DEATH TO THE BLUE RAT

It's Michigan Week.

Contrary to past form, I've managed to remain substantially productive at work this week, but not because I think the game is automatic or anything. I'm old enough to remember John Cooper's Reign of Terror and have no illusions about the actual inevitability of any supposedly inevitable wins by The Ohio State University over the wicked, cheating scoundrels from Meatchicken. And literally everything in the world (apart from Meatchicken's obvious and terrific awfulness) points to scUM pulling the upset this week.

First-year coach at TSUN, not one of whom has ever lost their first game against Ohio State: check.

Ohio State never having ever, ever beaten Michigan five straight times: check.

Wildly overconfident tOSU fans with no sense of historical perspective on the rivalry and possibly infecting the mental composition of the actual Ohio State players who after all are only 20 years old and themselves have no sense of historical perspective on the rivalry: check again.

To remind myself to actively hate Michigan every day and with every fiber of my core, I will be watching ESPN Classic's rebroadcast of the 1995 and 1997 Ohio State self-immolations against TSUN when they are on this week. As a diehard Buckeye from way back in the day before all this "spread offense" business was all the rage with the kids, I must say I find Ohio State's 1996 loss to Michigan the most painful and inexplicable of the many stunning examples of John Cooper finding a comical and improbable way to lose to an inferior team from a cold and rat-infested northern climate. Since I'm really trying hard this week to get my anger up, allow me to ask rhetorically: why does ESPN never rebroadcast that 1996 loss, or the stunning shutout loss in 1993? The 1995 and 1997 losses are on all the time. Why not the 1988, 1989, 1990, 1991, 1999 or 2000 losses, which were no less bitter for being less surprising?

Yes, this makes me sort of a connessour of the many flavors of defeat, which was a dish annually served to us Buckeyes in barely differing vintages for thirteen long and desperate years beginning the same month the first George Bush got elected. (And, this being a political blog, I can't help but observe that we'll be getting a different but similarly rancid flavor of defeat for at least four years beginning the month that BHO was elected. See if you can guess what I'm referring to! End political aside.) I use this angle to remind myself never to let down my guard against the treacherous heathen from Ann Arbor--because that's just what they would want us to do.

Never stop hating Michigan just because they momentarily appear laughable and hapless. It's all a show and a clever ruse. If the Buckeyes fall for it and allow the improbable 20-point spread go to their heads, the northern rodents will ply their sneaky rodent wares on us all and rise up from their totally feigned ineptitude to stab our Godfearing Buckeye hearts with a plastic spoon melted down into a pointy prisonyard stabbing implement. Never trust a Michigan rodent. DEATH TO THE BLUE RAT.

More on GM from WSJ

There's a great (subscription) editorial in the Journal today entitled Why Bankruptcy is the Best Option for GM, penned by Michael E Levine. Naturally this makes me feel just unsufferably smart for pointing some of this out a few days ago, and it's worth excerpting in areas I didn't explore:

Foreign-owned manufacturers who build cars with American workers pay wages similar to GM's. But their expenses for benefits are a fraction of GM's. GM is contractually required to support thousands of workers in the UAW's "Jobs Bank" program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it's not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month.

I hadn't really forgotten the Jobs Bank, which is probably the most egregious example imaginable of union excess. Many former employees who were laid off report to the Jobs Bank office daily to "earn" eight hours' pay by playing cards and drinking coffee. Exactly what GM thought they were getting by offering this concession is hard to imagine.

Federal law provides a way out of the web: reorganization under Chapter 11 of the bankruptcy code. If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM's viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn't be easy but, unlike trying to bail out GM as it is, it wouldn't be impossible.

So I'm not the only one who thinks throwing money at a failing company without reforming it first is a dumb idea. As a voting taxpayer, I kind of do have an interest in whether that money (mine, after all) is thrown about with reckless stupidity.

But unless we are willing to support GM as it is indefinitely, the downsizing and asset-shedding will have to come anyway. Even if it builds cars as attractive and environmentally responsible as those Honda and Toyota will be building, they won't be able to carry the weight of GM's past.

Amen. It's gratifying to see that the grownups have joined the conversation.

Bailouts 'R' U.S.

The $700B was naturally just the beginning.

