The Prius Problem

  I'm a used car salesman. A job does not necessarily define a person, as I am also Principal Clarinetist of the Wyoming Symphony, a Citizen at large member of the City of Boulder Downtown Management Commission, all the while I have degrees from Juilliard and the University of Colorado. I say all that not to down play that my "real job" is that I'm a used car salesman, because frankly I don't believe my profession needs defense. Like all professions there are the good and the bad actors. But I do present the breadth of my professional ties as a preface to this post because it will be obvious to the reader that my interest in the subject goes beyond simple desire for the best interest of our country.  

   My livelihood is directly dependent on the health of the credit markets and the auto industry. While my connection is direct, it should be noted that the jobs of many in our country are only a degree of separation or less from the health of these industries.

   I was opposed to the  economic recovery act of 2008. I was also opposed to the bailouts of individual firms that preceded it, and I saw only folly in the economic stimulus package. Most people can't even remember what happened to their stimulus check except they remember that it didn't solve any of their problems. 

   Perhaps the multiple bailouts forestalled economic tragedy before an election, but to the 6.5% of Americans unemployed and the untold amount that are under-employed our nations financial woes are real and the academic discussion of "it could have been worse" is uninteresting. 

   As congress and our president weigh options for a $25 billion rescue for our automakers, I struggle to see the logic. In defense of congressional democrats as well as the president, the plans do not involve new spending. The democrats want to include the big 3 in the $810 billion package (yes $700 billion is the amount marked for stimulus but the full price tag after pork was $810 billion and the media should not let the public forget it) while the president wants to expedite and re-direct a loan program already approved for auto  industry innovations. 

  However  GM, Ford, and Chrysler do not exclusively make up the American auto industry. Makers like Toyota, Nissan, Honda, Hyundai, and even BMW make plenty of cars right here in America. Walk out to your import right now and check the first digit of the VIN#. If it is not a W, J, 3 or Y, then your X5, Accord or Outback is made right here in the U.S.A. Some have argued that it would be unfair to the employees of those makers to tweak the market in favor of the Detroit boys. They question why these foreign makers who pay good wages can succeed where our domestic brands have failed?  More on that later . . .

 The reason why it is prudent to consider salvation for the big 3 is that the foreign makers rely on the same suppliers and the same basic retail infrastructure. With the failure of the American makers it does put in serious jeopardy the supply lines and sales mechanisms for the entire industry. The ripple effect of unemployment from the assembly line, to the sales floor, to the lunch counter is different than the financial markets in the sheer number of people and their unique unpreparedness for unemployment. Granted there were low level and ancillary jobs lost on wall street, but the majority of people on wall street did have personal saving safety nets. THIS IS A VERY DIFFERENT SCENARIO.

  The American auto industry has one unique problem. GM, Ford and Chrysler's biggest operating problem is legacy. While the leaders of industry have fought to maintain our current private, employer based health care and retirement system it is ironically crushing them. The big 3 are paying through the nose entitlements to people who have not worked a day in 20 years. That is not to forgive management excess and greed, but that is a drop in the bucket compared to legacy entitlements. (Not to mention those entitlements can't keep up with inflation anyway)  The long term fix is to change how we do health care and pension. In the short run, perhaps the best approach for federal intervention is to buy those health care and pension plans. Relieving the operating cost pressure may free up capital for innovation to spark demand for American cars.

  But aside from the political hot potato that would be, we all know that entitlement problem is not the entire problem. The American car companies have a Prius problem. 

   GM had the electric car. Let's assume that it was in fact a financial disaster. Okay fine. Let's further assume that the bigger the vehicle the more profitable it is. The issue is foresight and judgement.  While Honda built the insight, the first mass marketed Hybrid car, they also  built the Ridgeline. Volkswagen introduced the TDI while making a foray into SUV's with the Tourag, and Minivans with the Tiguan. Toyota cornered an entire market with the Prius while competing with the big 3 with models like the Tundra, the Sequoia, and the Highlander. And what did the American makers do? They made their fuel efficient cars bigger and less efficient, and doubled down on SUV's and trucks. Since when does it make business sense to have a less diversified portfolio?  It's not as if they did not have the example of the competition. It's not as if they did not see their market share fall and see who and what was replacing them. The imports where wise, not lucky. Even though fuel was cheap and credit was cheaper, they found market voids and filled them. They invented the alternative fuels market, they put a stranglehold on the efficiency market and just incase the SUV wasn't a fad of cheap oil, they competed with the American's on their own 10 yard line with high quality SUV's and Trucks built by American's in American factories from Mississippi to Kentucky.

   Now that the chickens have  come home to roost, GM is 2 years away from selling their most innovative product. If GM wants cash then fine, but they should use it to put the Volt in showrooms NOW and it needs to be the price of the Prius but they want to sell it for the price of 2! The American car makers failed at a fundamental of business. If your competitor is making money doing something, then do it better and cheaper. With the level of mismanagement it is hard to conclude that giving these firms any money is a good idea.

  So I, like many, struggle. If the government is going to step in, it has to do it now, GM and by extension, Ford, Chrysler as well as the American arms of import makes cannot survive until January, and they will not recover from bankruptcy. Aside from the fact that these companies will find it nearly impossible to raise capital in chapter 11, even if they could, the mass unemployment will make innovation unimportant when there are no customers to buy. After all, the auto industry at the end of the day is primarily in sales. Further as we approach the holiday season which is important for all retailers this uncertainty is causing people to hold their money crippling the broader economy. Even if our nations leaders finally throw up their hands and say that we're going to let the the big 3 fall, that would actually be better for consumer confidence as those who know they will be unemployed will likely spend to make this one last holiday season before the truly hard times hit rememberable for their kids and their families. But instead we wallow in partisanship. Nothing is worse than uncertainty.

