. Reporters who called the Obama administration for information on renewable-energy provisions in the legislation were directed to GE.

When the stimulus package was rolled out, Mr. Immelt instructed executives leading the company's major business units "to put together swat teams to get stimulus money, and [identify] who to fire if they don't get the money," says a person who heard him issue the instructions.

In February, a few days after President Obama signed the stimulus plan, GE lawyers, lobbyists and executives crowded into a conference room at GE's Washington office to figure out how to parlay billions of dollars in spending provisions into GE contracts. Staffers from coal, renewable-energy, health-care and other business units broke into small groups to figure out "how to help companies" "” its customers, in particular "” "get those funds," according to one person who attended.

From Henry Payne, in an article on the auto industry:

The Left likes having Big Industry straw men to bash whenever their socialist plans run aground, but the fact is, Big Industry is embracing the U.S.'s leftward lurch. Better to secure your place at the Rentseekers Roundtable, to lock out new competition and guarantee a never-ending stream of government welfare.

In Europe, economies are run by a troika of politicians, leaders of large corporations, and major unions.  These groups run the economy to their benefit and against entrepeneurs, nwe competitors, foreign competition, low-skilled workers, upstart competitors, and (most of all) consumers.   Q&O discovered someone on the HuffPo of all places starting to see what is going on:

When I heard the word "corporatist" a couple of years ago, I laughed. I thought what a funny, made up, liberal word. I fancy myself a die-hard capitalist, so it seemed vaguely anti-business, so I was put off by it.

Well, as it turns out, it's a great word. It perfectly describes a great majority of our politicians and the infrastructure set up to support the current corporations in the country. It is not just inaccurate to call these people and these corporations capitalists; it is in fact the exact opposite of what they are.

Capitalists believe in choice, free markets and competition. Corporatists believe in the opposite. They don't want any competition at all. They want to eliminate the competition using their power, their entrenched position and usually the politicians they've purchased. They want to capture the system and use it only for their benefit.

This applies to workers as well as employers -- just replace capitalists with "free workers" and corporatists with "unions" in the above paragraph.  This helps to explain why Obama is not actually pro-labor, but pro-union.  Via TJIC:

Workers in Barack Obama's new economic order fall into two categories "” those who are worthy of the president's energies, and those who aren't. You may be surprised to learn where you rank.

Obama doesn't weigh the value of workers based on their paychecks, what they do or whether they slip their feet into wingtips or steel-toed boots in the morning. His sole interest is in whether they have a union card in their wallet.

If they do, the president is in their corner, working hard to make sure they don't get the short end of any stick. But if they are among the 88 percent of American workers who don't belong to a union? Ask Delphi's salaried employees what Obama thinks of them.

As part of Delphi's restructuring in bankruptcy court, the Troy-based auto parts maker dumped its pension plan onto the federal Pension Benefit Guarantee Corp.

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That usually means a continued pension check, but one that is much smaller. And for Delphi's salaried workers, that's what they can expect.

Delphi's union-represented workers, however, will dodge that bullet. The Obama administration swooped in and, in an extraordinary deal, is forcing General Motors to make the 46,000 union workers and retirees whole. GM used to own Delphi, and relies on the supplier for much of its parts.

"The U.S. government is taking care of a select group of people and tossing the rest of us under the bus," Peter Beiter, a retired financial manager for a Delphi plant in Rochester, N.Y., told the New York Times.

And it's doing so with the tax dollars of those like Beiter who aren't in the favored class of workers. GM is operating with more than $50 billion in government bailout money.

That gives Obama the freedom to force GM to subsidize the pensions of union workers it has no legal obligation to, and who are employed by an entirely different company.

If you want to see where we are going, read this (and this) about the National Industrial Recovery Act, which FDR modelled after Mussolin-style fascism, whose economic system he greatly admired.

This year has been a frustrating year for my business.  As many of you know, I am in the business of privatizing public recreation.  We take over the management of public recreation facilities, and are generally able to run them to the same or better standards as the government for less money.  Whereas before we take over, the government typically loses money on a park, we often can run it at a profit AND pay the government rent for the concession rights.

This year, numerous state parks have been threatened with closure in states all across the country.  In many of these states, I have communicated with everyone I could think of, from the governor to state parks leaders, trying to say that companies like ours could probably keep many of these parks open. I told them I wasn't looking for a sweetheart deal - we weren't afraid to bid against other companies, but it was crazy to close parks that could easily remain open.   We have been told any number of times by numerous state leaders that they would prefer to close the park rather than put it under private concession management.

To some extent, this is due to the pressure of public employees unions, who have every incentive to play brinkmanship and force closure of parks rather than set the precedent of having them managed by a non-union private company.  This is unsurprising.

