Taxpayers Will Lose Money on GM Investment

... calculate what it would have cost to NOT rescue the auto industry...

Below are comments on the following article.

GM Share Price Needs to Triple for Taxpayers to Beak Even by Paul Eisenstein

The good news for shareholders is that General Motors shares are on a rise, gaining more than 25% in value so far this year – and reaching a $37.45 high during Wednesday trading before settling back a bit.

Good news, perhaps, but not good enough for U.S. taxpayers who received 61% of GM’s equity in exchange for a $50 billion bailout linked to the maker’s 2009 bankruptcy. While the increase is likely to benefit the U.S. Treasury as it continues selling down its stake in the Detroit maker, the latest report by a special federal watchdog cautions that GM shares would have to nearly triple – to $95.51 a share – for the government to break even. “There’s no question that Treasury, the taxpayers, are going to lose money on the GM investment,” Special Inspector General Christy Romero told the Associated Press.

GM received $49.5 billion to complete its restructuring, a bailout initiated by former President George W. Bush in 2008 and completed by his successor, Barack Obama, in 2009 as the maker exited a managed bankruptcy. The White House also approved a bailout for GM’s crosstown rival, Chrysler, but only after Italian automaker Fiat stepped in and effectively assumed control.

The White House has said repeatedly that it has no interest in being in the car business. And it began selling down its stake in November 2010 when GM staged its initial public offering. Priced at $33 a share, it reduced the Treasury’s stake to 33%.

Late last year, the government announced plans to sell off the remaining stock by April of 2014. That followed heavy pressure on the Obama Administration during the 2012 presidential campaign during which Republican candidate Mitt Romney said he would sell off the remaining stock immediately. Ironically, that would have been at a low point when GM was trading at barely $18 a share and such a move might have pushed losses on the sale to nearly $20 billion. In recent months, as GM stock has rebounded, pushing part the November 2010 IPO price, the Treasury has accelerated its sell-off.

While some observers had worried that could actually hurt the stock price GM has been benefiting from other positive factors, such as the rebounding U.S. automotive market – which is now approaching sales levels not seen since 2007. GM also got a psychological boost with its recent return to the closely followed S&P 500 stock index. Because many funds are required to buy shares covered by the index, analysts believe that has boosted demand for the automaker’s stock, driving up its price.

As of June 6, the latest date covered by the Special Inspector General’s report, Washington still held 189 million shares of GM, or 14% of the outstanding stock. To cover the outstanding balance as of that date – a total of $18.1 billion, the government would need a $95.51 share price, the report noted. Were the stock to be sold at the stock price at that point of $36.61 a share, it would still lose about $11.2 billion on the bailout.  The escalating price of GM stock could further reduce the loss but there are no indications that GM stock could come close to the point of a break-even, industry analysts warn.

The other maker to receive a bailout, Chrysler, has repeatedly said that it paid off the government in full for its rescue. That is partially true. The “new” Chrysler that emerged from Chapter 11 has paid off the loan it received after bankruptcy. But about $2.9 billion that was loaned to Chrysler before its bankruptcy filing was assigned to the “old” Chrysler and written off as a loss.

Ruggles writes: In terms of the actual funds advanced, there is no way taxpayers break even on the GM investment.... at least on the surface. Now if we could calculate what it would have cost to NOT rescue the auto industry we could compare that number with what will be lost when taxpayers sell their last share of GM stock. A paragraph from WIKI follows:

"In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would be had by taking the second best choice available. "The New Oxford American Dictionary defines it as "the loss of potential gain from other alternatives when one alternative is chosen". Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice."

Another way to look at it? The choice between "moral hazard" and Depression. Which do you choose? GM CEO Dan Ackerson has been pushing the government to sell its stock more quickly.  Why?  While the government still owns stock GM has a cap on executive compensation.  Danny wants a raise.

Mack Stamping, or a Tale of Detroit's Decline

...[Mack] was a six-story structure [from] 1916...

Detroit is in bankruptcy for three reasons. One is that a city is a fixed cost enterprise, and so adjusting to a sharp drop in revenue is hard to impossible. The second is that Detroit really was the Motor City, but by the 1950s was suffering from the common fate of manufacturing, where as a general rule productivity increases outstrip the growth of demand. The third is that Detroit suffered from the disadvantage of being a first mover: the layout and location of factories reflected the environment of the 1910s and 1920s. Ford Motor Company literally outgrew Detroit, as it moved first from the Piquette Plant to Highland Park in 1910. It began work on its Dearborn Rouge complex in 1917. By the late 1920s it no longer operated inside the city [though in fact Highland Park was itself a separate city, albeit entirely contained within the boundaries of Detroit].

