Threads from Henry's Web

Tag: auto industry

  • Rewarding Incompetence

    There was quite a stir recently over a rant by Rick Santelli of CNBC on the mortgage plan produced by the Obama administration. One of the claims made was that this plan was “rewarding incompetence.”

    Now without regard to context, I wouldn’t have a problem with that. Where I do have a problem is with those who would cheer these words, and yet support bailing out banks and the auto industry. If you support ideas like “saving an industry as a whole,” then it is quite easy to see the mortgage plan as a means of trying to save a particular industry, rather than as a program to save those who may have made bad decisions.

    On the other hand, if one objects to saving people who have made bad decisions, then surely the executives of financial institutions and of our major auto companies qualify. What better measure of failure could one have than that the company led by a particular management team fails spectacularly and requires a government bailout. Yet even the idea of limiting compensation for those responsible meets resistance.

    As general policy, I don’t think limiting compensation is nearly adequate, nor is it good policy for the government to be trying to directly set compensation. But somewhere there is a major failure when companies are crashing, and the executives managing them are not only not fired, they find defenders who think $500,000 per year is too little pay for such failures.

    I’ve said it before, and I’ll say it again: I’ll be happy to run companies into the ground for much less than $500,000 per year.

    And it appears it’s not even a real limit. Ed Brayton today on Dispatches points out that this limitation has considerable loopholes.

    So if we’re rewarding bad decisions when we bail out homeowners, some of whom might have had excellent jobs when they signed their mortgages, but have since lost them, we are even more guilty of rewarding bad decisions in finance and in industry. I would also point out that bankruptcy is one of those risks that a lender takes, as well as a borrower. Lenders who make bad loans end up losing their money when the borrower goes bankrupt. There are two sides when a bad loan is made: A borrower and a lender. If fraud is not a question, it is not just the borrower who made a bad decision.

    I don’t see much consistency in these debates. It seems that the standards change depending on who is getting the money.

    Having said that, I know that I’ve written several notes in which I might not have been fully clear. So let me put it in a few words. I don’t believe in rewarding incompetence, not anybody’s incompetence. In fact, I don’t believe in the government “rewarding” at all. I do believe in economic stimulus, but the portion of stimulus that I support involves government spending more on things that ought to be done anyhow. Unfortunately this has become a minor portion of our spending, especially with all the hidden money going into the banking system.

    What I mean by spending money on things government ought to do anyhow? Essentially if one looked forward at the infrastructure needs of the country over say 25-50 years, and then during an economic downturn borrows and builds several years worth of projects much faster, I would consider that a valid stimulus. If you pay money out for ordinary expenses, then all you have done is paid those expenses. If you build a bridge, you have a bridge. You do, of course, have to make sure it’s not a bridge to nowhere.

    Bridges, roads, communications infrastructure, needed government buildings, military research, and many other things are valid things on which to spend. They are things that must be done sometime, and most of them will produce income into the future. If a project is a bad idea under normal circumstances, it’s a bad idea in terms of stimulus.

    The problem, of course, is to bring the government off of a deficit spending spree and back to something that should be “normal.” Governments like to spend money. It’s the stopping that’s hard.

  • Cars for the Public Interest

    Ignoring the day’s flavor of scandal, I want to comment on something I heard yesterday about the auto industry bail-out. Of course, just in case you were thinking the government would be free of corruption, you’ve just had a reminder.

    Chris Matthews last night commented that we needed to get the auto industry to “produce cars for the public interest.” First, we ought to ask just what that phrase would mean. Frankly, I have no idea. One presumes producing more cars that please Chris Matthews and associates.

    I had this really weird idea, however, that when one has a problem one identifies it and then finds a way to solve that problem. Now is the problem that auto manufacturers have not been producing “cars for the public interest?” Well, no, not exactly. The problem is that the auto manufacturers are not making a profit.

    So if the problem is that they’re not making a profit, and thus accumulating the cash reserves necessary to going through difficult times, perhaps the solution would be either that they make a profit, or be replaced by folks who will.

  • The Worst Argument for Bailing Out the Auto Industry

    I was thinking of this as I watched a few interviews today. I’m still less than at full speed after being sick in bed early in the week, and I’m spending more time on the couch working on my laptop and less at the desk in my office.

