“Cash for Clunkers” an Abysmal Failure

August 27, 2009

 

http://www.reuters.com/article/newsOne/idUSTRE57P5C220090827

When the “cash-for-clunkers” program ran out of funding after only a few days, Congress quickly injected another $2 billion into the program (which was first authorized with funding of $1 billion).  Auto dealers across the nation were hailing it as a huge success.

The intent of the program was two-fold:  to improve the overall mileage of America’s auto fleet by taking old, inefficient gas-guzzlers off the road but, more importantly, to stimulate auto sales and rev up domestic auto manufacturing.  And it did both.  GM added shifts to its Malibu and Cobalt manufacturing plants to replenish depleted stocks, putting 1300 auto workers back to work. 

So the program was a success, right?  700,000 cars and trucks (as reported in the above-linked article) were replaced by more efficient models.  Sales of domestically-produced vehicles were boosted from their recession level lows. 

So why was the program so unceremoniously terminated Monday by an administration that has played fast and loose with cash to boost the economy?  And why am I calling it an abysmal failure?  Because it was eroding our GDP (gross domestic product) at a frightening clip, undoing the effects of other stimulus spending.  More than anything, the Obama administration would like for 3rd quarter GDP to actually show some growth, however modest.  (After all, GDP is the gauge by which the end of the recession will be judged.)  But, if it misses that mark, the blame may very well lie at the feet of the “cash-for-clunkers” program. 

To understand, let’s do some math.  As reported in the linked article, 700,000 vehicles were sold in this program, at a cost to the government of $2.87 billion.  But 80% of these vehicles, or approximately 560,000, were imports.  (This figure doesn’t match the percentages reported in the linked article because some of the sales by GM, Ford and Chrysler were also imports from Mexico or Korea, like the Chevy Aveo imported from Korea.)  If we assume the average value of those imported vehicles to be $17,000, then almost $10 billion worth of vehicles were imported, and every dollar of imports is subtracted from GDP.  (Dollars spent on imports are lost and no longer available to spend in the domestic economy.)  So, for $2.87 billion in taxpayer expenditures, the government managed to reduce GDP by almost $10 billion.  A little of this was offset by boosts in domestic manufacturing, but not much. 

And this $10 billion erosion in GDP took place in the course of only about three weeks.  At that pace, if kept going, the program would have eroded GDP at a quarterly rate of $43 billion.  Actually, the effect upon GDP is doubled when you consider that those imported vehicles could have been produced domestically.  In addition to the subtraction for the imports, an equal amount of domestic business was lost. 

Making matters worse, the share of the “cash-for-clunkers” that went to domestic auto makers fell below the pre-program market share of those manufacturers.  In other words, the program was actually eroding the market share of the big-3, exactly the opposite of what the government – now by far the biggest shareholder in both GM and Chrysler – wanted to have happen. 

Now you can see why the program was terminated without any further calls to keep it going.  As the administration began to evaluate the data and saw that 80% of the money was being used to boost the economies of Japan and Korea (primarily), their response was surely, “Oh, sh#t!”  “This isn’t very smart!”

To its credit, the Obama administration has drawn a line in the sand when it comes to the demise of the manufacturing sector of the American economy – a line that, as owner – it will not allow the domestic auto industry to cross.  But, as owner, they are now also faced with the quandary of how to boost domestic auto sales (and thus the entire economy) within the framework of free trade policy it has inherited.  Now it can see that stimulating auto sales in a way that doesn’t violate trade agreements doesn’t work.  Will it now rely on boosting the quality and competitiveness of American cars?  If it does, it will be ignoring decades of experience that proves that that approach doesn’t work either, as imports will simply match them move-for-move.  Or will it continue to rely on jaw-boning other nations to start importing more American products?  That approach too has been proven a resounding failure.  Sooner or later, either the Obama administration or some subsequent administration must come to the realization that failed trade policy lies at the heart of our economic woes.


New GM Emerges into Same Old Environment

July 12, 2009

http://www.usatoday.com/money/autos/2009-07-10-gm-bankruptcy-friday_N.htm

General Motors emerged from bankruptcy on Friday promising more nimbleness, better products, more customer focus and a return to profitability.  Freed of all its crushing debt, it certainly should find it much easier to make money.  And its image of poor quality and boring cars is largely a hangover from the ’70s and ’80s.  They already have a nice line-up of vehicle offerings with quality on a par with anyone in the world, a line-up that is promised to only get better. 