I also understand that there is a fear of private management of public recreation facilities.  I swear the first think I hear almost every time I present on what we do  is that they fear we would put a billboard or a McDonalds in front of Old Faithful.  I kid you not, this charge is as regular as clockwork.  Fortunately, we manage about 175 public recreation facilities to a pretty high standard, and not one billboard or McDonalds can be found at any of them.  A large part of the bid process for any facility management contract is not just the rate or the rent but also the detailed operating standards to which it will be managed.  So this is a normal, but surmountable hurdle.

But even taking into account these usual sources of resistance, I am always just amazed at how vociferous the opposition is to even experimenting with private management.  States like California are simply hell-bent on closing parks a company like ours could easily keep open for the public (to be fair, Ruth Coleman, head of California State Parks, is very open to new models but she gets absolutely no support either within her organization or in the legislature for such new ideas).

But I think I understand this phenomenon better now after reading Kevin Drum today. This is what Drum wrote in response to the DNC ad, which clearly stretched the truth, claiming that Republicans voted to end Medicare:

Why not just tell the truth: Republicans essentially voted in favor of turning Medicare over to private industry.  With only a few words of explanation, this could easily be more effective than the ad that actually ran.  Like so:

Republicans voted to turn Medicare over to private insurance companies!  You heard right: they want to hand Medicare over to the same companies that [insert two or three insurance company outrages here, maybe a Wall Street reference, something about profits over people, etc.].  Democrats will never do that.  Blah blah blah.

Would that really be any less scary than the ad that actually ran?

So for Drum, and I presume for much of the Left, the suggestion that a government service be managed privately is just as bad as the suggestion that the service be ended. In essence, Drum is saying he would almost rather have no Medicare than Medicare provided privately.

It certainly explains a lot, and puts the phenomenon I see in public recreation into a larger context.

Update: A couple of the comments hpothesize the problem is that many in government and on the left just hate profits and the profit motive in general.  One related story -- I was in a meeting with a large state parks organization where a senior person raised the idea of private park management.  Well, everyone hated the idea, but when it looked as if the leadership might still seriously consider the private option, one person in the room said "well could we at least mandate that they can't make a profit."  There was a lot of head nodding at this.

I didn't go off on this and kept a smile on my face.  But I did lose it in an earlier meeting with the head of some government parks we actually did run.  We were discussing park fee increases for the next year (the state had just raised minimum wages about 30% and we were scrambling to make ends meet).  He said he was uncomfortable with the level of profits we made.  I asked him, "Jim (not his real name) does this state pay you more than $25,000 a year to run this park?"  He nodded.  I said, "then you make more profit in this park than I do, and what is more, you didn't have to invest $100,000 in equipment to get your job, nor do you have to rebid for your job every 5 years, nor does you salary go down if for some reason park visitation decreases."

Sometimes I wish I had stood up in that state meeting and said something similar, as in "Why is the money I make in a park somehow tainted because it is the difference between my revenues and expenses and the result of substantial investments and subject to extraordinary risks, while the virtually guaranteed-for-life salary you make, paid for by the same visitors, is somehow pristine?"

Mark Mix has an article in the WSJ on various paybacks to unions buried in the current health care bill.  The steps range from forced-unionization of certain health care professions to direct subsidies of union health care funds to exemption of union health care plans from the rules everyone else will have to follow.

Update: The Greg Conko study also looks good, but I am only part way through it.

From a Chicago Tribune editorial on the city aldermen blocking Wal-Mart construction in the city, via Carpe Diem:

Organized labor doesn't like Wal-Mart because Wal-Mart doesn't have union jobs. It just has jobs (with an average hourly wage of $12.05 in Chicago). The aldermen, of course, already have jobs. They get paid $110,556 a year and they figure that as long as they keep the labor unions off their backs, they'll keep making $110,556 a year.

Who says the City Council doesn't generate jobs? If you're one of the 50 aldermen, your unemployment rate is 0 percent. But the unemployment rate for the rest of Chicago is above 10 percent. One in 10 Chicagoans is out of work.

Bottom line:  Never assume the states reasons of "safety" or "consumer protection" are the actual reasons for a regulation.  Regulation is much more likely to be protection of powerful political interests:

Flashback to 1959. The airline industry is on the cusp of its fifth decade, but there is a problem facing younger pilots who want to enter it. The old-timers just won't retire, and this frustrates potential entrants with much flying experience and training, thanks to military service in World War II, Korea, and elsewhere. The result is a sort of malinvestment in human capital, with many men trained to be pilots without private-sector jobs to justify the training.