    My first inclination was to cite the argument that we already gave $700 billion to the financial industry, so we should obviously be willing to give $25 or $34 or $xx billion to the auto industry. That suggests that if I stupidly spend a large amount of money on some techie toy I thereby license myself to spend additional money on any other toy I may desire. Why not? I’ve already established the principle, no?

    Of course, since I do think the financial system bailout was a bad idea, and has also failed to bail out the financial system, I obviously would find the argument that we ought to do more of the same unconvincing.

    The auto company executives shouldn’t be too surprised they’re getting more scrutiny either, since many congressmen are quite annoyed at the apparent lack of effect of the original bailout and the fact that they really don’t know just how the money is being used.

    But I actually heard what I think is the worst argument from the mayor of Lansing who was interviewed on MSNBC. He refined the “we already bailed out the financial industry” argument so as to make it much worse when he said that since we had bailed out the financial industry we should be willing to bail out the auto companies where, after all, “real” people make “real” products. (Note that this summary is from memory just after watching the interview.)

    When certain Republicans talked about “real” people during the campaign and suggested that those of us on the other side were less patriotic, less American, or didn’t have values, I found it annoying. I also think it’s counterproductive in politics when you suggest people you ought to try to persuade that they are morally defective. (The left prefers to accuse its enemies of being mentally defective instead.)

    But in this case problems come from two directions. First, some of us “unreal” people out here are customers who buy those cars. And I would note that unlike a certain congressman who was advocating the bail-out this week, but was found to be driving a Honda himself, I do own an American car. And no, I don’t have a couple of foreign cars as well–I only own the one American product.

    But further, this entire distinction between the “real” people who produce “real” products is invalid in an economic sense. Without those “unreal” people on wall street, the auto manufacturers would be unable to gather the capital necessary to invest in those factories and create those jobs. We have this bizarre vocabulary that suggests that the “everyday workers” who man the assembly lines “make cars” but somehow the white collar folks do not.

    But the brains the design the cars, the managers who organize the rather complex manufacturing process, the financiers who pull together the money, and those who distribute them all have a major part to play. The assembly line workers would be unable to build any cars without all those people. That’s not intended as a put-down. They also have their part in the process, and an honorable one it is. But that’s no excuse to pretend that they’re the whole operation.

    The best argument may be the economic risk of letting the industry fail with the resulting dislocation. The problem with this argument is that, if the industry is not doing well now, and if we don’t have an actual plan that is likely to make it better later, all we’ll be doing is delaying the day of reckoning. And sort of like an earthquake fault, the more pressure we allow to build, the worse the crash is once it comes.

    The arguments used to pretend that the U. S. auto industry is really much better than their sales and balance sheets indicate don’t give me any sort of feeling of assurance that the current team is going to fix things. When they are told that they’re failing they point to ratings in automotive magazines and good reviews. But good reviews don’t pay the bills. “Unreal” people like me, who don’t work assembly lines but nonetheless need transportation, pay those bills when we choose an American car.

    Of course there is an alternative. Get those magazines and those reviewers to bail out the industry. Apparently they believe the manufacturers are doing well. On the other hand, I’m betting they got their test and/or review cars free.

  • Wondering About Executive Pay

    I’ve been fighting a nasty cold this week, and thus blogging and reading less on the internet and watching much more TV than usual. The experience has reinforced my low opinion of the value of television news as information.

    But this really, truly is going to be a short post. I mean it.

    There are lots of good questions regarding the auto industry bailout, such as why we’re willing to bail out the financial industry but not the auto industry. How about doing none of the above?

    But here’s my question. What is sustaining the high rate of executive pay? We have very highly paid executives, making in the millions, riding companies down to failure. It seems to me one could hire a recent business school grad, for example, who would be willing to ride the corporation down in flames for considerably less money. If these guys were that much smarter, i.e. as smart as their pay would suggest, one would think they would have greater success.

    There seems to be something other than the market working here, but I can’t quite see what it is. Perhaps it’s simply a disconnect between the boards that hire the executives and the people who don’t buy the product. But normally that kind of reward should come from some kind of great performance.

    In reality, of course, the amounts of executive pay are just a minor portion of the money that is being poured into bailouts. But the principle, I think, may be much larger. High rewards are being paid for failure. As consumers and as voters, that is something we need to oppose, irrespective of the amounts of money involved.