But so what?  The federal government went to extraordinary lengths to salvage both Chrysler and GM, not primarily to return them to profitability, but to salvage the last vestige of the manufacturing sector of our economy and the jobs that go along with it.  What’s important is not so much a return to profitability for GM, but the restoration of the job-creating sales volume that GM, Ford and Chrysler once enjoyed. 

Unfortunately, the new GM and Chrysler emerge to rejoin Ford in the same marketing environment from whence they came.  GM and Ford build outstanding vehicles (hopefully, Chyrsler will soon join them), but that’s not going to make a bit of difference.  Neither will reduced labor costs or lower debt overhead.  The problem is that Toyota builds great vehicles too.  So does Honda.  And Nissan. And Subaru, Suzuki, Mazda, Kia, Hyundai, Volkswagen, Mercedes, Audi, Porsche, BMW, Jaguar, Land Rover, Saab, Volvo, …  The list can go on and on.  Soon, Chinese manufacturers will be joining the fray.  How can anyone honestly expect that the market share of GM, Ford and Chrysler will do anything but decline as more and more foreign manufacturers get free access to the U.S. market?

It wouldn’t be a problem if American manufacturers were getting access to equivalent foreign markets.  The problem is that there are no equivalent markets.  Most of these foreign brands emanate from countries that are so badly over-populated that their car markets are a mere shell of what we have in America.  In Japan, even the Japanese auto manufacturers have difficulty selling cars because so few people buy them, not because they can’t afford them but because owning a car there is impractical.  There’s no place to park them and the roads are far too congested.  That’s why Japan is famous for its badly overcrowded mass transit system.  It’s the same in Korea.  Germany isn’t much better.  American exports of vehicles to these countries is virtually non-existant, while they export hundreds of thousands of cars to the U.S. every month. 

With all the celebration of GM’s return, there was little notice of the fact that GM plans to lay off another 20,000 workers.  And there will be nothing but more job losses in auto manufacturing as the ever-growing onslaught of foreign manufacturers erodes market share for the domestics.  Nothing will change until the time (if ever)  that our nation’s leadership wakes up to the real underlying problems with our trade policy that make our huge trade deficit and the accompanying loss of jobs unavoidable.  Only when they come to the realization that the experiment in unfettered free trade begun in 1947 with the signing of GATT (the Global Agreement on Tariffs and Trade) has been an abysmal failure for the American economy, wiping out in six decades all the wealth created over the previous 171 years, will there be any chance of putting this economy back on a sound footing.

The new GM has emerged, but into the same old world of dumb U.S. trade policy based on half-baked 18th century theories and politicians lacking the wisdom, will or intestinal fortitude to do anything about it.


Fresh Start for GM, or Another Landmark in Economic Decline?

June 2, 2009

http://www.reuters.com/article/newsOne/idUSN3044658620090602

General Motors filed for bankruptcy yesterday, closing the book on the greatest American manufacturing company in history, as we knew it.  A new GM will emerge, but it will be only a shadow of the company that once was. 

The day was filled with a lot of cheerleading for GM, led by our president, now heavily invested in its success along with his taxpayers, to the tune of $50 billion.  And there were brave faces on display among GM executives in front of the camera, vowing reform and begging consumers not to abandon them.  All spoke of a fresh start and a vision of a new power-house U.S. auto manufacturer, one that will out-compete the foreign competition and win back market share. 

Lost in all the hubbub was the real significance of this event:  that it’s just one more landmark – and a huge one – in the steady deindustrialization of America and the downward spiral of its economy.  GM is just the latest victim of a policy that grants free access to the American market while asking and getting nothing in return – no access to equivalent markets.

Nothing has changed.  The new G.M. will re-emerge into the same environment.  Mounting job losses (to which G.M. has been a big contributor) will continue to be a heavy drag on auto sales.  The market will still be saturated with dozens of foreign brands, free to “dump” cars at below cost with impunity while American brands face a stacked deck in foreign markets that have been emaciated by overpopulation. 

The new G.M. re-emerges with a lower labor cost structure and has been freed of its crushing debt burden.  But it won’t make a bit of difference, except to force the foreign brands to cut their costs as well in order to maintain market share.  The U.S. auto market will simply become even more of a dog-eat-dog world, especially as Chinese brands make their entry. 

Reminiscent of the movie Groundhog Day, in a scene that has played out over and over and over for decades, if not in China then in Japan or Germany, Treasury Secretary Tim Geithner is in Beijing on a jawboning mission, trying to talk his way out of a trade deficit and into a healthy economy.  The effort is laughable and the results predictable.  Geithner will be patted on the head and sent on his way, leaving the Chinese negotiators rolling their eyes and shaking their heads in disbelief at the naivete they had just witnessed. 