What is a young, aspiring pilot to do? Well, he and his peers could make their presence and skills known to the airlines, signaling that the labor market had changed and that it would be possible to hire new pilots at lower wages. Not only would some airlines opt for the lower-priced laborers, thus lowering the airlines' reservation price required to provide flights to consumers, some owners of capital might invest in new airlines, thus increasing consumer choice, industry output, and create a downward pressure on prices.

Such would be the market solution, coordinated by changes in relative prices, and it would be peaceful, characterized by voluntary interaction and compromise by the parties involved. Unfortunately, there was another option, requiring the pilot to join a pilots union to lobby the federal government to enact rules forcing existing pilots to retire at age 60. All the union needed was a lobbying presence and some sympathetic regulators at the FAA.

Guess which option was chosen? It seems that in 1959, the aspiring pilots found a sympathetic ear in C.R. Smith, the then-president of American Airlines who also wanted to ground his older pilots. The industry was switching to jet engines, and Smith wanted to freeload off of the tax-supported training with those engines many of the younger pilots received in the military. So Smith instructed his lobbyists in Washington to rewrite FAA rules to force retirement at 60, and in December of 1959, an FAA administrator named Elwood R. Quesada simply authorized them. In January of 1961, Quesada retired from the FAA and immediately joined the board of directors of American Airlines. The retirement age rule has been in effect for almost 50 years.

Good for Megan McArdle:

when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line?  Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group.

No, leave that aside for the nonce, and let's pretend that the most important thing in the world, far more interesting than stupid concepts like the rule of law, is saving unions.  What do you think this is going to do to the supply of credit for industries with powerful unions?  My liberal readers who ardently desire a return to the days of potent private unions should ask themselves what might happen to the labor movement in this country if any shop that unionizes suddenly has to pay through the nose for credit.  Ask yourself, indeed, what this might do to Chrysler, since this is unlikely to be the last time in the life of the firm that they need credit.  Though it may well be the last time they get it, on anything other than usurious terms.

I am not sure I agree with the last part.  While banks seem to have an unbelievably long memory when it comes to you or I trying to get a loan after we forgot to return those Columbia House records 15 years ago and couldn't pay our bills, major banks have goldfish memories when it comes to major losses.  Whether it be lending to Latin American companies or to industries like airlines that go bankrupt with clockwork regularity, banks seem perfectly capable of repeating the same mistakes over and over again.

This is in part due to something I was trying to tell folks waaaaay back in October with the threatened liquidity crisis -- banks have to lend.  There is simply no good business model for a bank that involves sitting on hoards of cash under the mattress.  And when you have tens of billions of dollars to lend, you can't just do it in $100 increments -- you have to lend big slabs to large institutions.  And given that lots of other banks are trying to lend to the same guys, someone is going to issue that $300 million line of credit to Chrysler a couple of years hence.

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

I just finished "The Box," which is a history of container shipping.  Never has any book I have read elicited so many laughs from my family.  Nothing says "geek" like reading a book about shipping containers.

But, for those of you who might similarly be turned off by the subject matter as unpromising, I can say this is easily one of the most interesting business books I have ever read.    It is fascinating to see how the entire economics of an industry can be changed not by some arcane advance in silicon, but by a metal box.  In a period of about 20 years, the entire merchandise shipping business, which had remained virtually unchanged for thousands of years, was completely reinvented.  Every ship and every port had to be replaced.  Moreover, these changes resonated far beyond shipping, as they enabled much of the global manufacturing revolution of the last generation.

Because pre-container shipping and transport were so highly regulated, the book provides a great window on how regulation affects innovation, and vice versa.  It also focuses quite a bit on how unions and in particular union work rules affected industry economics, and how these unions reacted to change in the industry.

And of course, the book allows us to look at any number of interesting business strategy issues:

• Is being a first mover an advantage, or a disadvantage?  Sea-Land reaped a number of first mover advantages, but it also got hurt badly when a number of the earlier investment choices they made turned out to be wrong.  Several late movers, who invested after ship designs had been through two or three generations, did quite well.  Others did not.
• Who makes money investing into this kind of change?  A few early SeaLand investors made out well, the equivalent of angel investors, but later investors did poorly.  And it is not at all clear that anyone making massive, billion dollar investments ever really made great returns.  Like the airline industry, the industry quickly hit over-capacity and prices dropped.  It is clear shippers won big, but did it really make sense for anyone to invest in this business?  The best strategy I can come up with was followed by Maersk, which basically sat out until late and then bought up assets on the cheap out of bankruptcy from early participants.

This situation was reminiscent of a business case I had at HBS about the beginnings of the high fructose corn syrup (HFCS) market.  It was run as a computer simulation among teams.  Basically, almost not matter what everyone did, the industry ended up in over-capacity and everyone lost money.  The only successful strategy was the Wargames approach ("the only winning move is not to play').