Now that we've established in the public's mind that virtually every company in this grand old republic of ours is "too big to fail," there will be no end of requests. This week's pleas from General Motors (which the Michigan public naturally supports) and the good Mr Paulson's new and randomly-evolving strategy to now use the money to directly bail out consumers are a taste of what we're getting into here, where the general assumption is that the federal government can simply write checks to cure all ills.

BHO and Nancy Pelosi have chipped in with their helpful suggestions that we solve the nation's problems by extending unemployment benefits and increasing spending on food stamps, and also hire a bunch of workers to upgrade roads and other "crumbling infrastructure." This overlooks that unemployment insurance already runs for three months, and there is evidence suggesting that increasing the length of time a person can receive a check for not working may sometimes--surprise!--increase the duration of unemployment, but nevermind. And Nancy wants a(nother) $25B handout to GM.

Thankfully, the good news this week is that congressional Republicans have already started to regroup after the past several years of spineless and unprincipled opportunism have cost them two elections by wide margins. The Republicans in the first half of Bill Clinton's first term were a disciplined and (relatively) principled group; nothing quite lends focus to an operation like being the last line of defense against an ascendant liberal doctrine determined to shower the masses with taxpayer-funded hugs and rainbows and lollipops and soothing assertions that the scariest elements of competition and bad consequences can simply be legislated from existence.

John Boehner, from my temporarily blue state of Ohio, has come forth to lead Republican opposition to democrats' intentions to throw good money after bad by allocating some of the $700B financial system bailout to General Motors. Boehner observes that spending "billions of additional federal tax dollars with no promises to reform the root causes crippling automakers' competitiveness around the world is neither fair to taxpayers nor sound fiscal policy." [Applause--Ed.]

This makes sense on a lot of levels; the whole $700B spending spree by the government should be an alarming prospect of impending Soviet-style nationalisation to anyone who believes our economic freedom is part of the great tradition of personal liberty in the United States, or who believes that the innovations of free enterprise are the cause of our unprecedented economic hegemony among the other participants in the world economy, as I do.

The massive bailout made sense only in the context of avoiding something much, much worse, and the failure and resultant bankruptcy of any particular company doesn't elevate to that level. The only thing that elevates to the level of requiring an unprecedented nationalisation of private companies and the expenditure of that much money would be something truly horrifying that would rain down sweet justice on the innocent and guilty alike--such as the total failure of the banking system. The $700B we're talking about the government handing out to essentially whomever they think needs the cash is a staggering amount--more than the total cost of the entire Iraq war--and is the equivalent of a financial nuclear option. A hammer this big shouldn't be used against anything other than an existential threat, and the democrats have predictably cheapened the argument by (equally predictably) drifting toward turning the whole program into a broad giveaway to everyone and anyone who supported democrat campaigns.

The real issue here is whether we are willing, amid a severe economic challenge, to act like serious grownups for a little while and choose accordingly. The appropriate level of seriousness which this discussion requires is contrary to the norm in Washington, but not everything reduces to the cartoonish moral simplicity of the arguments offered by Chris Dodd and Nancy Pelosi--that we can give (another) $25B to GM and that the only measures we need take to ensure that we're not merely increasing the cost of the eventual bankruptcy is to place "severe limits" on executive compensation. This is a favorite bugaboo of the left, and is offered as the sole product of their supposedly serious review of GM's cost structure, and what needs to happen to ensure its longterm viability. It doesn't work.

Let's take a look. If we're going to do this honestly, now would be a good time for everyone to go download their very own copy of General Motors' 2007 annual report, so we can argue from facts instead of parroting talking points. There's a lot of typical glossy corporate propaganda in the report, but skip past about the first 40 pages and we can get to the meat of the financial statements.

According to the consolidated statement of operations (page 49), GM lost $38.7B last year. That's a truly awesome failure on many levels and approaches federal government levels of fruitless expenditure, but soak in the sheer awfulness of the number for a moment: a single company lost $38,732,000,000 in one year. And it would have been worse except for having sold a major component of the company during 2007 (the Allison Transmission business) and recording a gain of almost $4.6B on this. The number which should grab your attention here is Loss from Continuing Operations: $43.3B.

Against this monumental loss, Nancy Pelosi proposes "strict limits to executive compensation" as a magic bullet. Individual executives' compensation is public record, and can be found, among other places, here. How much do they make?

