Will backstopping U.S. autos reduce, increase or disperse social costs?
Read this post by Mr. Reich dated Monday, June 1st, 2009, regarding government intervention with General Motors (GM):
“Why would US taxpayers want to own today’s GM? Surely not because the shares promise a high return when the economy turns up. GM has been on a downward slide for years…
Many younger Americans have never bought a GM car and would not think of doing so. Given this record, it seems doubtful that taxpayers will even be repaid our $60 billion. But getting repaid cannot be the main goal of the bail-out. Presumably, the reason is to serve some larger public purpose. But the goal is not obvious…
It cannot be to preserve GM jobs, because the U.S. Treasury has signaled GM must slim to get the cash. The company has only slightly more than 60,000 Americans today (83,000 around the world), and plans to shut half-a-dozen factories and sack at least 20,000 more U.S. workers this year.
The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what reorganization under bankruptcy would do…
Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars. Congress has already given auto makers money to do this. Besides, the Treasury has said it has no interest in being an active investor or telling the industry what cars to make…
So the Obama administration is, in effect, paying $60 billion to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.” (1)
This is a far cry from campaign-season-Reich, who believed President Obama had “rightly identified the armies of lawyers and lobbyists that have commandeered our democracy, and pointed the way toward taking it back.” Without getting overly political, we know lobbyists and tax evaders serve in Obama’s cabinet. We also know the second stimulus package, loaded with superfluous pork, is all about special interest groups lobbying for Federal money. And perhaps worst of all, government “management” of insolvent companies like Chrysler and GM lead to a free-for-all in bankruptcy negotiations. In GM’s case, substantial equity stakes were allotted to the Treasury (60%), with Canada, (12.5%) and the United Auto Workers, (UAW) (17.5%) union making out rather nicely. Meanwhile, unsecured bondholders were shoved to the side. Recall that bondholders are investors who loan money to an organization. These investors were in line to be paid before the government, Canada and the UAW, according to bankruptcy law; a rule of law which has been in place since the era of Industrial America. In fact, the government, Canada and the UAW are not in line to be paid at all by chapter 11 bankruptcy proceedings, unless they are some sort of junior lien holder. Contracts, and by default, trust, must be upheld for any capitalist system to succeed. The fact is, no jobs are ever created without capital. And if investors have no confidence that their capital is secured by a contract, why risk it in the first place? If nothing else, they will require higher interest rates to compensate for the risk, which will make it more expensive for businesses to operate. (2)
Reich is a staunch supporter of stimulus, but not of any more bailouts. In his post, A Report Card on Obamanomics, Approaching One Hundred Days, he gave the $787 billion stimulus package a ‘B’. His chief criticism? That it wasn’t large enough, compared to the size of the economy. Conversely, Reich hit the bank bailouts with an ‘F’. Reich asserts that bailing out financial institutions, to get big banks lending again, makes little sense, given that consumers are already over-leveraged and do not want to borrow any more money. Given that Reich believes the Federal government should be a spender of last resort, in order to maintain jobs, he probably thinks more highly of the auto bailout scheme.
The first stimulus package, signed into law under President Bush in February of 2008, had the government sending checks directly to American mailboxes, including to those who didn’t pay Federal taxes at all. President Obama’s package sent the money to special interest groups to fund specific projects, as well as to the States, for organizations to “compete” over. (3)
To revisit a few of Reich’s words:
“So the Obama administration is, in effect, paying $60 billion to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.”
Social costs are not being reduced by the bailout, they’re being dispersed: to the taxpayer, to everyone who earns or saves the U.S. dollar and to unborn generations of Americans. When the government takes actions, like shutting down profitable GM dealers who have been in business for generations, and prepares the entire country for prolonged stagflation, the argument could be made that social costs are being both dispersed and multiplied. (4)
With the coming elections of 2010, I predict there will be an incumbent slaughter. Politicians of all stripes and affiliations will be sent to the chopping block to make way for new blood. If you’re paying any attention at all to the economy, how happy can you possibly be with the current group’s job performance? Because I’m a solutions-oriented guy, I’ve come up with a plan to reinvigorate the economy while effectively, and actually, limiting the social costs. I think I’ll call it Operation Economic Wit.