Via TJIC:

The steel industry, a bellwether for the state of the nation's economy, is looking to the government for a huge investment program: up to $1 trillion over two years.

Government can't create capital -- it can only force it to be reallocated and, to a small extent, move it forward from the future.   Given that there is some sort of fixed amount of investment capital in the economy, then, it strikes me that we are rapidly approaching the point where we are giving to Congress the job of allocating the vast majority of the country's available investment capital.  And if that prospect does not scare you, and it should, consider this:  Congress has made it fairly clear the three criteria it will use to select the recipients of capital:

• They must have a business model that has been proven a failure (by poor performance, eroding market share, and/or near bankrupcy)
• They must have strong, powerful unions with the historically proven ability to dictate terms to management
• The company and its key stakeholders must be strong supporters of the party in power

They say the government does things that private parties can't or won't, and that is certainly true here since I cannot imagine any private investor allocating capital on these criteria.

I have mixed feelings about the Republican basing of automotive unions.  On the one hand, I see no reason why individuals in a free society shouldn't be able to organize and bargain as a group on wages.  However, this is not a free society, and the union organizing process is one of the most regulated in the country, with numerous state and federal laws that artificially tilt the bargaining and financial power towards unions.  Unions, for example, are the only private organization that I know of in this country that have taxation power, ie the ability to apply non-voluntary financial assessments on a population with the full force of government behind their collection.

But it may be that so much attention has been applied to wages and health care that this issue has been under-reported.  Below is apparently the Ford-UAW 2,215 page contract. Eeek.

How can it be possible to run a company where even the smallest operational improvement idea has to be screened against this document?

In a post on letting GM fail, I discussed what I called "corporate DNA"

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot. You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA.  And DNA is very hard to change. ...

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation....Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you. When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

This seems to match the take of many insiders.

To John Shook, a former Toyota manager who worked at a joint-venture plant run by the Japanese company and GM in Fremont, California, that explains why the two automakers are in such different shape today. When it comes to engineering and manufacturing, Shook says, Toyota and GM are about equal. Where they differ is in their corporate cultures.

"Toyota is built on trial and error, on admitting you don't know the future and that you have to experiment," Shook said. "At GM, they say, "˜I'm senior management. There's a right answer, and I'm supposed to know it.' This makes it harder to try things."

The whole Bloomberg article this comes from is quite good.  Its pretty clear that GM had every reason to anticipate the current mess 3-4 years ago, and basically fiddled while the cash burned.  My strongest reaction from the article was, please let me have an epitaph better than this one:

Wagoner, a 31-year GM veteran, was the embodiment of its culture, an apostle of incremental change. Exciting as a Saturn, quotable as an owner's manual....

The auto bailout is dead, at least for now:

A bailout-weary Congress killed a $14 billion package to aid struggling U.S. automakers Thursday night after a partisan dispute over union wage cuts derailed a last-ditch effort to revive the emergency
aid before year's end.

Republicans, breaking sharply with President George W. Bush as his term draws to a close, refused to back federal aid for Detroit's beleaguered Big Three without a guarantee that the United Auto Workers would agree by the end of next year to wage cuts to bring their pay into line with U.S. plants of Japanese carmakers. The UAW refused to do so before its current contract with the automakers expires in 2011.

Good.  Chapter 11 was made for this kind of situation, and folks will quickly come to understand that productive assets don't go *poof* in a bankruptcy  (though equity values can).

By the way, you will note that Senate Republicans did not suddenly become economic libertarians.  Their objection seems to be that the bill does not micro-manage the auto industry they same way they would want to micro-manage the auto industry.  You can see in these political battles that Congress brings its usual identity politics to these decisions:  Republicans want to hammer the unions, Democrats want to hammer executive pay.  Which is why these restructuring discussions don't belong in Congress.

I posted some data this morning showing the current jobs report ranked not on absolute job losses but as a percentage of the total work force.  I have now pulled the whole data set from the BLS, which goes back to about 1939, and this is what the entire monthly series looks like of employment changes as a percentage of total employment (the purple line is a 3-month moving average).

Folks familiar with this data base may know of reasons the data has become less volatile (perhaps improved seasonal adjustments?) but never-the-less, I have a hard time reconciling this with the popular leftish notion that the decline of traditional American manufacturers (e.g. autos) and unions have led to increasing risk and job/income volatility.  I played around with a couple of ways to summarize the trends.  Here is the number of substantially negative (monthly losses greater than 0.25% of the workforce) jobs reports per decade:

And here is a metric of the volatility of the jobs number.  Since most folks don't really buy the classic economic argument that "risk" equates to volatility up or down, but feel that risk is only to the downside, I have looked at what is sometimes called the downside standard deviation of the jobs change numbers, in which all monthly data greater than zero are set to zero, and then a normal standard deviation is taken on the data.