Including salary, stock awards, stock options, incentive and all other forms of compensation, they make a lot by the standards you and I are used to living on. Rick Wagoner, CEO and Chairman, makes $14M, which is obviously a lot. If you add up the total compensation of Wagoner, Fritz Henderson (CFO), Bob Lutz (Vice Chairman) and the two other group vice presidents named in the table, you get $38.9M, coincidentally contributing almost exactly 0.1% of GM's loss for the year. So if Nancy's "strict limits to executive compensation" could convince them to volunteer their time and work for free, GM's loss for 2007 would still be 99.9% of what it actually was. So while there may or may not be a playground issue of fairness going on, this executive compensation is not really where the money is.

Much of the money is in note 15 to the financial statements, Pensions and Other Postretirement Benefits, which is the grand legacy of decades of UAW extortion. Take a look at the table of benefit payments on page 107 of the annual report. In 2008 GM plans to write $7.6B in checks to its US pensioners; when you figure in non-US pensioners and other postretirement benefits (eg., free health insurance) the total balloons to $13.5B, so we've stumbled onto an apparently major component of it. The legacy of being under the thumb of the union for decades is the annual expenditure of more than thirteen billion dollars of checks written to people who no longer are productive contributors to the company.

[Technical note to other accountants: yes, this oversimplifies things, and the payments are technically from the Plan, not the Company, and yes, the Plan earns a non-trivial amount of interest on its assets so only a portion of this must be funded annually by cash contributions by the company. But the contributions cumulatively made by the company to the plan over the years represent foregone modernizations, capital improvements, R&D, etc; and the company and probably even the union wish at least some of that cash was still presently on hand to pay salaries.]

Page 50 of your GM annual report tells us that GM sold 9,370,000 cars worldwide in 2007. The $13.5B in postretirement benefits amounts therefore to $1,441 per car sold. This is how much a GM buyer pays to the union every time they buy a GM product, just for the union's former workers.

So what ultimately is the point of all this? That the UAW contributes more to GM's long term uncompetitiveness than do much maligned executive compensation packages. The union has been so successful for so long in its negotiations with management that it has finally actually bankrupted the company. I struggle to comprehend how a workforce can negotiate thirteen billion dollars a year out of its employer just for its retirees.

I recognize the issue of equitability at stake in renegotiating any of this, since real individual people who have reached retirement age and have planned their finances carefully around what their union promised them are not in a position to adapt to change very well after their working careers are over (leaving aside the hale healthy 50-year olds retired on pensions equalling their full pay and indexed for inflation, who I can't really feel sorry for despite my best efforts). It's not just that it was a bad deal for the company, though it was; it was so bad a deal for the company that it's going to kill the company outright.

Now. What do we do about this? If a federal bailout is to be made, it must be done with fundamental changes to GM's cost structure that make it viable. To do otherwise is simply to throw taxpayer money down the drain. None of GM's competitors (even Ford and Chrysler, to say nothing of the much more relevant Toyota) have this huge legacy of costs built into it. If GM is to be competitive, it's insufficient to simply say that executives should be paid less. The real question is whether GM can afford to continue to pay UAW wages and benefits when Toyota and Honda plants in this country largely don't. I don't think anyone should think it a good thing that reducing pay and benefits to union workers is the likeliest outcome, but if we're honest about the analysis, it is pretty clearly a necessary thing.

And, incidentally, if the company enters bankruptcy it will suddenly gain the legal right to negotiate alterations to many of the contracts which provided for these legacy costs. So for GM itself (though not its present shareholders), bankruptcy would actually have some salutary consequences. And contrary to the doom-and-gloom forecasts of millions of jobs lost, it's worth observing that when a company that size enters bankruptcy, it doesn't simply close its doors and sell off its remaining equipment. Worldcom, to name but a single example which occurs to me offhand, went into bankruptcy in 2003 and came back stronger than ever. The new GM would likely do the same.