Without meaningful action instead of talk by the U.S. to force a balance of trade, GM will be re-emerge as a little fish into a pond full of very hungry predators.  It’s been said that the U.S. doesn’t need and can’t support three separate auto manufacturers any more.  Yet, no one says the same thing about France, a nation one fifth the size of the U.S., with its Renault and Peugeot brands.  No one complains that Germany, a nation one fourth the size of the U.S., has four manufacturers – VW (the company founded by Hitler), Porsche, Mercedes and BMW.  No one complains that Japan, a nation less than half the size of the U.S., has six manufacturers – Toyota, Honda, Nissan, Mitsubishi, Subaru and Mazda.  How many of these companies would thrive without access to the American market, or if Americans’ per capita consumption of vehicles was cut in half, as it is in the emaciated markets of these overpopulated nations? 

No one can say that President Obama hasn’t been aggressive and decisive in tackling our economic implosion but, in the area that matters most – restoring a balance of trade, he’s talked a good game.  He’s chided the rest of the world to rely less on exports and to do more to boost their own economies.  But, though talk and diplomacy may be effective in dealing with other foreign relations issues, it can’t alter basic economic realities like the role of population density in driving global trade imbalances.  Without meaningful action by the  U.S. to address the root cause of our economic melt-down, GM’s bankruptcy is just one more waypoint in our downward spiral, soon to be followed by more – the bankruptcy of Ford, a collapse of domestic auto manufacturing, defaults by states like California, hyperinflation and eventual insolvency of the U.S. as a whole. 

We need action, not talk, and only time will tell if Obama has the courage to act when all of the talk has failed.


GM Recovery Plan Presents Obama with Paradox

May 6, 2009

http://www.freep.com/article/20090505/BUSINESS01/90505076/?imw=Y

The linked article reports on the UAW’s opposition to General Motors’ restructuring plan, which relies heavily on shutting down U.S. plants and outsourcing production to countries like Japan, China, Korea and Mexico.  (In case you’re not aware, Chevy Aveo and Pontiac G3 are already imported from Korea.  GM plans to do much more of this.) 

This presents the Obama administration with quite a paradox.  As the major stakeholder in GM, the government is now responsible for approving or disapproving GM’s plan.  However, given the current climate of extreme trade policy and tax regulations that favor foreign production, no recovery is possible for GM that doesn’t involve outsourcing production, which will dramatically worsen the trade deficit.  But, at the same time, no plan by the government to restore the economy and our nation’s fiscal health is possible if a balance of trade isn’t restored.  So what’s Obama to do? 

My prediction is that he will approve GM’s plan and hope that changes in the trade climate and in tax regulation in the meantime will make their plans to outsource production moot before it ever comes time to implement them.  He’d better hope that’s the way things unfold because, as unemployment rises beyond 10% and climbs into the teens, there’s going to be a real groundswell of anger if people see more jobs being exported. 

As this recession wears on, Obama will find that bank bail-outs, optimism and happy talk of economic “green shoots” won’t restore prosperity.  He’ll eventually have to confront the collision of economic forces that underlies the  ruination of our economy.


Requiem for Chrysler

May 1, 2009

http://www.reuters.com/article/ousiv/idUSTRE53S8F620090430

After 84 years, Chrysler, once one of America’s largest corporations, an automaker with a long history of innovation and iconic brands and models,  filed for bankruptcy yesterday.  Like a zombie, Chrysler will seem to live on for a while, propped up by the federal government and Fiat.  But it’s a dead company walking. 

I give the Obama administration credit for trying to salvage it for the benefit of the employees, but both the Bush and Obama administrations, and many administrations before them, are culpable for its demise in that they’ve done nothing to fix the broken trade policy that grants free access to the American auto market to any foreign maker who wants it, while getting nothing in return. 

But Chrysler is unlikely to survive for long.  Regardless of whether or not, with Fiat’s help, they start marketing small, fuel-efficient cars, few will buy them.  Chrysler has two strikes against it:  a lot of Americans won’t buy American-made vehicles because it’s not consistent with the “hip” image they want to project.  And now they have a “bankrupt/loser” image to go with it. 

Their plants are already shut down as suppliers, many on the verge of bankruptcy themselves, are refusing to provide parts with no hope of being paid.  Dealerships are putting on a brave face, but know that many will be closing their doors as well.  Bond-holders are mounting a legal challenge to government’s quick, “pre-packaged” bankruptcy plan, threatening to drag it out for months. 