David Yermack has an awesome essay in the WSJ this weekend, encouraging Congress to just say no to spending $25-$50 billion bailing out Ford and GM.  Why?  Well, beyond the obvious moral hazard, these companies are value destruction machines of epic proportions.

Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.

Step 1:  Really, really screw up your industry beyond all hope of repair, while paying yourself a nice salary to do so

Step 2:  Claim to the world that your industry is unique and different, and failure of your company and/or industry will cause a chain reaction that will bring down the whole economy and cost the country many multiples of the bailout price tag

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.

Step 2 is obviously pulled off easier if either a) representatives from your industry run the Treasury department or b) the new President owes your unions big time for his recent victory in a critical state.  For those of you just trying to keep you small business afloat, don't try this at home.  No bailout will ever be forthcoming if you don't have the power to move electoral votes, but you should expect to pay for other people's bailouts.

Postscript: This is funny:

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 think if people still buy tickets on airlines that are operating out of chapter 11 (an item that has zero value if the company folds) then people will still buy cars.  This is so totally lame it is tremendously irritating.

The media is really bending over backwards to find ways to twist earnings data for average Americans to try to make the point that real income for many folks has stagnated or dropped.  They are doing this to support a two-pronged legislative strategy in the next Obama administration:

1. Use the power of the government to further tilt the balance towards unions and against employers in wage negotiations  (this strategy having worked out so well to create prosperity in the automobile and airline industries)
2. Further modify the income and Social Security tax structures to make them even more regressive than they are today.

They are firing on all cylinders behind this strategy.  They are even mobilizing the neo-Keynesians to make the pitch that the Great Depression and the current financial crisis were caused by a shift in wealth from laborers to the capital classes, and that the only way to prevent future crises and depressions is to, wait for it, increase the power of unions and institute more wealth redistribution  (Example here, via Kevin Drum).

I was going to do a post fisking the James Livingston article linked above on Kevin Drum's site, but Livingston's hypothesis was such a mess that it was just going to take too much of my day.  But in doing some research, I found this chart from a couple of years ago in the NY Times that really caught my attention:

Talk about chutzpuh -- look at the lede on the chart and then look at the chart itself.  Yes, the lede is correct, but only if you choose the totally meaningless number of "cash wages" rather than total compensation.  If one looks at total compensation (or what they call "overall" compensation), the entire argument falls apart.   Workers have maintained about their same "share" of the economy.

Sure, a large percentage of that is now in health care benefits, but that's a choice workers have made (and the government has encouraged through tax policy).  In fact, this compensation mix has been driven in large part by the Left's beloved unions, so on what basis can folks say that these other benefits somehow "don't count?"  Certainly, they cost their employers equally, whether it is cash or health care.  Corporate profits are up a bit, but in line with their normal historical levels in the 1950s and 1960s, the golden age of the US economy, according to the Left.  (By the way, the pattern of falling wage shares and rising profit shares after recessions is a well-documented one.  Wage-earners do best at the end of an economic cycle, employers more towards the beginning.  The chart cut off after 1997 would look about the same as the last several years).

I will tell you right now that every time you hear someone bemoaning the stagnation of wages, they will never, ever, ever be talking about total compensation per individual.  Having, through government policy and union activity pushed the compensation mix to non-cash elements, they then play a heads-I-win-tails-you-lose game of not giving any credit for those compensation elements.

Other games that are played to try to make the case that real earnings have stagnated include:

• Time frame selection. Everyone making this argument will choose 2000 as a starting point.  They justify it by saying it is the beginning of the Bush years, but 2000 is really selected because it is a pre-recession peak, and they have to measure peak-to-trough of the economic cycle to try to make their point.  Just as an example, if you look at the household income numbers below, you can see there is very typically a 5-year drop after a recession followed by net gains.  If we chose, say, the first Clinton term we could play the same game, showing a peak-to-trough drop in real incomes.
• Household income game. The household income numbers are fraught with peril, because companies don't pay households, they pay individuals.  And household makeups are changing simultaneous to income changes.  For example, imagine the economy was just my household.  If my wife were to get fed up with my shtick and divorce me tomorrow, average household income would drop by 50% in one day (as our total income stays the same but we go from one to two households).  If my wife were to go back to her high-paying pre-kids job tomorrow (if only it were so!) our household income would go way up, in part because the labor department does not capture the value of the labor she provides at home.Mark Perry has a lot more on the household income numbers here, but he shows that the household size number has been changing a lot, causing the metric to understate income changes per individual:

• Individuals matter. Median income looks at the middle person on the ranked list of US incomes.  So, for example, if there are 100 million income earners, the median income is the income of number 50 million on this list.  But whoever the person is at spot 50 million is almost certainly not the same person who was at spot 50 million last year.  They might have fallen on the list, but the odds are they moved up.  As folks age and gain experience and/or seniority, they tend to increase income faster than inflation.  Most minimum wage earners, for example, tend to be under 25.  The number of families supporting three kids on minimum wage (at least of the primary bread-winner) at the age of 45 is really, really low, despite the anecdotes we are bombarded with in the media.

