Some Auto Bailout Math That Might Change Your Mind
By Justin Gardner | Related entries in Business, Cars, Economy, Money
First off, jobless claims are at a 16 year high. That’s the backdrop to consider when you’re looking at these numbers.
So let’s imagine if the Big 3 go down the tubes, which they’re likely to do at this point. Yes, I know people are saying they can simply go into Chapter 11 and reorganize, but I think Chapter 7 liquidation is much more likely. Why? Because those who tout Chapter 11 act as if these companies are offering a simple service, not building tens of thousands of expensive, complex transportation vehicles that rely on multiple companies that are part of a symbiotic supply chain that, if broken by one company going under, would cripple the other 2.
So let’s imagine that Chapter 7 happens and roughly 3,000,000 jobs are lost.
Bush just signed a bill that would extend unemployment benefits to a total of 20 weeks. The average payout is $300 a week. So over the course of those 20 weeks the average unemployed worker gets $6,000.
Now imagine that 3,000,000 new people are introduced into the unemployment system if we allow the Big 3 to fail. It doesn’t take a rocket scientist to see that just in unemployment benefits alone it would costs us $18B if you follow the 20 week timetable at $6,000.
But if 3,000,000 workers get laid off, it’s going to take a long time to get them back into the workforce. And does anybody think any President would allow unemployment benefits to run out on Americans during this crazy economic time? So we’d easily be at $25B if we extended those benefits for just 8 more weeks to 28 weeks. And if it’s a year? We’ll you’re looking at $46.8B. But for the purposes of this exercise, I’m just going to use the $18B from my first calculation.
Now we need to look at the tax revenue that will be lost from all this job loss.
Most likely a fair portion of these will be higher paying union jobs, so let’s just say for the sake of argument that the average income of these 3,000,000 jobs will be around $35,000. An average of 25% of that income would go to local, state and federal taxes, so that’s about $8,750 per person. That works out to $26.3B in tax revenues lost.
So we’re up to about $54.3B so far and we haven’t even touched on health care costs for the uninsured (won’t speculate on those numbers) or the effect of not having the average post-tax income from those 3,000,000 workers (roughly $78.7B) flow through our economy.
Let me say that again…between unemployment benefits paid to laid off workers and the tax revenue lost the American economy will lose $54.3B in less than a year.
On the other side…the car manufacturers are asking us to give them $25B in loans that we could use as leverage to restructure their business plans to fit into our long term strategic goals and help our manufacturing sector go green. We’d also be able to secure concessions from the labor unions and renegotiate contracts, health benefits, pensions, etc.
To me, it’s a pretty easy decision.
Folks, this simply isn’t a time for ideology. Instead, let’s look at the numbers and compare.
Yeah, the car companies executive are morons, and yes, the unions have overreached, but this situation has the opportunity to completely screw this economy for years to come and we can’t let that happen because we don’t like these people at the top. Because there are millions underneath them that we’ll have to pay for anyway.
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November 21st, 2008 at 8:44 am
You’re ignoring a couple of things.
1) It’s not just going to be 25 million dollars, they’re likely to ask for more when it runs out.
2) How much does it cost the economy to have these companies running? They’ve already been a sinkhole for over 450 billion dollars over the last decade or so.
Ideology does fit in into this, as well. There’s loads of small businesses which are going to fail this year, and they all have an owner and a few employees. Should they be bailed out, because they will have to collect unemployment benefits?
November 21st, 2008 at 9:18 am
Gabriel,
To your first point, even if we reupped that $25B loan twice, it would still be far less than what it would cost in unemployment benefits and the lost tax revenue in a year’s time.
As for your other point, sorry, but it helps the economy to have these companies running because they employ people, pay taxes and create needed transportation. To suggest anything else is to not understand basic economics.
November 21st, 2008 at 9:52 am
So, we prop them up now and let them screw the economies for years to come in a few years? Why delay the pain and waste resources?
Why can’t they file for chapter 11, Justin? This is the first time I’ve heard anyone say it is unlikely they can. Given their enormous size, what makes you think chapter 7, liquidation, is more likely than chapter 11 where they keep operating and reorganize?
November 21st, 2008 at 11:15 am
Workers colluded with the auto execs to produce an inferior product, they rolled the dice and will need to find new employment. It’s blackmale to threaten unemployment if we don’t give them money. Even in death, these manufacturing executives have screwed us. Good ridance.