The net impact of all of this will be that the American auto market will be diluted even further with the entry of yet another foreign auto-maker  – Fiat.  Market share for all auto makers, foreign and domestic, will decline slightly.  Has Italy promised Chrysler, or GM or Ford for that matter, a corresponding number of sales in Italy?  Of course not.  Because of their extreme population density and over-crowding (Italy is six times as densely populated as the U.S.), many Italians don’t even own cars.  Italy is one of the parasitic economies of the world dependent on exports to the U.S. to keep their labor force employed.

What’s happening to the domestic auto industry and the U.S. economy as a whole is no different than what happens to any host organism that becomes infested with parasites – a slow, agonizing death as it bravely soldiers on but becomes more sickly with each passing day.  As overpopulated nations feed on our market, slowly draining us of jobs and wealth and giving nothing back in return, we try to pretend that nothing is wrong, even as our economy has been brought to its knees.  And, just as in the case of a parasitic infestation, where the parasites begin to feed even more ravenously as the host is dying, oblivious to the fact that the host’s death portends their own fate as well, foreign manufacturers like Fiat are swarming to the American market.  Soon will come a flood of auto-makers from China.  All will be chanting the benefits of free trade and snarling at the host in defiance of any moves to swat away the invading horde with moves toward protectionism.   

It’s time to start taking swats.  Just as a horse is blessed with a tail to keep the hordes of flies at bay, we have at our disposal a whole array of trade policy tools to maintain balance.  Yet, inexplicably, we’ve settled on a policy at the extreme end of the spectrum, giving free access to our markets to everyone while demanding nothing in return, and disavowing other policies that offer some hope of restoring balance. 

We’d better awaken from this zombie-like trance soon, or the same fate that has befallen Chrysler awaits our entire economy.


Farewell, Pontiac.

April 28, 2009

http://www.usatoday.com/money/autos/2009-04-27-gm-kills-pontiac_N.htm

Taking yet another step toward oblivion, General Motors announced today that it will kill the Pontiac brand in 2010.  Thus ends another proud American name-plate, sacrificed on the altar of “free” trade. 

President Obama had the power to breathe new life into the domestic auto industry when he took office by restoring a balance of trade in the auto industry, demanding that Japan, Korea, Germany and Mexico begin buying as many American-made autos as we buy from them, or face tariffs and import quotas.  This would have almost instantly doubled domestic auto sales, breathing new life and profitability into GM, Ford and Chrysler, even as we headed further into recession.    Additional shifts would have been added and idled plants restarted.  This would have been a stimulus plan that put the one he opted for instead to shame.  Instant results. No expense to the taxpayer.

But no.  That would have made him a turd in the punch bowl at the G7 and G20 parties.  Much better to drive the domestic automakers into bankruptcy, slash pay and benefits, kill off thousands of dealerships, stiff bondholders and shareholders and stick taxpayers with the bill.

What a shame.  Pontiac made some of the most iconic models of all time including the G.T.O. and Firebird.  I’ve only owned one Pontiac in my life, a used ’84 Fiero which, aside from my first car, a ’73 Corvette, was the most fun car I’ve ever owned.  A mid-engined, 4-speed sports car with a composite body, independent suspension, four-wheel disc brakes and incredible handling for only $4,000.  High insurance rates finally killed off demand among its target demographic.  Too bad.  It was a terrific sports car at a great price. 

In my opinion, Pontiac still has the most attractive styling of all of the GM products available today (except Corvette, of course).  The Pontiac G6 is as stylish as anything in its class and the styling of the G8 is in a class by itself.  Then there’s the Solstice – the equivalent of a BMW Z4 at almost half the price.  I’d be driving one now if I was in the market for a new car. 

Obama has said that America needs a vibrant auto industry.  But the plan seems to be to down-size it out of existence.  In 2004, Oldsmobile bit the dust.  Today it’s Pontiac, Saturn and Hummer.  Along with those cuts come the closing of more plants, the elimination of almost half of its dealership network and the elimination of 21,000 more jobs. 

If this was all part of a process of slowly reducing our population to a sustainable level, I wouldn’t have a problem with it.  But killing off the last vestiges of the manufacturing sector of our economy even as the population is expected to grow by at least 100 million people in the next forty years is a recipe for an economic catastrophe.  Oh, wait, we already have one!


