Saturday, December 13, 2008

A Deal With the Devil

Congress set up criteria to bail out the auto industry and the unions said no. They were unwilling to agree to a date certain where they would reduce their pay to what foreign companies operating in the US are paying their workers. The union seemed to be gambling that Bush would once again ignore capitalist principles and use TARP funds to keep the companies alive, and unfortunately, I think they are right.

In the press release the union president said those evil right wing Senate Republicans wanted the workers to shoulder the entire burden. This would be a reasonable complaint if only it were true. Actually the Republican plan required that all unsecured creditors reduce the amount of their debt by two thirds, costing several billions of dollars and replacing it with equity. If they didn't agree by March 15, the companies would declare bankruptcy (in which case the creditors would get far less, if anything). It sounds like they were shouldering part of the burden to me. The equity holders would get diluted beyond recognition, all but wiped out, because of the plan to replace debt with equity. That sounds like they would have done their share.

OK..So the UAW president lied. Still I have a problem with congress financing any bailout, but the argument may be correct that a chapter 11 bankrupcy is not practical. The argument is with the complexities involved at GM Chrysler and Ford, bankruptcy as a viable option that could create healthy companies (the normal procedure) is all but impossible. It would result in chapter 7 liquidation. Plan B (aka the Republican plan) has congress acting like a bankruptcy judge, and therefore it could work.

But Bush's weakness will undermine that plan getting passed. Unions are betting he will fund the autos with TARP, and the money will flow from the government through the companies to the union. Of course in two or three years and 40 or so billion later everyone will return to the scene of the crime..and they will go bankrupt.

This brings up an interesting question. Do the workers in Detroit live better than those in Mississippi (Mercedes plant) even though Detroit earns 50% more money? The answer is no. Because the cost of living is so much higher in Michigan, their workers probably don't live as well.
The sales tax, state income tax, state corporate taxes that pass through to consumers, school taxes, fees etc. are all higher in the north. People pay more taxes, pay more for consumer goods (because of taxes and regulations foisted upon them), pay more for services (because the service providers pay more taxes), and pay more for health insurance (because of mandates, regulations and their support for trial lawyers).

The point is, if government were more responsible and spent less, a 50% reduction in wages might be acceptable. But under present conditions, given the same amount of money, the lifestyle in Michigan is far inferior to that in Mississippi. This is because long ago the unions chose to throw in with the socialists/ Democrats, and like any deal with the devil, it looked great, had momentary benefits, but now the devil is calling in his note.

Marx and Lenin said the workers should revolt, they have nothing to lose but their chains, and I agree. But the revolt should be against a government that uses its power to tax unconscionably, pick and choose winners and losers, use massive amounts of money attempting to stop the creative destruction of capitalism, thereby inflicting far more pain than would otherwise occur, and in the process squanders the fruit from the labor of millions.

An addendum..Ben Stein weighed in on TV today and said those of us opposed to a bailout are un-American..This from a would be conservative who gave Al Franken money for his senate campaign (now that's really un-American), whose father was an economist but he can not even understand supply side economics. I kid you not. With every financial crisis, or crisis of any sort, he advocates raising taxes, buying into the Democratic insanity that money can be extracted from the economy without any effect. Earth to Ben: The life blood of an economy is capital...raising taxes is no different than bleeding a sick patient. Every economy in every part of the world proved this. It is not only that he is wrong, but he is arrogant and has now slandered those of us who disagree.

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