November 21st, 2008 at 11:21 am
And they screw the economy….how? Please, enlighten me.
I’ve said this a dozen times already, but here we go again. A loan is not a bailout.
This loan in particular is needed because the economy is so screwed up from 30 years of deregulation and poor management that the auto companies have no where else to turn because no one has the $ to make this loan right now.
MANY companies take loans out when times are tough to get through a rough patch. Because the Big 3 are so large, there are limited places where they can acquire the loans they need.
Because the government did such a poor job of oversight and regulation of the financial industry, and because their $700 billion BAILOUT of the financial industry is so inept as to defy description, there is no credit market large enough and liquid enough to make these loans.
While I will be the first to admit the auto companies could have done a better job over the years, the nonsense that is coming from the blogosphere has reached a point of utter lunacy.
To whit:
…the big 3 make crappy products. The quality of US brands is not what it was in the 1970s. They equate very favorable in the market they are competing in.
…the big 3 make cars no one wants. BS. The big 3 were making exactly the kind of cars that every one wanted until the gas spike killed everyone’s love of large SUVs. Even then, these cars get remarkable milleage on a gallon of gas.
…the big 3 pays its workers too much. The myth of the multi-millionaire autoworker is nonsense. Some of these guys do make a nice living because they work a lot of overtime; they work a lot of overtime, because the big 3 cannot afford to pay for healthcare for new workers (something car makers in other countries with single payer healthcare and nationalized healthcare don’t have to worry about. The truth is the worker productivity in the US is higher than almost anywhere in the world.
This is the simple truth.
The market changed quickly. It takes time to change over a plant to produce different models. Foreign makers had the advantage because they were already producing these vehicles in other countries–other countries the big three are not permitted to sell into because of high tarrifs and other articifical barriers.
Given a truly free and open market, the Big 3 could compete. This world ain’t about free markets in manufacturing because every country but ours protects its manufacturing base.
Why not ours? Because for the past 30 years there has been an undeclared war on labor and the middle class and under Bush is has been almost open hostility. How many times did the Big 3 try to meet with Bush for the last 8 years? I lost count.
Now, the auto industry is engulfed in a perfect storm of GOP hostility (get rid of the labor unions!), an economic crisis created and perpetuated by an inept administration, and from the left a bunch of environmentalists who see this as an opportunity to stick it to the big bad polluters.
This is truly frightening. We are seeing an unholy alliance of political forces conspire to destroy what’s left of the manufacturing base in this country for less than it costs for us to be in Iraq for two months
This is sheer and utter insanity and if people don’t wake up soon I truly fear for the future of this country.
You want to impose some requirements on the auto industry–by all means, do so.
But this nonsense about pushing them into Chapter 11 is the kind of thing being pushed by people with an inability to think past the moment.
November 21st, 2008 at 11:54 am
Justin, I really don’t get why you think it’s so reasonable to just sweep ch 11 bankruptcy off the table and then talk about what a holocaust ch 7 would be. Of course ch 7 would be a holocaust, that’s why it’s not going to happen. Word is that the Obama camp is supporting a quick packaged ch 11 deal with some financing to lead the big 3 out of it.
It’s pretty clear to me that the solid middle ground here is that folks want to preserve the industry but reform it to a sustainable form. That’s exactly what ch 11 was designed to do.
Ch 7 leads to collapse, which most folks don’t want.
And altogether avoiding bankruptcy will most likely lead to insufficient reform where the democrats declare victory while simply kicking the reckoning can a few years down the road.
Gerry, your lengthy comment would be more persuasive to me if you had addressed the big 3′s legacy costs and actually compared the total UAW labor cost of wages and benefits to that of competitors. I’m happy to acknowledge that US automakers have made great strides in quality and have reduced wages. But their cars still aren’t as reliable as hondas and toyotas if you believe the Americans who talk to Consumer Reports. And the total compensation package of UAW workers is both substantially higher than that of its competitors and substantially higher than what other workers in manufacturing get.
I’ve never heard anyone shop that myth. What I have heard from lots of different kinds of folks is simply that they are shocked by how much UAW workers make compared to them. And that is something I think you’re missing. There are plenty of people all across the country who have more highly skilled jobs than those of UAW autoworkers, and yet they make the same or less per hour in total compensation.