Obama Auto Plan Comes Up Short

March 31, 2009

http://www.reuters.com/article/topNews/idUSTRE52T4Z320090330?sp=true

The linked article contains excerpts from Obama’s remarks about his administration’s plans for the auto industry.  The following is an outline of the key elements of that plan:

  • GM’s CEO Rick Wagoner has been ousted, replaced by COO Fritz Henderson.
  • GM gets 60 days to come up with a “better plan,” which involves shedding more brands, striking a deal with bondholders, and creating a “credible model” for “succeeding in this competitive global market.”
  • Chrysler gets 30 days to close a deal with Fiat.  (Fiat promises to build “new fuel-efficient cars and engines here in America.)
  • Fiat promises to repay American taxpayers before taking a majority ownership in Chrysler.
  • Both GM and Chrysler will go through some sort of government-sponsored bankruptcy, but not liquidation.
  • The government will back GM and Chrysler warranties in a bid to alleviate consumer concerns.
  • Acceleration of Recovery Act funds for government fleet purchases, though he didn’t say what percentage of these purchases would be American cars.  (Remember, the “buy American” provision of the Recovery Act had to be watered down to respect existing trade treaties, which includes Japan and Germany, but not Korea.)
  • Boosting funds to finance units like GMAC.
  • Sales tax deductions for the purchase of new cars (not necessarily American cars).
  • A “Director of Recovery for Auto Communities and Workers” to help affected communities.  No specifics about what this means.

The president’s plan misses entirely the real crux of the problem for the domestic auto industry – falling sales, most recently hammered by the deepening recession but in a much longer term slide due to an endless supply of foreign manufacturers getting free access to our market while we get nothing in return.  Even when confronted with blatant “dumping” by Japanese and German manufacturers, and by Mexico raising tariffs on American imports, the president has chosen to look the other way.  And after being crowded out of the small car market by a horde of imports, forcing the domestics to turn to the small truck and SUV market as its last bastion of profitability, the adminstration plans to force them out of that segment of the market as well, leaving it entirely to a swarm of imports.  (See Obama Backs Automakers, Fails to Act on Trade Problem.)  Obama speaks of a “competitive global market.”  There’s no such thing!  There’s only an American market open to global competition.  All other markets are either closed to American manufacturers or are so badly emaciated by over-crowding as to have the same effect. 

Experts have repeatedly warned that consumers will not buy autos from bankrupt auto companies.  Government backing of warranties won’t change this.  Small cars are predominantly purchased by young buyers and, among this demographic, it’s just not cool to drive American cars.  How much less will they buy them once they’ve been further stigmatized as loser-mobiles?

Regarding Chrysler, Obama just destroyed whatever bargaining power Chrysler may have had left in their negotiations with Fiat.  Fiat can now demand all of their assets while taking on none of the debt.  They will also build one or two models in the U.S. while using the deal with Chrysler to open the gates to a flood of imports from Italy.  Bye-bye more market share for domestic manufacturers. 

GM already planned to rid themselves of Hummer, Saturn and much of Pontiac.  But that’s not enough for Obama.  More brands have to go.  GMC is redundant with Chevy trucks, so that seems an obvious choice, except that GM makes a nice premium on GMC with little more effort than sticking a different badge on the truck.  So they can probably kiss that profit stream goodbye.  That leaves Chevy, Buick and Cadillac.  Will one or more of them have to go too?

When it comes to tax incentives to purchase new cars, 75% of the taxpayer money used to fund the program will go to boost foreign car sales.  So the net result will be to do more harm than good for domestic manufacturers. 

In the end, the plan is to reduce GM and Chrysler to bit players in a horribly glutted small car market, one small piece of a strategy to reduce our dependence on foreign oil.  But the crown jewel of that plan was the “cap and trade” item in Obama’s budget, the only thing that might motivate a switch to small cars by raising gas prices, already axed in the name of fiscal responsibility.  So we will be left with low gas prices fueling America’s appetite for SUVs and trucks, but now with only imports to choose from.

Four or eight years from now, when Obama is gone, the last vestige of the now-gutted domestic auto industry will be gleefully abandoned by his Republican replacement and held up as a shining example of how the free market purges itself of “inefficiency.”  Never mind that the market was never free or that millions of jobs have been purged with it.  Who cares?

With unemployment in Detroit at 22.5% and at 12.0% for Michigan as a whole, a state of depression has now been over-layed by a sense of hopelessness.  No one should take any perverse delight in the demise of the auto industry and the state of Michigan, because Michigan is a bellwether – the canary in the coal mine – for the American economy as a whole.


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