Chrysler's Mack Avenue stamping plant, where I worked during the summers of 1972 and 1973, is a good example of this process. The plant itself was a six-story structure that began as the Michigan Stamping in 1916, making metal and welded assemblies for multiple customers. The facility was bought by Briggs Manufacturing in 1920, in time to catch the rise of enclosed steel bodies. It became a major supplier to Chrysler, which didn't make its first car until 1925. Eventually – in 1953 – Chrysler purchased the facility. (In this Chrysler was fairly late to the game, as GM first purchased a stake in Fisher Body in 1916, and became a full-fledged internal division in 1926.) In other words, by the time I worked there, the plant was already 50+ years old. In my recollection, production only took place on the bottom two floors, while the top two floors couldn't be used; the floors in between were used to store inventory. Production required hauling material up and down freight elevators. Meanwhile, the plant was surrounded by residences and other factories; there was no open land.

http://www.allpar.com/corporate/factories/mack-avenue-engine.html
http://www.allpar.com/corporate/factories/briggs.html

 

Productivity was low not because of unions (though jurisdictional fights were a pain, foreman weren't supposed to turn on and off machines, that was reserved for millwrights). It was simply ancient technology in an ancient building. Presses for large pieces required four men; two would manhandle sheet metal into the die and get it seated properly, two more would pry it loose and put it on a table or conveyor for the next press. For a piece with a lot of curves such as a station wagon roof, my recollection is that there could be as many as 7 presses. Only in 1974 did the company begin trying to use mechanical handlers, suction cups on arms that would slide in, grab a part, and pull it out; by the end of the summer and my return to school, none of them worked reliably. In contrast, today such body panels are made in a single automatic transfer press turning out many, many more parts per hour, attended by only one or two people instead of 29 (28 on the presses, plus a foreman). Higher quality sheet metal for stampings, decades of learning how to pick up and move parts without scratching surfaces, and improvements in press design and die design all contributed. To make matters worse, the layout meant the giant machines were in the middle of the plant, whereas the road access – the shipping docks – were at the end, hundreds of feet away. (The middle of the plant had rail access, but while in the 1970s steel still came in by rail, parts were shipped out by truck.)

For more on stamping plants, go HERE thanks to Sam Ronald

Over time the industry shed thousands of jobs – though some were added back as the market grew and as first emissions and safety requirements, and then consumer demand, led to far more complicated vehicles: air conditioning, power windows, catalytic converters, automatic transmissions, airbags and more. However, that didn't benefit Detroit. Already by the 1970s most of the output of Mack Stamping was sent outside the city – the only assembly plant was Jefferson Avenue. But Chrysler's assembly plants themselves were old. When capacity was added in the US and Canada, new plants reflected different design and manufacturing principles. First, plants were on one level – that transition was already underway by the 1920s as machines with individual electric motors displaced belts pulling power off of overhead shafts. With that the efficiency of a multi-story buidling vanished. In addition, new plants had truck access along their length, and ready access to one of the major interstates. Now Mack Stamping's location wasn't bad as it was only a mile from an entrance to I-94. But many other of Detroit's plants reflected not only the location of rail lines but also the old trolley system – and of course therefore lacked parking.

So as the demand for cars expanded following World War II, and as Studebaker, Packard and other firms shut their doors, the Big Three had to add assembly plants. For that however they needed 1,000-acre sites, for one-floor buildings with more elaborate foundations to take heavier machines, and with room for trucks to maneuver along the full length of the plant, a plant made larger with an integrated stamping plant. Existing plants couldn't be torn down, their footprint was too small and they were often locked in urban streets. Vacant land in such quantity simply didn't exist inside the city. Jobs (and the tax base) moved to the suburbs and further afield.

By 1960, the population was already falling. (The graph is from a blog by Thomas Sugrue.) But people didn't leave in a convenient fashion; while some black neighborhoods had been severed to make way for expressways in the 1950s, Detroit remained a city of multiple small communities. The city simply became less dense. That meant that the per person cost of providing schools, police and fire protection rose rather than fell, because nighborhood schools, fire stations and police precincts couldn't be closed. Fewer jobs meant lower revenue per person. And neither the state nor the Federal government were willing to provide subsidies from stopping the scissors from eventually cutting the city's jugular.