That’s not even counting the fixed-benefit pensions that hardly anyone else is getting these days!!
And there are folks in manufacturing who make way less than UAW workers. Count on nothing but crocodile tears from these 2 classes when you shop for UAW sympathy.
I’m all for single payer healthcare and I think its on the way in some form. But I am not so foolish as to think it will resolve the other fundamental competitive disadvantages the big 3 are still saddled with.
Your point about loans as opposed to bailouts is a valid one. Of course, we know that it’s not wise to lend money to someone who probably won’t pay it back. If we give the big 3 a giant wad of cash and call it a loan, what is our reason to think that the money will simply get the automakers over a bad patch and that they’ll be able to operate fine thereafter? This sounds like pure fantasy to me.
November 21st, 2008 at 1:01 pm
Why are taxpayers being played like fine tuned violins by big 2 (chrysler doesn’t count)?
At one point Ford’s Expedition was the most profitable car on the planet. SUVs made the car companies a ton of money. Where did all that go? In GMs case it went to building up a huge finance arm that’s probably getting money from the other bailout. I think Ford squandered theirs on Jaguar, Mazda and Range Rover. Oops.
And who says the car companies would use that $25Billion to pay workers? Didn’t the bank bailout show us that executives do what’s best for their stockholders with government money? In the case of the big 2, that’s not for keeping idle hourly workers paid. It’s to re-tool. So, do another computation that still assumes massive layoffs. No sense making cars no one’s buying.
Oh, one more thing. Governments support of failing industries rarely goes well. Think Amtrak.
All is not lost. But if Uncle Sam is going to support autos (more than he does already), bring in somebody smart to run the show. Mitt Romney has a good approach to Detroit’s fix. Most importantly, he insists that car companies don’t get a dime without an overhaul of management and union contracts. And our approach to health care. I didn’t like him for president, but he’s a smart business man. And he learned the car business from his dad.
November 21st, 2008 at 1:55 pm
For decades the IMF demanded African countries cut their budgets, fire doctors, and establish pro-market reforms. The theory was this shock therapy would hurt in the short term, but that in the long term economic growth would fix it. This strategy was also applied to the Soviet successor states. It didn’t work too good. The problem is the “short-term pain” just never goes away.
Take your insistence the Union contracts be re-re-negotiated. The “bloated cost structure” you decry puts food on the table for millions of Americans.Their only crime was agreeing to a contract with a pension scheme, working for decades under the terms of that contract, and retiring at the appropriate age will lose the pension they worked for. And health insurance.
All this happens AFTER the Unions took numerous pay cuts. And accepted a 20% co-pay. Not to mention the VEBA. And remember these guys aren’t Paris Hilton. When mom gets breast cancer that 20% co-pay = bankruptcy. So even if you turn out to be the Einstein of finance your “short-term pain” will ruin millions of people. The businesses that depend on those people will be in immediate trouble.
There’s just no way that pain’s going to be short-term.
November 21st, 2008 at 2:17 pm
“It’s pretty clear to me that the solid middle ground here is that folks want to preserve the industry but reform it to a sustainable form. That’s exactly what ch 11 was designed to do.”
Chapter 11 with government-guaranteed DIP loans would be great with me.
And keep in mind plenty of countries have worse labor costs than us. German autoworkers cost a full $6/hour more than the UAW:
http://www.nytimes.com/2005/10/26/business/worldbusiness/26labor.html?pagewanted=print
Note that the most recent contract included lots of concessions to cut Big Three costs. The Big Three do not have to pay for retiree health care.
I know the UAW won’t find a lot of sympathy with ordinary folks. But there are millions in the UAW, or as retirees. And they do spend their money at actual businesses. If the Feds force those millions to take a significant pay cut those businesses will be in deep doo-doo.
November 21st, 2008 at 3:29 pm
I will support the bailout when the entire management teams of the big 3 agree to work for the same salary Iaccoca did when he got a taxpayer bailout, $1 per annum.
November 21st, 2008 at 3:52 pm
Well, one isn’t plenty. But I think we can guess why volkswagen and other German makes cost so much more money, right? Suppose for the sake of argument that some other foreign auto cos have higher labor costs. Do any of these companies have the ability to offer cars for 12-18,000 bucks a piece? [Not including tiny little crapbox deathtraps, of course.] So they’re stuck selling only high-end high-profit cars here in the US.