Before the large-scale representative swap occurs, my plan would cut about 75% of government departments; including the Internal Revenue Service (IRS). In its place would stand some sort of fair tax; rather than starve the government beast by limiting tax increases, we had better slay the beast, before it kills us first. The dollar would be pegged to gold, or some other physical asset, preventing the Treasury and Federal Reserve from increasing the money supply, inciting inflation and artificially lowering interest rates. I know you’ve heard variations of this plan before, but mine has an additional wrinkle: I want the 75% of axed government positions to be partially replaced by certified public accountants (CPA). In Operation Economic Wit, about 20% of the 75% of government jobs erased, would reappear in the form of accountants; preferably the nerdiest accountants available. We need thick, protruding glasses and pocket protectors if possible. After all, without the IRS and the 67,000 pages of tax code to navigate, Americans will have little need for CPAs. This makes me sad because I like CPAs; they actually make sense when they speak and they encourage us to Feed the Pig (dot org), aka save! They also make up a group of financial professionals that ascend to the front lines of firms as chief financial officers (CFO). They don’t just sift through client receipts, but look to project numbers of the future. This clairvoyance, built on historical analysis, is a burgeoning need for the U.S. government.
The fleet of accountants will all be titled “supreme rulers”, a clear notch above the pay czar’s “special master” designation (“supreme overlord” came in at a close second, but monikers, like people, play to win the game).
Is it too much to ask that a representative read a bill that authorizes spending our money?
A massive cut in the size of government, thus drastically reducing government spending, and the implementation of a simple, straight-forward fair tax, is the most sensible way to get us back on track. Government spending, and borrowing, must stop; particularly because the Treasury has started selling bonds to the Federal Reserve. In other words, we’re buying our own debt, by printing money. Monetizing the debt increases the money supply, which devalues all of the other dollars already in circulation i.e. your savings, retirement, paychecks and couch change. It’s an invisible tax on everyone, truly dispersing the social costs of failing banks and auto manufacturers. (5)
CPAs and Operation Economic Wit to the rescue.
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(1) Robert Reich’s Blog – The Future of Manufacturing, GM, and American Workers (Part III)
http://robertreich.blogspot.com/2009/06/future-of-manufacturing-gm-and-american.html
(2) Robert Reich’s Blog – Obama for President
http://robertreich.blogspot.com/2008/04/obama-for-president.html
(3) Robert Reich’s Blog – A Report Card on Obamanomics, Approaching One Hundred Days
http://robertreich.blogspot.com/2009/04/report-card-on-obomanomics-approaching.html
(4) Business and Media Institute – Fox News Host Gretchen Carlson: Government Unfairly Shutdown Parents’ GM Dealership
http://www.businessandmedia.org/printer/2009/20090609205031.aspx
(5) Congressional Budget Office – Budget Projections
http://www.cbo.gov/budget/budproj.shtml
Most CPAs have the common sense of a garden slug and the social skills of fence post. They are risk averse and tend to add more red-tape. I should know, because I am one, and my only friends (actual that should read friend) are also CPAs.
However, your article makes sense. Before any further expenditure could be made, a detailed financial analysis would have to be completed, and a purchase requisition would have to be completed and approved by the department manager, the deputy director of the agency, the IRS, the DEQ, the supreme court and David Letterman. Because of the complexity of the system, few expenditures would be approved. Thus, our national deficit would instantly turn into a surplus.
This article reminds me a thought I had about war. Imagine if all military expenditures had to be approved by a CPA. We would never bomb anyone. Those missiles that rained down on Iraq cost over a millions dollars each. I would have to be assured that each missile would be used cost effectively with a kill rate exceeding the standard benchmark. Instead of firing them with the carelessness of a hillbilly with a 22 rifle, each missile should have to carefully planned and scheduled. Hence, no war. It is a nice thought any way.