Friday, May 20, 2011

Let's not celebrate just yet...

Paul Krugman makes two interesting statements about the auto industry in today’s New York Times about the rebound underway in American manufacturing:
“the U.S. auto industry, which many people were writing off just two years ago, has weathered the storm. In particular, General Motors has now had five consecutive profitable quarters.”
He continues later to say:
“And then there’s the matter of the auto industry, which probably would have imploded if President Obama hadn’t stepped in to rescue General Motors and Chrysler. For those companies would almost surely have gone into liquidation, closing all their factories. And this liquidation would have undermined the rest of America’s auto industry, as essential suppliers went under, too. Hundreds of thousands of jobs were at stake. “
Now, I’m the first to admit that I don’t have a Nobel Prize in Economics in my back pocket, but these two statements reek of misdirection and exaggeration.

It is indisputable that GM has recorded accounting profits for five straight quarters.  Well done GM. However, to infer that GM “weathered the storm” is incredibly misleading.

It would be accurate to say that Ford Motor Company “weathered the storm” since it avoided bankruptcy and multi-billion dollar taxpayer bailouts during the recession and then generated $6.6 billion in profits in 2010. Not sure if Krugman forgot about this success, didn’t know about this success, or didn't mention it because it doesn’t fit within his “government spending is great” narrative.

GM and Chrysler were saved by having the government come in and expunge debts (crushing bondholders and public shareholders in favor of the unions) and provide truck loads of cash ($50 billion+). If you consider this “weathering the storm” then I guess Krugman is correct.

It’s as if Ford and GM were both king crabbing boats stuck off the coast of Alaska in a storm worthy of a the best “Deadliest Catch” episode ever.  Ford was able to quickly plug the holes in its boat and navigate its way out of the storm to live another day.  Meanwhile, a few miles away, GM continued through the storm, oblivious to the holes in its boat, and just before those holes caused the ship to sink, a luxury cruise liner captained by Presidents Bush and Obama rescued them and awarded them with a brand new, debt free crabbing boat to use in competition with Ford.

Let’s not celebrate GM as a success until the taxpayers get their money back. If a business can’t turn a profit after a bailout of those proportions, it should just rename itself the US Postal Service.

Which leads to Krugman’s second statement…

President Obama is not responsible for saving the auto industry from implosion. He might be able to take credit for saving Chrysler and its cars that nobody buys, but the industry as a whole, including a GM reorganized through a normal Chapter 11 bankruptcy proceedings (i.e. not a government orchestrated and pre-approved Chapter 11 proceeding), would have survived and thrived without government intervention. The suggestion that all the factories would have been shut down, and hundreds of thousands of jobs would have been lost is preposterous.

GM, and its brands, factories and inventory, were entirely too valuable to abandon. Chevrolet, Buick and GMC aren’t exactly the gold standard in the auto industry, but they have a considerable amount of value -  way too much value to just throw away. Seriously, to have a Nobel Prize winning economist suggest this outcome is shocking.

The sole purpose of the government bailout was to reorganize GM in the most politically advantageous manner possible, which - SURPRISE! - provided the unions, a major factor in GM's problems, with preferential treatment.

I wonder if Krugman will be able to make the same claim after five years instead of five quarters. As an American I hope so, as a realist, I’d be surprised. The taxpayer rescued GM from the storm, but can management and the UAW keep GM in calm waters? That remains to be seen.

Monday, May 16, 2011

Unions vs. Reality, Boeing Edition

Boeing was recently issued a complaint by the National Labor Relations Board (“NLRB”) that alleges Boeing unlawfully transferred jobs to a non-union facility.


The NLRB is a “quasi-judicial” federal agency whose board members are appointed by the President. At present, the four acting board members, and one yet-to-be-confirmed board member have all been appointed by President Obama.

Despite the sputtering economy, Boeing has managed to secure orders from airlines around the world for hundreds of their new 787 Dreamliner aircraft. Great news for Boeing, but they have a problem. Its current 787 plant in Washington can only produce 7 of the 10 planes it needs to deliver every month to fill its outstanding orders on schedule. As a result, Boeing determined it needed to build a new plant (and create thousands of new jobs) to manufacture the 3 additional planes per month needed to fulfill the orders.

When Boeing decided to build that new plant in South Carolina instead of its home state of Washington, the International Association of Machinists and Aerospace Workers union threw a temper tantrum and whined to its friends at the NLRB. South Carolina happens to be a right-to-work state, and apparently unions don’t like the idea of expanding businesses into right-to-work states. That’s right, expanding, not moving. The union employees in Washington will be unaffected – not a single job will be moved from Washington to South Carolina, yet this is still somehow unacceptable to the unaffected union.

Right-to-work means that employees cannot be FORCED to join a union; it doesn’t mean there can’t be a union. Interestingly enough, when employees aren’t forced to join the union, they usually don’t. The wholly-Obama-appointed NLRB knows exactly where their bread is buttered and quickly formalized the union temper tantrum with an official complaint alleging that Boeing’s business decision to set up shop in South Carolina was unlawful and the new plant must be built in Washington. All this, AFTER Boeing built the facility in South Carolina.

It doesn’t take an aeronautical scientist to see why Boeing would choose South Carolina as the site of its new plant. While the weather in South Carolina is infinitely better than Washington and the southern drawls that will be heard throughout the factory will be charming, Boeing ultimately believes it can produce the same quality product more efficiently, and cheaper, than it could in Washington. Basic Business For Dummies tells us that the primary advantage of a South Carolina plant is that its employees cannot be forced to join a union, thereby eliminating the prohibitively expensive and restrictive union employment and benefit contracts, and perhaps more importantly, eliminating the constant threat of crippling union strikes (averaging one every three years in Washington) that would derail the already tight delivery deadlines, and ruin their relationships with the airlines.

Anyone with even the slightest hint of business acumen would advise Boeing to locate the plant in South Carolina, yet a governmental agency is trying to strong arm, or potentially even force, one of America’s largest manufacturers into a sub-optimal business decision to appease a special interest group.

Do we really believe this is something that should be allowed to happen in the United States? Maybe Greece, but the United States?

With all due respect to Matt Taibbi at Rolling Stone, the” great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” could just as easily refer to the union bosses and their politician puppets, not just Goldman Sachs. I’m happy to be challenged on this, but can anyone name a heavily unionized industry that the unions haven’t parasitized into bankruptcy and/or models of inefficiency and ineptitude? Autos, airlines, US Postal Service, Public Education, Healthcare, Utilities, Public Transportation…I could go on and on.

How can we allow four bureaucrats in Washington DC to exert this level of influence over a private company making the most basic of business decisions?

We can’t.

I’m glad Boeing, Congress and Governor Haley of South Carolina are all standing up to the unions, the NLRB and President Obama. Our businesses, not to mention our unemployed, can’t afford to be strong-armed into non-competitive cost structures by unions and their bought-and-paid-for friends in Congress and the White House. Anti-capitalist policies like this are a sure fire way to promote off-shoring of manufacturing facilities by American companies, while at the same time scaring away foreign companies looking to invest in the US.

Way to go NLRB.