Yes, there was corruption. Is there a big city for which that was not the case? Yes, politicians were short-sighted. No surprise there, either. Yes, the Big Three were poorly managed, and stuck in a strategic position thanks to the direct and indirect subsidies to energy that meant these companies had no small cars when the first and second oil crises hit. Yes, quality was abyssmal (though in the midwest Japanese cars rusted out instantly, one reason market share in the region remained low). That however was an issue of management – at Mack Stamping I was required to hit volume targets, even if every single part was scrap because of flaws in design and machine maintenance. That wasn't the UAW's fault, and until the 1970s the premium over other areas of manufacturing was minimal. Nor was it their fault that they didn't die according to the 1950s pension schedule, but the Detroit Three funded pensions as though they would. Then there's healthcare, and while their benefits were gold-plated, the cost was driven by defects in the US healthcare system, not union contracts.

New entry – first Japanese firms, and subsequently German and Korean – accentuated the pace of exit from Detroit. That wasn't the union's fault, though politicians – in this case Ronald Reagan with his Voluntary Export Restraint – did encourage the Japanese to set up shop here, and adhered to a strong dollar policy that made imports attractive. Race was a contributing factor, as Thomas Sugrue argues – see this interview in Historically Speaking drawn from his fine book, The Origins of the Urban Crisis. But these were not what led to Detroit's downfall, nor was it anything recent – not post-1990, much less post-2007. Instead it was the scissor of fixed costs and falling revenue due to long-run industrial change.

Mike Smitka

A tongue-in-cheek blog post on air conditioning as history's most important invention did suggest one more factor: in the early 20th century living in the South was most unpleasant for many months of the year. (The Alleghanies are sprinkled with ghost towns that functioned as resorts well into the 20th century. A few, such as the Greenbrier, survived the transition.) Improved transportation made possible "snowbirds," and air conditioning made it possible for northerners to conceive of living in the South year-round. Surely without air conditioning BMW would not have located in South Carolina or Mercedes in Alabama, while many more Detroiters would have retired in situ. Ironically, the first use of air conditioning outside of industry was at the Hudson Department Store in downtown Detroit in 1924.

What Does Mullaly Do?

Guest Blogger Blake Grady, edited from April 30, 2013 post on the Econ 244 site

For those of us who do not have much of a business or even economics background, it is difficult to truly understand how large corporations work. One may not truly know the answer to basic questions such as: what does a CEO actually do on a day to day basis? Or: how do meetings of the board of directors work? These questions become even more difficult to answer when dealing with massive - and thus complicated - corporations such as Ford or General Motors.

One of the big takeaways, as I see it, from Bill Vlasic’s Once Upon a Car, is the massive effect a CEO is capable of having. Given my lack of business experience, it was difficult before reading the book to grasp how a CEO is able to run a company straight into the ground – or save it. Through reading about Alan Mulally at Ford, and then talking with current Ford executives in Detroit (as well as Mr. Vlasic) one learns of a CEO's responsibilities and their potential impact on a company. Many of the qualities a CEO must have, at least in a time of crisis, are on display in comparing Mulally to Richard Wagoner. This ranges from the ability to motivate people and to put one's ego in check in order to grasp a situation. In short, Once Upon a Car is a book about competence and incompetence in running a business, focused on one industry.

An interesting side-story, which occurs towards the end of the book, revolves around Sergio Marchionne. Marchionne clearly has a very different style from Mulally, however he also seems to be effective as CEO. Perhaps it is a relentless drive towards accomplishing a concrete goal, and an ability to convince other people to also want to accomplish that goal, that links the two men.

The Prof poses additional questions:

1. is the CEO in a turnaround situation is the best person for normal times?
2. would Mullaly have been able to do anything at GM? he had absolute support from the board of directors (Bill Ford) and a coterie of exceptional senior managers (Lewis Booth as CFO, Mark Fields in several roles) plus there was a sense of crisis and a restructuring in already progress (the “Way Forward”) when he become CEO. At GM the Board was not united, there was no corporate-wide sense of crisis, and at least one key individual (the CFO) could provide neither a clear and timely financial overview of the company, nor a baseline against which to construct business plans.
3. the decision to mortgage the company was made before Mullaly arrived; absent that, Vlasic suggests Ford would not have been able to stave off bankruptcy

Let’s rephrase this with the jargon of formal logic: something can be necessary but not sufficient. We’re attracted to personalities, we’ve been imbued with the idea that leadership matters. I’ll accept the premise that Mullaly (or someone similar) was necessary. (If I wanted to be a devil’s advocate I’d argue that what really mattered was splitting the CEO and the Chairman function in two, but I personally believe that was necessary but not sufficient.)