• Immigration has a huge effect. The total number of foreign born people in the labor force is estimated around 21 million, of which perhaps 6.3 million are illegal immigrants.  Positing that at least 10 million of these arrived in the last two decades, and that many of these folks began at relatively low, below-median incomes, means that median incomes are hugely affected by immigration.  Leaving immigrants out so the comparison is close to apples and apples, to find the true median income gain over the last 20 years one would have to count up 10 million or so spots on the list.  Again, as in the previous point, most individuals can be better off even if the median stagnates  (presumably immigrants coming in at the bottom are also better off, even at the bottom, than where they were before, or they would not have come.  We often forget that much of our bottom quartile of income in this country would be upper middle class in many other nations).  This is a classic mix problem that most people, and the media, almost always get wrong.  In a situation with a changing mix of multiple groups, each of the groups can be improving on some metric, but the overall metric can go down.  You can see the income stats by race here.  Every race group has increasing median income, but since the Hispanic group has grown 8x faster than the anglo population in the US, the total results are mixed downwards.Here is a quick example.  Group A has values of 5,6,6,7.  Group B has values of 1,2,3.  Ten years later Group A is the same size and has values of 6,7,7,8.  Group B has doubled in size, and now has values of 2,3,4,2,3,4.  In these examples, every single individual has a higher value.  Also, Group A's median has increased from 6 to 7, and Group B's has increased from 2 to 3.  But the median for the whole combined group A+B has dropped from 5 to 4.  Both medians (and averages) can do funny things when mix is shifting.
• Even the NY Times. The NY Times actually makes two of these points for me in another article, arguing that historic median income drops were concentrated in areas of high immigration, and reported drops were due to the choice of the economic peak as a starting point.  WOW?  Is this the same NY Times I began this post criticizing.  Yes it is, the only difference is that this article ran in 2001, when they were reporting on the economy during a Democratic administration.
  
• Income taxes are already wildly progressive.  While I would love to be in that top 1% group, I don't really begrudge them their success.  Besides, who can look at the chart below, again from Mark Perry, and come to the conclusion that the top 1% are being treated unfairly generously.

• Every country that has implemented this plan (government-backed unions and wildly progressive tax policy), including most of Western Europe, is demonstrable worse off than the US on absolute measures.  This is both the median, but also in every quintile, including the poorest.  While it is true the poorest quintile has a bigger gap from the riches in the US vs. France for example, on an absolute basis our poorest are at least as well off  (particularly when differences in immigration policy are taken into account).

I think the incentives issue has been beaten to death pretty well, but there is another problem with bailout:  They leave the productive assets of the failed company in essentially the same hands that failed to make good use of them previously.  Sure, the management has changed, but a few guys at the top of these large companies don't really mean squat.  To this point:

A corporation has physical plant (like factories) and workers of
various skill levels who have productive potential.  These physical and
human assets are overlaid with what we generally shortcut as
"management" but which includes not just the actual humans currently
managing the company but the organization approach, the culture, the
management processes, its systems, the traditions, its contracts, its
unions, the intellectual property, etc. etc.  In fact, by calling all
this summed together "management", we falsely create the impression
that it can easily be changed out, by firing the overpaid bums and
getting new smarter guys.  This is not the case - Just ask Ross Perot.
You could fire the top 20 guys at GM and replace them all with the
consensus all-brilliant team and I still am not sure they could fix
it. 

All these management factors, from the managers themselves to
process to history to culture could better be called the corporate
DNA*.  And DNA is very hard to change.  Walmart may be freaking
brilliant at what they do, but demand that they change tomorrow to an
upscale retailer marketing fashion products to teenage girls, and I
don't think they would ever get there.  Its just too much change in the
DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you
still have a culture aimed at big box low prices, a logistics system
and infrastructure aimed at doing same, absolutely no history or
knowledge of fashion, etc. etc.  I would bet you any amount of money I
could get to the GAP faster starting from scratch than starting from
Walmart.  For example, many folks (like me) greatly prefer Target over
Walmart because Target is a slightly nicer, more relaxing place to
shop.  And even this small difference may ultimately confound Walmart.
Even this very incremental need to add some aesthetics to their
experience may overtax their DNA.

