Consumption versus Capital Expenditures: The Auto Sector

As long time EPJ readers know, I view the downturn in the economy as a period when the economy is adjusting to a savings/consumption ratio that is not influenced by central bank money printing, thus the ratio tends to increase on the consumption side and decline on the savings side--since the Fed tends to pump money into the capital goods sector in general (i.e. capital goods versus the consumption side). That's why the capital good sector tends to get hit so hard during the downturn, the declines in housing, construction, autos etc.--all goods that are heavily financed by bank credit.

However, there are even distinctions in these broad-based categories. Which brings me to an interesting piece of data reported by the Association for Financial Professionals in their weekly report on the economy, EconWatch.

EconWatch dug deep into last weeks auto sales report and found this nugget:

Vehicle sales dropped below the 10 million mark (SAAR) in January for the 1st time since 1982. A closer look at the data shows that fleet sales dropped sharply as they represented only 12% of total sales versus 22% in December. Sales to consumers actually grew slightly during the month.

This data fits in nicely with my Consumption versus Capital Goods watch. Although, I generally lump auto sales as a capital good in that autos last over many years, it's understandable how, in a way, a fleet purchase is more of an intense capital good since it is mostly used by business in their efforts to create other goods [Thus, in many cases, it is more of a capital good than an auto purchased by a consumer--because it will take even longer for its value to reach a consumer, say a car fleet owned by a tool and dye manufacturer] , while a consumer auto purchase, while providing value over years, has generally speaking reached the final consumer.

Thus, one would expect fleet sales generally to be weaker than general auto sales, and, viola, as EconWatch reports, such was the case.

A New Low for Bush-Paulson: Kiting Checks

The Treasury has already allocated all the $350 billion that Congress authorized for the first half of its bailout program, NYT reports. They have no money left. So how exactly is the Treasury going to fund its latest bailout, $ 6 billion to GMAC?

NYT again:

...even though the Treasury Department has not yet requested the second half of the money, officials said they could provide the financing to GMAC because they have not actually used all of the money allocated for recapitalizing banks.

As Henry Blodgett points out :

This sounds equivalent to writing $1,100 of checks on a checking account with $1,000 in it because only $900 of the checks have already been cashed. In the real world, this is called "check kiting," and it's illegal.

And, keep in mind, as Robert Reich detailed, this is all for Bush to save face and keep the Big Three from failing on his watch, so that the problem is passed on to Obama.

Check kiting to save face, this will really help GW with historians.

Robert Reich Breaksdown the Auto Bailout: Loopholes and All

RR is apparently trying to pull a GW and go out the year 2008 on a high note.

He has ditched his Keynesian propoganda campaign for at least one post, and puts together the best analysis of what's behind the George Bush auto bailout that I have come across. It's very much worth reading.

The UAW Wants This Bailout Money, Real Bad

Like I have said from the beginning, this talk of a bailout of the big three automakers is in significant part a bailout of the United Auto Workers (That's why the Democrats are behind it). The big three in bankruptcy would not stop producing cars, they would simply become more efficient, which would include lowering wages for auto workers, resulting in much less power for the UAW.

That's why this bailout versus bankruptcy is so important to the UAW. Here's their latest statement issued today:

The UAW is deeply disappointed that Senate Republicans have blocked the bipartisan legislation that was agreed to by President Bush and congressional Democrats.

In an effort to work out a compromise, the UAW was prepared to agree that any restructuring plan should ensure that the wages and benefits of workers at the domestic automakers should be competitive with those paid by the foreign transplants. But we also recognized that this would take time to work out and implement, using attrition programs to allow the companies to hire new workers at the lower wage and benefit rates. Unfortunately, Senate Republicans insisted that this had to be accomplished by an arbitrary deadline. This arbitrary requirement was not imposed on any other stakeholder groups. Thus, the UAW believed this was a blatant attempt to make workers shoulder the lion's share of the costs of any restructuring plan.

The UAW has recognized from the beginning that all stakeholders will be required to make sacrifices to ensure the viability of the domestic auto companies. We were prepared to do our part. But we could not accept the GOP demands to treat workers differently from all other stakeholders, and to subject them to different requirements than other groups.

Now that the legislation has been blocked by Senate Republicans, the UAW calls on Secretary Paulson to use his authority to provide TARP funds to provide emergency assistance to the domestic auto companies. The ball is squarely in his court. He has the power to prevent the imminent collapse of the companies, and the disastrous consequences that will follow for millions of retirees and workers and for the economy of our entire nation.

The UAW wants the bailout money. They want it now and on their terms. The most recent Senate bill failed after talks broke down over the refusal of the United Auto Workers union to meet Republican demands for aggressive wage reductions.

Inhofe on the Treasury Possibly Using Bailout Funds for Auto Industry: "I Have Never Seen Anything Like This"

The current philosophy of the Bush White House is that if you can't get something passed through Congress do it any way.

Today, Senator James Inhofe R-Oklahoma issued a statement in response to the White House's announcement that they are considering using the remaining $15 billion of the first $350 billion of the financial bailout legislation Congress passed earlier this year to bailout the Big Three automakers.

