Monday, June 21, 2010

The latest from Ideas in Action is about Detroit Bailouts. It raises the question: Is Dear Old Dad driving the Chevy into the levy?

From the Ideas in Action site: What was the problem with the Big 3 automakers? Corporate oligopoly and labor monopoly: The law of unintended consequences.

Not being in an expert position, and so offering a 'for what it's worth' caveat, it is striking to me the parallels that exist between companies like Chevrolet in 2008-10 and the Federal government as it appears over the next few decades as projected by the CBO.

Let me try to explain concentrating on G.M.: Over time, a very costly entitlement program grew up thanks to the power of the labor unions. Included: High salaries, generous vacation packages, generous old-age pensions, protection from, or pay during, lay off, all of this is not unlike federal entitlement programs, and indeed in some ways akin to the European model.

This all did its job attracting labor over the years. But, it was certainly a substantial part of Detroit's undoing. The unions naturally worked to protect these benefits, and those that ran the unions were able to consolidate their political clout by doing so, and negotiated for increases and additions to the benefit package, such as the 'jobs bank' program, that essentially paid people for not working.

Both management and labor kicked the can down the road in successive rounds of contract negotiations over the years, until costs simply outstripped income. They were serenely assured that the situation would not alter all that much. But it did. Markets changed. Heraclitus was not heeded.

Foreign auto manufacturers provided competition. These companies did not have the same sort of entitlement program on their backs, they moved plants to the states, and were able to create equal or better products, without also having to maintain hefty entitlement programs. Ultimately, the competition proved to be too much, and G.M. and Chrysler had to either go bankrupt or take bail outs, federal money, in order to continue in business.

Arguments were made that the supply chain and other fallouts should these companies fall, would simply be to great for our economy to withstand. That, coupled with similar worries concerning our financial institutions, brought about the TARP and Stimulus spending. Government is now spending unprecedented amounts to keep these sectors going (or rather existent players in these sectors).

Now, as I said, it seems to me there is a striking analogy here, one that paradoxically, contains a disanalogy. The auto companies and the banking industry had the federal government to fall back on. That big old pot o' money is seemingly always there, sort of like Dear old Dad. You remember him, right? When you crashed your car, or couldn't make the rent he floated you that loan, and you didn't have to pay him back.

But this raises an obvious question. Who bails dad out when he can't make the bills? In the case of the U.S. government, only two options are possible: Dad can in essence borrow from or tax, well...himself (er, that would be the taxpayer, since we are the government, right? 'of by and for' and all that jazz), or he can borrow from other Dads, like that Chinese chap across the Pacific.

In the meantime if he is in a position like that of G.M, vis entitlement programs, he had better seriously work on cutting back on overall spending if he hopes to keep afloat. After all, if Dad cannot keep the household and bank account going, then next time sonny-boy drives the Chevy into the levy, he may be out of luck. For, if Pops gets so far into debt that the other Dads in the neighborhood consider him to be a credit risk, they simply will not loan to him, unless they are doing so for humanitarian and fellowship reasons. And that goes for any internal folks he would like to borrow from as well (bond buyers for instance). And if Dad can't get enough income from, then next time one or more of the kids (Fannie and Freddie, or the banks, or the auto industry, or etc.) needs a loan, he she or they will be out of luck.

Now, I did not intend to veer off into a dad analogy, damn it. It was supposed to be an auto industry analogy, so let me finish with that.

An auto industry company that runs an entitlement program at the same time that it is running a business ostensibly for profit can do so, just so long as it has sufficient income (profit). When it does not, it has to run to Daddy (sorry). Now, consider the federal government. It's not a business, but does need money. A large chunk of the non defense budget goes toward entitlement programs. Other chunks go toward all the various agencies that regulate our lives. That's all fine and dandy, as long as the government has the analog of profits rolling in; tax revenue or willing lenders (be they internal or external to the country). There is even some room for flexibility in that regard. Suppose your tax base is not reproducing at a rate equal to the rate previous generations maintained. That means with each new generation, there are less working folks to pay the taxes or internally lend to dear old dad (sorry again). This gets particularly pesky if at the same time, the population of retirement aged folks is expanding, as it is now due to the aging of the baby boomers and the fact that we live longer today than at any time in history. (Alan Simpson is right on about this)

Never fear. You can maintain the level of benefits promised, and maintain the complex of agencies. You can simply up the tax rate on the young 'ens, and sell more bonds. Heck, you can even borrow from 'them furiners' if you have to.

Problem is, increased tax rates tend to be a disincentive to work, so taxes actually fall. What is more, even if you decrease rates, and thereby increase revenues, as also is often the case (remember the 80s?) it simply won't cover the bills. This is especially true if you promise to continue the level of benefits, and the size of government, and especially if you intend to increase one or both of these. You will be operating at deficits year to year, increasing the overall long term debt, and the percentage of income that must go toward payment of interest (rates of which are likely to increase by the way) all of this the alleviation of which will require that you now borrow even more from that Chinese chap and others. You can alleviate some of this by borrowing all along. But, the problem is, if you make a regular habit of this, and you also make a regular, even if infrequent habit of bailing out the kiddies, well, if you go on long enough doing this, you end up like..Greece, or shouldn't I get my analogy straight damn it, G.M, that is; reliant on the good graces of others, but, unlike G.M, without a dad to bail you out.

This ain't good if you are to all intents and purposes the world's Dad, not only economically, but militarily.

Let's not drive that Chevy into the levy.

The southern aurora, from space

Astronomy pic of the day: Stonehenge

Which brings to mind those haunting lyrics:

In ancient times...
Hundreds of years before the dawn of history
Lived a strange race of people... the Druids

No one knows who they were or what they were doing
But their legacy remains
Hewn into the living rock... Of Stonehenge

Stonehenge! Where the demons dwell
Where the banshees live and they do live well
Stonehenge! Where a man's a man
And the children dance to the Pipes of Pan


Stonehenge! 'Tis a magic place
Where the moon doth rise with a dragon's face
Stonehenge! Where the virgins lie
And the prayers of devils fill the midnight sky

And you my love, won't you take my hand?
We'll go back in time to that mystic land
Where the dew drops cry and the cats meow
I will take you there, I will show you how


And oh how they danced
The little children of Stonehenge
Beneath the haunted moon
For fear that daybreak might come too soon

And where are they now?
The little children of Stonehenge
And what would they say to us?
If we were here... tonight