David Leonhart (via Carpe Diem) argues that this was exactly the long-term downside of the Chrysler bailout:

Barry Ritholtz "” who runs an equity research firm in New York and writes The Big Picture,
one of the best-read economics blogs "” is going to publish a book soon
making the case that the bailout actually helped cause the decline. The
book is called, "Bailout Nation." In it, Mr. Ritholtz sketches out an
intriguing alternative history of Chrysler and Detroit.

If
Chrysler had collapsed, he argues, vulture investors might have swooped
in and reconstituted the company as a smaller automaker less tied to
the failed strategies of Detroit's Big Three and their unions. "If
Chrysler goes belly up," he says, "it also might have forced some deep
introspection at Ford and G.M. and might have changed their attitude
toward fuel efficiency and manufacturing quality." Some of the
bailout's opponents "” from free-market conservatives to Senator Gary
Hart, then a rising Democrat "” were making similar arguments three
decades ago.

Instead, the bailout and import quotas fooled the
automakers into thinking they could keep doing business as usual. In
1980, Detroit sold about 80% of all new vehicles in this country.
Today, it sells just 45%.

As I wrote about GM:

Changing your DNA is tough.  It is sometimes possible, with the
right managers and a crisis mentality, to evolve DNA over a period of
20-30 years.  One could argue that GE did this, avoiding becoming an
old-industry dinosaur.  GM has had a 30 year window (dating from the
mid-seventies oil price rise and influx of imported cars) to make a
change, and it has not been enough.  GM's DNA was programmed to make
big, ugly (IMO) cars, and that is what it has continued to do.  If its
leaders were not able or willing to change its DNA over the last 30
years, no one, no matter how brilliant, is going to do it in the next
2-3.

So what if GM dies?  Letting the GM's of the world die is one of the
best possible things we can do for our economy and the wealth of our
nation.  Assuming GM's DNA has a less than one multiplier, then
releasing GM's assets from GM's control actually increases value.
Talented engineers, after some admittedly painful personal dislocation,
find jobs designing things people want and value.  Their output has
more value, which in the long run helps everyone, including themselves.

From the grasping at straws file, Michigan governor Jennifer Granholm has been talking for a while about remaking Michigan as an alternative energy powerhouse.  Henry Payne reports on her breakfast talk yesterday morning at the DNC Convention:

At a breakfast talk, Michigan's deeply unpopular governor
Jennifer Granholm explained that she was chosen to moderate Tuesday
night's energy panel from the convention stage because of the Wolverine
State's efforts in renewable power. The idea that windmills will rescue
one of America's great manufacturing states is absurd on its face, but
she persisted in spinning a fairy tale that Michigan is perfectly
positioned to take advantage of alternative energy manufacturing
because of the "Five Ws" (I'm not making this up) in abundance in the
state: "Wind, water, waste, workforce and wood."

That's terrific - they have all the key inputs needed for setting up an early 19th century business.  What is left unsaid is that Michigan has the highest unemployment rate in the country, driven by fussy and high cost unions and a crushing taxation and regulatory burden.  The only message I take from the governor's talk is that if one is not in an alternative energy business, it's time to get out of Michigan, as the majority of businesses are about to face higher power costs and more taxes to support the governor's preferred industrial investment.  Which, come to think of it, is a message most businesses have already internalized about Michigan, seeing as the population of its largest city has dropped by more than 50% over the last several decades.

It is highly entertaining to see people who have never even worked in, much less have run, a real business (including Obama, Clinton, and about everyone else on the DNC rostrum) express the hubris that only they know what the right industrial investment plan for the US is and that only they know how to build a major new industry.  In particular, we saw last night the repetition of Obama's ridiculous made-up 5 million jobs number that I critiqued in depth several days ago.

Disclosure:  I actually run a few campgrounds in the UP of Michigan, but since sleeping in tents seems to fit the governor's industrial policy, I'll probably be OK.

George McGovern has an editorial in the WSJ urging the Democratic party to abandon the idea of stripping secret balloting from union organizing elections:

The key provision of EFCA is a change in the mechanism
by which unions are formed and recognized. Instead of a private
election with a secret ballot overseen by an impartial federal board,
union organizers would simply need to gather signatures from more than
50% of the employees in a workplace or bargaining unit, a system known
as "card-check." There are many documented cases where workers have
been pressured, harassed, tricked and intimidated into signing cards
that have led to mandatory payment of dues.

Under EFCA, workers could lose the freedom to express
their will in private, the right to make a decision without anyone
peering over their shoulder, free from fear of reprisal.

There's no question that unions have done much good
for this country. Their tenacious efforts have benefited millions of
workers and helped build a strong middle class. They gave workers a new
voice and pushed for laws that protect individuals from unfair
treatment. They have been a friend to the Democratic Party, and so I
oppose this legislation respectfully and with care.