"This morning the White House announced that some of the $700 billion bailout of the financial system might be used for the auto companies," Senator Inhofe said. "As the Bush administration changes course once again, it is becoming clear to me that Washington, D.C. might be completely out of control.

"How have we come to a point that Congress-the institution that represents the will of the American people-has handed over so much money and authority to the Treasury Secretary that, if the democratic process fails to achieve a certain desired outcome, the outcome is simply ignored? The stated purpose of $700 billion bank bailout was to rescue us from a catastrophic breakdown of the financial system. Now we're told that the money might be used to bailout the auto companies because legislating their multi-billion dollar gift from the U.S. taxpayer might come with conditions that were too inconvenient for interested parties. I've been a U.S. Senator for some time, and I have never seen anything like this.

The Booming Auto Industry (For Real), That Is, The Bailout Is About Bailing Out Auto Unions

If you don't have the albatross of above market union wages and legacy payments, you can do pretty well in the auto industry. Mark Perry writes:

On Monday, Honda celebrated the opening of its $550-million, nonunion plant in Greensburg, Indiana, capable of producing 200,000 vehicles annually, highlighting the contrast between the healthy Asian automaker and its ailing domestic rivals.

And even though the starting hourly wage at the plant is $18.41, or roughly $10 less than an average Detroit Three worker, demand for these jobs was off the charts. When Honda announced it was hiring 900 employees, 33,000 people applied. Honda eventually plans to employ about 2,000 at the plant, which started production in October.

Here's Perry on union versus non-union wages :

For a time, unionized workers can enjoy higher-than-market compensation, and job security. To the extent that union labor costs are higher and therefore the profits of unionized firms are lower (GM, Ford), investment expenditures will flow into the nonunion sector (Toyota, Honda, Nissan, see CD post on Honda's new Indiana plant) and away from unionized firms. As a result, the growth of productivity and employment, as well as market share, will tend to lag in the unionized sector (from 90% market share in the 1960s for the Big 3, to 47% today).

The larger the wage premium of unionized firms and the greater the guarantees of job stability, the greater the incentive to shift production toward nonunion operations (Honda, Toyota). Empirical evidence shows that industries and companies with the largest union wage premiums and greatest guarantees of job stability (Big Three) are precisely the industries and companies with the largest declines in the employment of unionized workers.

Bottom Line: Gains in the short run of higher-than-market wages and benefits, and greater job security, eventually undermine the companies employing unionized workers, destroying hundreds of thousands of union jobs in the long run (172,000 UAW jobs lost at GM alone). The more success a union has in the short-run, the greater the failure in the long run. The discipline of the market eventually dominates and prevails.

The Auto Industry Bailout...

is a road we have been down before. It was a mistake in the past and is a mistake now. Richard Ebeling explains.

Obama May Name Auto Czar

The socialism begins.

Barack Obama wants to give Detroit automakers $50 billion, but with Big Time socialist strings.

The latest news out of Detroit is that Obama may name an "Auto Czar" to oversee the industry. What would the czar oversee? It's not pretty.

Robert Snell and David Shepardson at The Detroit News speculate about the details:

A car czar could serve as a point person for federal agencies that deal with automakers, such as the Treasury, the Labor and Transportation departments, and the Environmental Protection Agency.

Creeping socialism my friends.

Behind Bush's New Free Market Religion When It Comes To the Auto Industry

So why has the Bush Administration and Henry Paulson suddenly found Free Market religion when it comes to auto industry and is dragging its feet on an auto industry bailout?

The auto industry via the United Auto Workers union is a tool of the Democrats, not the Republicans. The blatant hypocrisy in this "bailout" never fails to amaze.

Bloomberg with the ugly details:

President-elect Barack Obama is pushing Congress this year to approve as much as $50 billion to save cash-starved U.S. automakers and appoint a czar or board to oversee the companies, a move that would require President George W. Bush's support, people familiar with the matter said...Still, the Bush administration so far has opposed bailing out the carmakers...``The intent of the TARP was to deal with the financial industry,'' Treasury Secretary Henry Paulson, who is administering the program, said yesterday in a press conference. ``My focus is on the financial sector, getting credit going, getting lending going.''

Anderson: Foreign Owned Auto Plants Based in the US Will Be Smashed Beyond Recognition

Bill Anderson seems to have the best pulse on the specifics of what the Obama Adminstraton will be all about. He writes:

As we look at the upcoming Obama administration, it will do us well to remember that the main power groups of the Democratic Party which will call the shots for at least the next four years, and more likely the next 40, include the following: Labor unions, environmentalists, the American Trial Lawyers Association, the hardcore Religious Left, and ACORN. All of these groups are united in their visceral hatred for free markets and for personal liberty in general (except in areas of sexual freedom and in the "freedom" to kill unborn children).

These groups will be unchecked in their Grand Vision that they intend to impose on the rest of us. Not only will Obama and Congress make sure that the Big Three automakers survive in some form, but their political allies will make sure that the other auto plants in this country owned by foreign subsidiaries are smashed beyond recognition.

An Auto Industry CEO On The Current State of The Detroit Auto Industry

"Think of the car business today as being a singles bar, one hour before closing."