Ultimately this entire issue, from union benefits to bailouts and the discussions about it in Washington all feature one prominent defect: a willingness to embrace wishful thinking and avoid hard choices. It would be great if union retirees could really quit at 50 on full salary and benefits for the rest of their comfortable lives (or accountant retirees, for that matter). But it is not affordable. Insisting that it is, or should be, or gosh-that's-what-we-were-promised doesn't change the fact that there's no such thing as a free lunch, however much we would want it to. Bailing out everyone in the country who's made a bad decision in real estate by conjuring money from thin air doesn't make everyone rich either. You can't legislate prosperity or argue that only the fatcat executives are to blame or should have to pay to fix the mess, because the money just isn't there. And if a federal stimulus could really fix this thing, let's stop messing around with a paltry $300 per person and let's really fix this thing.

If GM goes bankrupt and forcibly imposes some reality onto the discussion, that wouldn't necessarily be an entirely bad thing.

The big one

For all the fuss about government-provided health care, bailouts to AIG, &c, a phenomenon approaches which I think probably demands more attention due to the sheer awfulness of the idea. We approach a tipping point at which more than half the voting public pays zero income taxes to the federal government.

When that point is reached, there is no recovering from what will prove an endless exercise in trying to squeeze more money from fewer people, in order to provide more services at greater cost to more people. Once a voting bloc gains the power to tax a minority without restraint, the largesse-addicted majority loses the incentive to work since raising someone else's taxes is simply so much easier; and, incidentally, the working and taxpaying minority loses the incentive to work as well since the return on incremental hours worked or capital risked will diminish rapidly.

An example of this principle in action can be observed at the level of state governments wrestling with the implications of falling tax receipts. During the halcyon days of the late 1990s, virtually every level of government everywhere ran a budget surplus, and most of them rather lazily allowed spending to increase far in excess of either inflation or population growth. When the economy tanked after the dot-com bust, state and local governments had managed to get their constituents used to certain levels of services and government spending, which they could no longer conveniently afford to provide. This phenomenon is one of the problems Michigan and Ohio have had, and they're still picking up the pieces. When I was in school up at Eastern Michigan, we spent a fair amount of time in my government accounting class discussing this process, and it was an instructive exercise.

One constant which you will notice as you listen to the budget debates in Michigan is that it is considered politically expedient to raise the cigarette tax repeatedly. In 2001, from a budget amounting to $35B, cigarette taxes amounted to $596M (1.7% of total state revenues from all sources). By 2007, the budget had increased to $39B despite the flagging Michigan economy, and cigarette taxes had roughly doubled to $1.1B (2.8% of total revenues). Since only 21.1% of Michiganders smoke, it's a politically low-cost proposition to raise cigarette taxes every time a budget crunch presents itself--certainly easier than proposing meaningful spending cuts no matter how badly the economy is doing.

Now it may be supposed that raising cigarette taxes is good in that it encourages people to quit since it's more expensive (though I haven't noticed a tremendous amount of success behind this concept in the usage of illegal narcotics, which suggests that some people will find the black market to be more appealing than forgoing cigarette consumption). To the extent this is true, it is certainly for the good, but there's more to it at work than just that. The 79% of Michiganders who don't smoke have increasingly turned to simply raising taxes on a minority to fund their perpetually expanding expectations of spending by the government. It's easy, it's cost-free, and it happens with little or no political opposition most every year in Michigan.

Soon, we who pay income tax to the federal government will become our own minority. When that happens, we will discover abruptly that we have no political power to oppose the ravenous calls of the largesse-receiving majority for us to furnish them with ever more shiny pretty government-funded baubles, and the noble wealthy liberals among us will be surprised to discover that by then it cannot be stopped.

Mark Steyn has an excellent essay out today on this subject, which as always is worth a read.

So where are we now?

Quite the eventful week. A few quick takes on the election: mostly bad of course, since it's no secret I think elevating BHO to the presidency will have untoward consequences for the nation, and that I also regret what this outcome says about our nation and its priorities. But! Ever the optimist, there are a few silver linings to be had if one but pauses to look for them.

The bad:
I'll refrain from even talking about policy here, since frankly that's been exercised over and over for the past three months or so and there's nothing really to add, and it's obviously too late even if I had something new to contribute. But there's two things I think are especially unfortunate.

1. This outcome rewards past bad actions and therefore encourages future occurances of same.

What bad actions? The frenzied, paranoid, repulsive wallowing in a simmering broth of incoherent hate which has represented so much of Democratic opposition policy the past eight years. The years-long campaign at the expense of governing. The Machiavellian disregard for laws (eg. campaign finance) and civility, and the variously successful attempts to suppress free speech which the BHO campaign and its apologists and sycophants in the press have so enthusiastically embraced.