However, I do argue that Ford was ready for someone like him. GM wasn’t. And because it was bereft of new product, Chrysler was beyond saving – indeed people were jumping ship long before bankruptcy. Except ... Chrysler survived post-bankruptcy long enough to see decent RAM sales and the arrival of new product, and while today at GM the top couple people may be clueless, they're at least forcing lower-level people to make decisions. A standard quip in Detroit is that GM had the stupidest group of bright people you'll ever find – individually brilliant, collectively dysfunctional. Perhaps that's no longer the case.

Suppliers Constrain Output

By Alisa Priddle, Detroit Free Press Business Writer excerpted by David Ruggles from Could automotive supply chain snap?, June 16, 2013

A combination of rebounding sales and an unprecedented number of new models in the works has stretched the auto parts supply chain so taut that the entire industry is holding its collective breath that it does not snap and jeopardize the recovery. .... “Everyone has parts shortages,” said Carla Bailo, who heads Nissan Americas’ research and development in Farmington Hills. “The supply chain is one of our biggest threats. Everyone cut back and is now ramping up. We can’t get up to speed as quickly as in the past.”

During the downturn, suppliers consolidated operations — closing plants, laying off workers and reducing capacity by as much as 30%, said Kim Korth, president of IRN, a Grand Rapids consulting firm that works with suppliers. Now a smaller number of suppliers with fewer facilities and bodies is struggling to handle a 22% rebound in the auto industry. … “We’re not seeing lines shut down, but programs are being delayed,” Korth said. “We anticipate periodic disruptions due to material shortages, quality issues and troubled suppliers.”

Suppliers have always been cautious about increasing capacity in the boom-and-bust auto industry. This time, however, there’s reluctance from companies to reinvest that have achieved a lower break-even and are now enjoying profits. .... “It’s tough to increase bottom lines,” said Roland Zitt, president of Mahle Industries in Novi, which closed powertrain components plants during the recession and reduced costs. “We won’t be a bottleneck but also don’t have to be at the leading edge increasing capacity.” ….

“We’re meeting weekly,” Joe Hinrichs, Ford president of the Americas, said of his purchasing staff that works with suppliers. Ford has been adding shifts at plants, increasing capacity by 400,000 vehicles last year and preparing to add another 200,000 this year because sales are hot.

…. The annual “Car Wars” report by Bank of America Merrill Lynch says automakers are launching new models faster. After a decade of averaging 37 vehicle launches a year in the U.S., the rate is forecast to accelerate to 44 a year for the next four model years.
Globally, Michael Robinet, managing director for IHS Automotive Consulting, forecasts 500 vehicle launches from 2012 to 2016, or about 135 a year compared with 100 a year in the past and only 85 a year in 2010 and 2011.

.… With 40% of vehicles in North America being built in plants running with three crews or shifts, there are limited options if there is a problem, Robinet said. “There is not a lot of slack in the system.” … Jeena Patel, a lawyer with Warner, Norcross & Judd of Southfield, said suppliers are trying to meet contracts with minimum volumes at a time when no one thought to negotiate maximum volumes or other terms to protect them against the demands they now face. ... Korth knows of suppliers being asked to increase volume by 20,000 units a month, and they are unable to do it….

Detroit and New Orleans

Detroit’s Recovery

Edited from a May 14th, 2013 post by Marybeth Benjamin on the Econ 244 web site

The eye opening drive through the city of Detroit during our weeklong trip perfectly showcased the devastation and the challenges that the city faces. The trip was particularly poignant for me because of the striking similarities between my city, New Orleans, and Detroit.

I saw the beautiful neighborhood of Indian Village, well-maintained mansion after mansion, bordered by crumbling buildings and abandoned homes. Everywhere I looked outside of such intact neighborhoods I saw abandoned street blocks, some with only one house in livable condition. It reminded me of the moment I returned home to New Orleans a few months after Hurricane Katrina. It devastated the city, but disproportionately affected some of the poorer areas.

The similarities did not stop there: During the last decade following hurricane Katrina, the population in New Orleans decreased by almost 30%, which parallels Detroit’s 25% population decline in the past 10 years.

After viewing the city and the extent of the decline, I couldn’t help but wonder if Detroit will ever make a full recovery some day.

Oliver Liu added on May 14, 2013 that Detroit will never return to its heyday. At the Detroit Institute of Arts in the exhibition Motor City Muse: Detroit Photographs, Then and Now there were exercises in rephotography; pictures that showed the city in the mid 20th century bustling and pictures just recently taken of the same places showed just a shadow of past activity. Over time more mechanization will take place in factories and I doubt the population of the city will ever approach peak levels, which is a real problem as the city which can’t pay its debt and has large pension obligations to retired public servants.