I bet the same is true for volvos and saabs and so on. So perhaps these companies do enjoy decent financial health, but it’s by selling a combo of high-end niche cras to the US and tiny cars that don’t meet US safety standards.
FWIW though Nick, don’t take my focus on labor costs as implying that I think big 3 management is composed of a bunch of smart tough savvy guys who have just been handcuffed. I’m not coming from a pro-management perspective at all. I’m fine with heads rolling there, too.
November 21st, 2008 at 11:03 pm
The last time the U.S. government loaned money to a car company was Chrysler back in the ’80s. The taxpayers made $300 million on the deal.
Nick is also right about the UAW having granted concessions. Personally, I’m getting very tired of the virulent hatred of unions that so many people display. Who should lose their jobs? Every executive that has fought improved CAFE standards, no exceptions. Every single one of their current ad companies. How about an end to the BS and they try to treat their customers like adults? Look where it got Barack Obama.
November 21st, 2008 at 11:51 pm
@ kranky – I wrote this the night before and hadn’t heard about this deal. But if this is viable, I may support it. Sounds like a decent compromise to me and would help them reorg in a realistic way.
Special times call for special measures, no? :-)
However, I don’t think Jim S’s point about the taxpayers making $300M (link please) shouldn’t fall on deaf ears.
Just because we lend these companies money doesn’t mean that we’ll lose it. We’re much too focused on the short term gains as opposed to the long term returns, and any investor worth his or her salt will tell you that a POV like that is foolish.
November 22nd, 2008 at 12:06 am
I know I am a day late with this, but have to weigh in – problem being, tthere is just so much to work with here that I don’t know where to start.
Sorry Justin, but you are the one that is not understanding basic economics. GM is burning through $2B a month right now all by themselves. If they get half of the $25B it keeps them alive six months. When you say that GM will be able “restructure” with a bridge loan what do you think that means? It means that GM must have massive layoffs regardless of whether the restructuring is under a bridge loan or Chapter 11. The difference is that under chapter 11 they will be able to break the Union contracts and get rid of this management, and have a chance at the kind of radical restructuring that would let them survive. Under a bridge loan neither of those will happen, and based on your math, they are not going to lay anyone off. So you are advocating converting GM into a massive public works program, with the added cost of keeping all that GM overhead in place and supporting GM management and private planes. Alll with the apparent purpose of preserving the union membership and building green cars designed by Nancy Pelosi and Harry Reid.
Moreover, the original ante’ is not $25B but $50B as $25 of our (children’s) money has already been allocated to the Auto industry to “retool” to build green cars. If the Dem leadership were sincere about purely providing a $25B bridge loan, Reid and Pelosi would have gone along with Carl Levin negotiated and supported bipartisan agreement to release that $25B to the industry to bridge the next few months. I don’t agree with it, but a plurality of Republicans and Dems in the Senate supported it and Bush would have signed it. The big three would have had the money by December. But Pelosi and Reid killed it. That tells you all you need to know about the real motivations here.
Megan McArdle (Obama supporter and economist) nails it:
Do you really believe this is going to save GM? Having Nancy Pelosi tell them which plants to close, which cars to build, how many people to layoff?
November 22nd, 2008 at 1:12 am
seasonally adjusted data on unemployment claims, from the US Dept. of labor:
from these numbers alone, a loss of 3,000,000 jobs is equal to six ordinary weeks. and, unemployment insurance is not necessarily to be considered a direct outlay of the federal government, since companies pay into the unemployment insurance fund with every payroll. if the government were to supplement these benefits for auto workers, yes, it would pile up into the billions – but we need to consider the long term, and if these companies continue hemorrhaging money at the current rate, we’re going to end up with the same result, the same job loss, only by then we’ll have wasted $25B and a year. can these companies retool their plants and their entire business model with $25B? no. they are only buying time.
we can’t afford time. and we can’t afford to keep bailing out companies who come to us holding their employees as a kind of hostage, telling us Joe the Welder is going to starve if we don’t pay up.
November 26th, 2008 at 11:06 pm
I’m with Gabriel – let them fall apart, the pieces get bought up by investors and they all learn a lesson. If we’re going to pay more in the short term – so what? In the long term they need to learn not to count on bailouts and focus on supplying better goods..