    The democrats could wait until January and have it their way which will be too late for not just GM but for Toys R Us, Macy's and every shopping center and municipality that relies on those sales tax dollars across the country. Or they can cave, let the president have it his way and introduce new legislation for industry innovation next session when the man in the White House won't have an itchy veto pen. But as late as November 17th we are stalled in the exact partisan gridlock the American people voted against only 2 weeks ago.

  I am too torn between my personal best interests to decide if bailing out the big 3 is truly in the country's best interest or not, though as stated earlier this is different than wall street and I'm inclined to believe that there is nothing academic about what will happen if even one of the big 3 closes. We know that dealers big and small, franchise and independent, along with your neighborhood mechanic, parts store, and by distant extension perhaps diner and toy store will not be far behind in going under taking irreplaceable jobs with them. 

  Since we have already made so many fiscal mistakes, since we have shown sympathy to the top of the tax bracket at the expense and despite vocal opposition of the bottom, since any misdirection of funds can be corrected through legislation in 2 months. Whereas in these trying times it is more important to get something done than be "right" congress should either pass a bill or stop talking about it. We can't solve all of the auto industries problems with the stroke of a pen, But we can cure the uncertainty that is plaguing our retailers in some short measure and perhaps save their holiday season. With knowing their future perhaps people will even have the piece of mind to buy a ticket to their local orchestra's holiday concert . . .

   The question that needs to be asked from a point of dispassion is, What is the best way to protect American Jobs? The answer is pass legislation now. To the person on the receiving end of the paycheck, it doesn't matter who crafted the policy or what it might do. Our auto makers must solve the Prius problem, the Democrats are right about that, but let's talk about that in January, for now lets take action based on the path of least resistance. Democrats will be behind the wheel soon, if the republicans want to redirect fuel efficiency money, let them. It's a 9 week problem, 9 weeks working class Americans don't have to spare.

  

Comments

[Eric]

Coleman you really need to stop bro, i undersatnd that, the fact fact the of is, you are a man of many words and obvious many predjudice. If you can read your own words clearly then you are not as smart as you think. If i where a english teacher i would give you a D+. I feel, as friend, you rant more then speek or teach your thoughts on subjects. I feel that is what you are trying to convey, more then any, in theses blogs/rants of yours. True they are merley opinions on subjects, that to the common folk are merley that of its own. Please dont forget about the little, people in your world of long dictionary words that people really dont give two squirts or piss about. You really need to come down from your high horse cause it is starting to piss people off. You have terrible gramar with intellectual words.
its just not YOU!

[Eric]

i also dont have the best gramar or vocab but i am one of the little people you forgot about in your rants.

[Shawn Coleman]

Thanks for the comments. After re-reading this post I changed a few words. Brevity is not my strength I realize, but these issues are complex. I'm sure someone with a intellect greater than mine could speak to all the moving parts more succinctly but I do the best with what I've got.

If you can suffer through reading the whole thing however I think you would see that my concern is for the job security of working class people. It would however be disingenuous to not acknowledge that this position is in conflict with fiscal policies I have supported in other posts on this blog as well as in public forums. With that in mind I am never of the illusion that my opinions are gospel, I would be interested in what solutions and alternatives you think would be more appropriate. Dialogue is the only means by which we figure out solutions that work for everybody.

And don't worry there is no word count or grammatical requirements, just speak your mind!

-Cheers!

[Ian]

Eric: I think you need to check your own grammar and spelling man. You can't even understand your first sentence. Shawn's just blogging, so relax.

Shawn: after reading your article I'm not sure what you want the legislation to be. You lost me a couple of times. I guess you don't want a bailout as you had objected to earlier. I got it when you said, "The long term fix is to change how we do health care and pension. In the short run, perhaps the best approach for federal intervention is to buy those health care and pension plans. Relieving the operating cost pressure may free up capital for innovation to spark demand for American cars."

But what is the ideal immediate legislation that you allude to?

[Shawn Coleman]

The legislation I allude to which is the expedited release, and redirection of the 25 billion dollar fuel efficiency money that congress has already approved to be used instead as a bridge loan for immediate operating costs.

The reason I supported that approach is because the President said he would sign that, but would veto using T.A.R.P. funds. I apologize if I gave the impression that I thought this plan would be ideal however.

But it would be expedient, and of course this piece was written before the 14.5 billion redirection of those funds became the policy that congress is currently (12-10-08) considering. It seems as if this current plan has a chance of passing, my hope is that it works, 14.5 billion is a long way from the 34 billion the industry claimed to need. It would be much wiser to give 34 for results, than a conservative 14.5 and end up with failure, but we shall see. To be clear however my basic points where that

1. This as well as the financial market bailouts where not sound policy

and

2. If there is going to be an auto industry bailout, it's more important to do it fast than right, as the best potential for a positive impact on the broader consumer economy is a window that is quickly closing.

As far as any policy to buy the health care and pension plans, I don't know of anyone offering that as an alternative, and it's probably too late now anyway, however the biggest reason why taxpayers should want to avoid bankruptcy of GM is that should GM go under, those pension plans would have to be paid out of the federal pension insurance funds, and there is (according to former Colorado Senator Hank Brown) good reason to believe that fund might not have the cash. (They don't account the full amount of pensions existing as the true value of the liability, scary and expensive stuff)

Thanks for the comments
Cheers!