"G" Jeong commented on May 14, 2013 that as per class discussions during our time in the city, the decline in Detroit was not sudden. It took a long time for Detroit to become a “devastated” city. Remembering what I saw from DIA, I also agree with Oliver and Professor Smitka that it is not possible for Detroit to recover unless something happens (government involvement?). By recovery, I meant it will be extremely difficult for Detroit to go back to its 1 million population days [much less its peak of nearly 2 million].

the prof wrote on May 15, 2013 that a city has tremendous fixed costs. In addition, the down cycle was not governed by any local planning, so no neighborhood in Detroit is totally gone. As a result, it’s hard to close down police and fire stations, or elementary schools, because they need to be close to where people live.

On top of that Detroit has decades of corrupt government – Louisiana doesn’t exactly have a reputation for clean government, either, but Detroit is exceptional, with the previous mayor and various close associates in prison, or heading that way. Tens if not hundreds of millions were embezzled, and (while not necessarily due to corruption) politicians frittered away lots more on projects that with hindsight proved inappropriate to the city’s needs.

Politically the state of Michigan doesn’t want to help Detroit (and is itself hurting), and the Federal government is nowhere to be seen. A slow disaster does not qualify for FEMA assistance. There’s no money to tear down the odd abandoned house in an otherwise intact neighborhood, and that makes it harder for adjacent houses to avoid blight – they lose their resale value. Teachers can’t be paid, with the connivance of city officials the warehouse that’s supposed to hold books and supplies is empty, and with the collapse of employment families are unstable. Kids suffer, through no fault of their own.

Cruise the city and count the grocery stores. It's not hard – in many neighborhoods there are none. For those interested, read a new book (2013), Detroit: An American Autopsy by Charlie LeDuff. It’s a riveting read, but I didn’t pick it up until long after I ordered books for the term.

Paul kuveke wrote on May 15, 2013 that maybe the city of Detroit should not spend resources trying to lower its fixed costs but rather try to draw people back into the city. Detroit has a horrible reputation throughout the country (on YouTube "we’re not detroit" is a popular phrase: watch this example). While Detroit was a lot better than what I’d heard, it's difficult to counter the perception of those who've never visited. It doesn’t help that for the past few years Detroit has ranked in the top 3 U.S. cities for violent crime.

On May 17, 2013 Tyler Kaelin wrote that he agrees with Paul, Detroit has some wonderful things to offer, but it will never return to its former glory until it can escape its less then attractive past. The auto industry hurt Detroit in more than one way in this regard. People see the Detroit 3 as an extension of Detroit itself. At the congressional meetings when people became angry and frustrated with the Detroit 3, they were becoming angry at Detroit by extension.

Midyear (Un)Employment: Stumbling

click on graphs to enlarge

Headlines are trumpeting the latest month's job gains, based on the Current Employment Survey. Let's not get overly excited. I track employment, not unemployment, and subtract the number on involuntary short hours. I also use as my base the expected number of employed, corrected for population structure (e.g., the aging of the large baby boom cohort). Furthermore, I use the Current Population Survey. Details follow. But first, the automotive sector, which continues to add jobs at a faster rate than the economy as a whole.

The auto industry is doing better than the economy as a whole, both in manufacturing and on the retail side. In other words, the share of the auto industry in total jobs is rising. While the economy as a whole added 160,000 jobs in June, the auto sector added 13,500 jobs; under these metrics, the share of auto sector jobs has gradually climbed from 1.6% to 1.8%. However, that remains well below the 2.3% share of 1999.

The monthly Current Employment Survey is the data source. Unfortunately, it provides no breakdown between vehicle assembly and parts manufacturing, but we do have data on automotive manufacturing (parts & assembly), dealerships, and total retail including auto parts. All three show steady gains. In the process better matching supply and demand in NAFTA, Japanese, German and Korean firms are all adding capacity. To give a purely domestic side, Ford is expanding F-150 production, adding a shift in Kansas City while preparing to launch the Transit van on KC's second assembly line. (I was in the KC plant as well as the Rouge in Dearborn – Ford's two F-150 plants – this spring.) Some of this will be replacing imports. Even when that capacity will go into Mexico, it those won't detract from assembly jobs and will add to parts employment in the US. In other words, the outlook is for continued gains.