Leaving aside any actual policy outcomes, it would be preferable in a healthy and mature republic to have had repudiated all these bad actions. Is it even conceivable that Democrats will suddenly and unprovokedly abandon all these wildly successful strategies in future elections, or are we more or less permanently to be subjected to this?

2. What the outcome says about us.

I'm tempted to simply overlook the pedestrian observation that the average American doesn't pay much attention, as has been evidenced in countless Jay Leno man-in-the-street type interviews where a staggering number of people can't name the vice-president, etc. But, at the risk of piling on, I'll simply point out that if a Democratic congress has a lower approval rating than George Bush, the logic which was employed to justify sending more Democrats to power in congress simply eludes me. I rather suspect that a non-trivial proportion of actual voters are entirely unaware that Democrats have been running both houses of congress for the past two years.

Also, I must confess that I simply can't grasp how Democrats are given higher marks for how they would handle the economy (and that BHO was probably carried to victory substantially on the expectation that he would solve our current economic woes). Sure, they care more than Republicans. But what are the major business-related planks of Democratic policy? Higher taxes on rich people and corporations. Higher taxes on capital gains, even if that results in a reduction of taxes paid to the treasury, as a matter of fairness. "Ending tax breaks for corporations that ship jobs overseas." Protectionism.

All of these are gut-level reactions which utterly fail when put into practice, at least if their intent is to create jobs and economic growth. I'm sure I'll have ample leisure over the next four-to-eight years to go on about this at length, but for now I'll simply summarize that anti-growth policies do not help to create jobs or wealth, no matter how much we want them to.

The advent of the BHO presidency suggests that we've become totally unmoored and unserious, and we are collectively willing to overlook the fact that wishing things in great and profound earnestness doesn't make them so.

The good:
For a variety of reasons, having a black president will be good for the country. I would rather our first black president have been Condoleezza Rice (which I would have enthusiastically supported), because I think her policy instincts are vastly preferable to those of BHO. But the outcome of the election will at least serve to prove that America isn't just a great seething maze of racism, as some [coughJesseJacksoncough] racialist opportunists [coughAlSharptoncough] have made careers by insisting. Anything that marginalizes Sharpton et al, or at least quiets their rantings, does serve some practical good.

Further along those lines, now that we've demonstrated America's non-racist bona fides, perhaps we can all start to come to agreement that any form of race-based discrimination is bad, and we can start to see affirmative action relegated to the pantheon of those noble programs which have succeeded so thoroughly as to have therefore outlived their usefulness.

One other thing: the Democrats will now have to actually govern instead of simply trying to sabotage every element of public policy whose success might have tangentally afforded some credit to George Bush. Transforming the Democrats in Washington from a bunch of shrill bleating children advocating ridiculously bad policy at every turn and confident in their minority status preventing them from absorbing any actual responsibility, into a bunch of shrill bleating children with bad policy ideas who can now scarcely avoid responsibility for the actions of government, may sober them up just a little. Not much, in all likelihood, but perhaps enough to avoid the most pernicious of their own ideas.

Lastly, the Republicans may now understand that the last two elections are, more than just bad timing from having an economic meltdown in the eighth year of an administration, also a referendum on a party which failed to adhere to many of its own principles. Small government, fiscal responsibility, and the ability to treat the economy seriously and in a grownup fashion are not characteristics of George Bush's administration nor of the Republicans in congress in recent years.

The United States has survived worse than this, and will survive BHO as well, no matter how foolish and ill-considered his policies will likely be. Such good as can come of this should be embraced and advanced at every opportunity. So smile, be brave, and be well.

Where have I been?

Hello...hellooo...

Is this thing on?

I apparently slept through an entire presidential administration since my last post (over at mu.nu) was the day after Indecision '04 as I recall. And here I am again.

Water under the bridge? Check. An incoming administration overflowing of exciting new ideas in spendthrift chicanery? Check again. Finally getting to play the role of dissatisfied opposition party instead of constantly fighting a grim rearguard action against the lies of the Kos Kids? Check check check. It's gonna be a thrilling ride the next four to eight years, and we'll break it all down right here at the newly improved Electronic Countermeasures.