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.