The picture for the economy as a whole is less reassuring. While the US added 160,000 jobs in June, the number of people working short hours rose by 322,000. So this past month we actually saw the number of full-time jobs fall by 158,000. Furthermore, the economy needs to add 67,000 jobs a month just to keep up with population growth. (This number is adjusted for population aging – the "boomers" are gradually retiring. For details, see this web site. ) While we've added a lot of jobs since the recession ended, and in most months have added more than the requisite 67K break-even level, the moving average of net job creation is now approaching zero.

Things look slightly better this past month if we look only at employment, and don't factor in people on short hours. Nevertheless, the basic picture remains unchanged; for many months the number of short hours fell sharply. So on balance the bottom line doesn't differ by much, particularly when compared against the total number of unemployed.

Two graphs on that. First, I have the "total pain" measure (formally, BLS's U-6 measure);

it remains shockingly high, still well above the pre-Great-Recession peak [though data only go back to 1994]. Second, there's long-term unemployment: the number out of work 27 weeks or more remains the level of the Volcker-Reagan recession of the early 1980s.

The data also show no evidence of any long-term structural shift towards a higher base. Of course for those in the auto industry, well, it's hard to keep up car payments if you've been out of work for over 6 months.

The government sector isn't helping. The sequester is turning out to be flexible, as seasonal cash balances have been depleted and as Congress has provided agencies with permission to reallocate funds unspent at the line-item level to programs running out of funds. (Of course these funds were unspent because in many cases Congress, in its predilection to micro-manage, gave agencies line items they said they didn't need. In other cases the underlying issue was annual budgets towards "lumpy" expenditures – large-scale maintenance projects – that may only be spent every 3rd year). Of course such accounting games can only go so far; once cash and reallocated funds are used up, the sequester will bite harder. In any case, despite population growth that would normally call for more police, fire departments, and teachers, local government cut 165,000 since January 2011, while state governments cut 119,000 and the Federal government 121,000. In any single month the numbers may not appear large, but given the weak level of job creation in the economy as a whole, this certainly represents a very real drag on growth.

Finally, what of the prognosis? Note that so far data suggest that the impact of the Great Recession has fallen almost entirely on the shoulders of younger and prime-age workers. The following chart illustrates that by looking at employment to population ratios of young, prime-age and older workers. This doesn't mean that lots of older people haven't traded a good full-time job for one at Walmart. However, it's very clear that lots of new college graduates have yet to find what society considers a "proper" job, and the empirical microeconomic evidence suggests that on average, after a couple years in such jobs they never fully recover career-wise: as conditions improve, employers turn first to new school-leavers who've not gone through an extended bout of underemployment. We really need an uptick there.

In any case, when we plot employment growth against the long-term implicit demand of the population for jobs, the news is not good. Yes, we're better off than in early 2009. However, under current trends we won't return to normal for another 5-6 years, even given the retirement of the "boomers" over the next several years. (Notice the black line of "target" employment gradually flattens, and lies far below the blue line that represents a naïve projection on the basis of historic labor force growth in the pre-2007 period.) The Fed may have its pedal to the metal, but while better than the alternative, that's not accomplishing much. However, that's the only policy tool available, since the House can't even pass a budget.

Detroit's Biggest Mistakes

Detroit’s Worst Mistake EverNov. 7, 2012 by Drew Winter in Ward's Automotive Final Inspection

Detroit auto makers wasted at least $50 billion during the past two decades in failed efforts to impress Wall Street and raise their stock prices.

History of Automotive Boondoggles

• Most Over-Hyped Automotive Trends of Past 25 Years
• Ward's 10 Best Engines: Chrysler 3.6L DOHC Pentastar V-6

I recently blogged about some of the auto industry’s biggest boondoggles of the last 25 years and asked readers to contribute their thoughts.

My email bulged with suggestions, especially related to the Detroit Three.

Many mentioned General Motors’ misguided attempt to reinvent itself with Saturn and ill-advised investments inFiat and Saab. Plus, there were vehicles such as the infamous Pontiac Aztek and the entire Hummer brand. Others mentioned questionable adventures at Ford, such as its purchase of Jaguar and Volvo, and numerous bad cars going back to the 1970s including the Pinto subcompact and Mustang II.

Readers also pointed to head scratchers at Chrysler such as the TC by Maserati, a gussied up K-car with a Maserati badge; the odd-looking Plymouth Prowler; and the disastrous “partnership” with Daimler that ended in divorce.

But to ferret out the absolute worst mistakes Detroit has made in recent history, I look to professional automotive observer and author Maryann Keller. She has been enormously influential since the early 1980s. After a 28-year career as one of Wall Street’s top auto analysts she now runs her own company, Maryann Keller & Associates. She is as tough and insightful as ever.