To my friends supporting EFCA I say this: We cannot be
a party that strips working Americans of the right to a secret-ballot
election. We are the party that has always defended the rights of the
working class. To fail to ensure the right to vote free of intimidation
and coercion from all sides would be a betrayal of what we have always
championed.

I have always been a bit torn on this issue.  I don't in general think the government needs to get involved in how private organizations do their business.  However, by force of law, unions are not a normal private organization. They have special rights, including ones that mimic taxation, other groups do not have:

Unfortunately, we don't live in a free society, and the term "union"
comes with a lot of legal baggage.  Recognized unions are granted
certain legal powers and rights that an average group of self-organized
folks don't.  For example, they are the only private organizations in
this country that I know of that have taxation power, and the power to
demand absolutely that certain monies be withheld from employee
paychecks (even of employees not in the union) and given to them.
Perhaps more importantly, companies can't ignore them - they have
to negotiate with a recognized union.  Unions also have informal
powers.  For example, the legal system tends to tolerate a lot of
violence and physical intimidation by union members (in strikes and
such) that it does not tolerate in other contexts  (seventy-five years
ago, the situation was reversed and the system tolerated a lot of
company violence against workers).

I thought this was a very illuminating bit from Obama on education:

TAPPER: But"¦proponents of school choice say that the best way to
change the status quo is to give parents, inner-city parents a choice.
Why not?

OBAMA: Well, the problem is, is that, you know, although it might
benefit some kids at the top, what you're going to do is leave a lot of
kids at the bottom. We don't have enough slots for every child to go
into a parochial school or a private school. And what you would see is
a huge drain of resources out of the public schools.

So what I've said is let's foster competition within the public
school system. Let's make sure that charter schools are up and running.
Let's make sure that kids who are in failing schools, in local school
districts, have an option to go to schools that are doing well.

But what I don't want to do is to see a diminished commitment to the
public schools to the point where all we have are the hardest-to-teach
kids with the least involved parents with the most disabilities in the
public schools. That's going to make things worse, and we're going to
lose the commitment to public schools that I think have been so
important to building this country.

Some responses:

• I love it when my opponents make my argument for me.  One strong argument for school choice is that public schools put a governor on 80% of the kids' educations, forcing them to learn at the pace of the slowest students.  But Obama basically says this.  He acknowledges in paragraph three that most of the kids would take the private option (and the only reason they would do so is that they perceive it to be better) leaving only the "hardest-to-teach
  kids with the least involved parents with the most disabilities in the
  public schools."  I'm sorry Mrs. Smith, I know you want more for your kids, but we've decided that they should not have a better education than that demanded by the least involved parents.
• If his fear in  paragraph #3 comes true, isn't that consistent with a leftish market failure model?  And if so, why wouldn't it be entirely appropriate for the government to focus only on this small segment not served by private schools?  Isn't that what the government does in, say, housing or transportation, providing services only to a small percentage of the market?
• Obama parrots the "there are not enough private schools" objection.  Duh.  Of course there is not currently 20 million student-slots of excess private school capacity just waiting for school choice.  But capacity will increase over time if school choice is in place.  Or, if the capacity does not appear, then what's the problem for Obama?  Everyone will just stay in government schools.
• The class warfare here is both tiresome and misplaced.  Most school voucher plans have explicitly focused on the poorest families and worst schools as a starting point
• The statement that kids leaving public schools with vouchers would be costly is just wrong, at least from a monetary point of view.  I don't know of any voucher program where students are offered a voucher as large as the average per-pupil spending of that school district.  So, in fact, each student leaving public schools is a new financial gain, subtracting a $6,000 voucher but removing at the same time an $8,000 cost.
• Finally, note the political mastery here.  Take the question of how many kids would leave government schools for private schools under a full school competition system.  Obama wants to be on both sides of this assumption, sometimes assuming the number is small (when discussing benefits) and then assuming the number is large (when discussing costs).  Obama is a master because he makes this switch back and forth from sentence to sentence.  First, the  number leaving public schools is low, since choice would just benefit "some kids" (Bad old rich ones at that) and leave our "a lot of kids."  He again in the next sentence implies the number switching must be low, because there are not many private school spots.  One sentence later, though, the number switching is high, since it would be a "huge drain of resources."  And then, in the third paragraph, the number switching is very high, since all that are left in public schools are a small core of the "hardest-to-teach kids."

Also note what was strategically left out of his answer:

• "Even if school choice worked, I could never support it because my party depends too much on the teachers unions in this election."
• "Just when I have a good chance to be the leader of this government, do you really think I want to abandon the government monopoly on the indoctrination of children and the power that brings to the government?"