During a recent speech to the Society of Auto Analysts, Keller unleashes her own list of auto industry blunders, and her choices make most of the items above look like minor glitches.

Detroit auto makers wasted at least $50 billion during the past two decades in failed efforts to impress Wall Street and raise their stock prices, she says.

That incredible figure includes stock buybacks, excessive dividends and diversification efforts, all of which could have been spent making better products. GM alone doled out $20 billion from 1986 to 2000 on stock buybacks and actually borrowed money it did not have to pay dividends from 2005 to 2008.

Ford kissed off half the cash it had on hand in 2000 creating a special dividend of $10 per share, Keller says. GM and Ford also wasted billions buying rental-car companies that hid excess production capacity and threw away billions more for e-commerce efforts that looked sexy during the Internet bubble economy but ultimately yielded zip in revenue and profits. Also on her list are the names of financial-services companies, vehicle retailers, recyclers, junkyards and mortgage companies. All were purchased in an effort to add glamour and growth to auto maker bottom lines, but they did neither.

Of course, these strategies did not look quite so boneheaded at the time. In the late 1990s, auto companies were considered old-fashioned. No matter how many vehicles they sold and how much cash they raked in, their stock prices looked weak compared with the soaring value of technology and Internet stocks.

So auto makers tried to redefine themselves as something other than companies that built and sold cars and trucks.

And this was the Detroit Three’s biggest mistake ever: They tried to be something other than vehicle manufacturing companies. When they focused on being banks and mortgage lenders and impressing Wall Street, they took their eye off the ball of their core business. Design faltered, quality slipped and market share skidded. Disaster ensued.

Ford was first to see the error of its ways and avoided bankruptcy. GM and Chrysler were not so lucky.

But as Keller points out, “Wall Street didn’t make these decisions; the CEOs did.”

I currently am testing vehicles for Ward’s 10 Best Engines and as a judge for the North American Car and Truck of the Year awards. Detroit’s new products such as the Cadillac ATS, Ford Fusion and Dodge Dart are terrific. Detroit auto makers clearly have their eye back on the ball. It shows in vehicle sales numbers, on their bottom line and their stock price. Let’s hope they never again try to be something they are not.

dwinter@wardsauto.com

Solyndra Revisited

Original version by Andrew Shipp on the Economics 244 blog, May 15, 2013

In a follow up to the Solyndra case, The House Committee on Oversight and Government Reform took testimony from several high-ranking Fisker Automotive executives. Fisker took $192 million dollars from the Department of Energy and immediately went bankrupt. Republicans are dragging the Obama administration and Democrats across the coals on the Fisker debacle. The republicans hope the failure of the electric auto company will be a beacon of government overspending and make voters return to the Republican ticket in the next election year.

In my opinion, loaning Fisker $192 million dollars was a mistake. Startup auto companies are an extremely volatile financially speaking. In my mind, professional private-equity or venture capital firms should handle the financing of these industries. Now this is not to say the bailout was bad. The support of already existing firms is safe enough to be considered logical while a startup with no prior experience is very illogical.

Source: http://autos.aol.com/article/feds-go-after-fisker-automotive-about-192-million-taxpayer-loan/?ncid=dynaldusauto00000002/

[Continued by Smitka, the prof] We can approach this debate in three ways, One is to look at the history of technology policy in the industry. Another is to look more generally at industrial policy. The third views the issues through the eyes of energy policy. These of course overlap, and not merely because the focus is on the same issue, the government being asked to make good on loan guarantees extended under the American Recovery and Reinvestment Act of 2009.

First, automotive technology policy. The history likely goes back further, but can certainly be traced to the Parternship for a New Generation Vehicle (PNGV) started in 1993 under Bill Clinton and coordinated by the Department of Commerce. After campaigning against PNGV, Bush in fact continued it with better funding as FreedomCar / FreedomFuel, transfering it to the Department of Energy. (Go HERE for a National Academies of Science evaluation of the program.) So the policy behind new energy-related technologies has a long bipartisan history. The brouhaha over Solyndra did however delay loans, with unfortunate side effects, as the policy was in place long enough for start-ups to build their business plans assuming loans would be forthcoming. Given the shoestring provided by venture capital, well, to say these ventures ran out of rope misses the centrality of the loan guarantee program for the provision of working capital.

Side Note: a venture headed a W&L alumnus was caught in this way. Bright Automotive, with solid purchase commitments in place for battery electric delivery vans, needed working capital to start production. Equity (venture) capital covered development costs, but starting production — hiring workers, buying parts — required $200 million, well beyond what such sources could supply. Loans guaranteed by ARRA were to cover that. Bright Automotive was never turned down, instead the DOE delayed again and again, and eventually Bright ran out of cash, even though it had working prototypes and customers who had signed on the dotted line.

Second, industrial policy more generally does a bad job at picking winners, but can be very important at developing common technology that is pre-commercial. For example, developing an aluminum unibody car requires lots of R&D close to the "basic" end of the spectrum – can you form one, can you weld or bond it together, how much does it weigh, can it withstand a crash test. No car company or even aluminum company will fund such a multiyear project. Yet now the results of this PNGV project are in common use – after lots of additional investment in refining engineering tools and figuring out the details of volume projection and assembly. PNGV helped work out enough details to make it clear that some technologies weren't worth pursuing, specifically hydrogen fuel cells. That too was valuable to industry — car companies had no knowledge base for evaluating technologies that involved so many areas of research historically foreign to the industry.

Gas prices first hit $3.00 per gallon in May 2006, and surpassed $4 in June 2008. There were those ignorant with energy markets (they're global, Mr. Boehner!) who intoned "drill baby, drill." But alternative energy policies garnered widespread support, from ethanol to feed-in tariffs for wind and solar power generation. Tar sands and Keystone. And batteries and solar panels. While Mr. Boehner didn't actively support the latter effort, a perusal of his speeches on energy didn't find him speaking against it. So loan guarantees seemed like a good idea, a safe idea — let the market fund the start-up of firms, and then have them compete for loan guarantees once they actually looked like they had a chance of succeeding. Well, gas prices fell and so many firms jumped on the solar panel bandwagon that many have gone under, including the leading Chinese producer, not just Solyndra. But unlike directly funded R&D (FreedomFuel), the results of which aren't newsworthy even when they don't pan out, well, google (or wiki) Solyndra. In effect, the loan guarantees pushed the limits of workable industrial policy. They also suffered from the normal political bias of industrial policy, an infatuation with what is politically salient. Add in the "market-friendly" approach and everyone could join in. Oh, and what happened to ethanol? – the losses there are huge, and that was a Republican administration policy from beginning to end. (Or maybe not an end, the corn lobby has clout.)

Finally, there's energy policy. Compared to tax breaks for energy exploration, and tax breaks for coal and other energy production, and implicity subsidies (grandfathering dirty coal), our military expenditures in the Middle East (surely no threat to the US except as events there affect our cost of drivign) ... and the stupendous amounts to build even a single nuclear power plant, well, we got off cheap with the failures of the loan guarantees for Solyndra and Fisker and A123. See Paul Kuveke's comment below for details.

What will become of BEVs (and solar power)? Cheap energy is an enemy to both. Against all expectations, at least among politicians and casual observers of energy markets such as myself, over the past 5 yeras natural gas in the US and Canada has proved to be abundant and accessible. We bet on lots of energy technologies; one is paying off so richly as to make the others look bad. Does that mean we were wrong to hedge our bets? I think not.

Paul Kuveke wrote on May 15, 2013: The government’s job is to provide infrastructure which no one else will provide. In a sense if the government wants to promote greener technologies it should focus not on the companies that are looking to make the technologies but on facilitating growth through the creation of refueling facilities across the country for greener technologies. [The Prof's logic above is the same: and on conducting pre-commercial R&D.] One example of this was the creation of highways by Eisenhower. The creation of highways (infrastructure) facilitated markets for distance travel and fast food which probably would never have blown up in popularity without the infrastructure in place.

http://priceofoil.org/fossil-fuel-subsidies/

The government spends roughly 10 billion dollars a year on subsidies for fossil fuels most of this being gas and coal. Today natural gas is cheaper than gas and is plentiful. But when President Obama tried to remove subsidies he had almost no success. By moving to greener cars which use a cheaper fuel the government can facilitate consumers moving to greener cars as well. In the long run the government can stop subsidizing gas for transportation because there are alternative fuel sources. [Again, the prof notes that gasoline in the US is undertaxed from the perspective of Europe and Japan...]

Blake Grady commented: It shouldn’t be all that surprising that some of these green companies fail. Companies of this sort do fail all the time, as you mentioned. The question instead, as I see it, is whether the occasional failure of the companies is offset by the benefit produced by all of the other companies which don’t fail. [And The Prof would add, whether we look at these failures without paying attention to the successes.]