Saturday, November 22, 2008


In the United States the current recession has mostly caused people to worry about U.S. issues. For instance, how easy a ride can we give wealthy New York bankers out of the crisis, and how badly should we screw blue collar manufacturing workers in the Midwest. As if some of the banks that will get money from the Feds are "viable" without the FDIC insuring their deposits, and the Feds eventually taking some of their bad mortgages. Yes, we should definitely punish GM for selling cars to consumers that consumers wanted. No doubt about it.

Anyway, other countries, or maybe "regimes" is more appropriate, have much more riding on economic growth than the U.S. does. For instance, Saudi Arabia and Kuwait both essentially buy off domestic opposition with oil profits. If oil continues to drop, this becomes much more problematic (and expensive). And remember, at least one group of "opposition" in Saudi Arabia is very much in the flavor of bin Laden.

The poster child for legitimacy based soley on economic growth may be China. China's Communist Party is not Communist in anything but name, and has essentially made this deal with the Chinese people: we deliver economic opportunity, you don't rebel against our authoritarian regime. However, China's economy is slowing down, and unemployment in the southeast is rising. Just this week we have seen evidence of the breakdown of the social compact (although this specific event was not in the southeast). Meanwhile, Tibetans in India are debating whether they ought to be pushing to be independent of China, rather than pushing for special rights within China, which is the current appoach of the Dalai Lama. Big hitter, that Lama.

Mind you, I am not saying this is imminent, or even likely, but there have always been opportunities for people on the frings of China when there is chaos in the middle. This is especially (potentially) true for Tibet since the neighboring Uighars in Xinjiang province are Muslims, with access to outside help from Central Asia, and already have a history of terrorism within China. I believe that Xinjiang is also easier to operate in militarily than the Himilayas. Thus, if Xinjiang and Tibet both rebel, Xinjiang seems likely to have to fight first. As I said, nothing seems imminent, or even likely, but if the big cities on the coast blow up, it seems likely that Xinjiang and Tibet will too. That could be an opportunity for Tibet while Xinjiang fights.

P.S. If Congress is so clear now that SUVs were evil why didn't they disincentivize purchasing them in the past? Gas taxes would have done it. So would really meaningful green taxes on SUVs. Instead, what we saw was the market operating. It is why BMW, Volkswagen, Hyundai, Toyota, Honda, Mercedes, and everyone else built SUVs. I say this as an SUV-hater: there was a time for Congress to legislate against the SUV in the public interest. Failing to help the Big 2.5 retool is too little too late. Remember that GM still sold more vehicles worldwide than Toyota did in 2007, and LOTS of that production is in America. That ought not be given up lightly.


Anonymous Anonymous said...

If GM made a ton of dough selling record numbers of SUV's, what happened to the cash? Am I wrong in expecting record sales to result in record profits? GM and the UAW only have themselves to blame. Production by GM will not cease if they file bankruptcy. Nor will the SUVs that they sold stop running. GM and the taxpayer will be best served in a bankruptcy. GM will have time and protection to get their house in order. Rushing a bailout will simply be throwing good money after bad. And what do we do about Honda, Toyota and Hyundai? Do we cut them out of the deal? Most of the cars that Americans buy are made in America, so you can't say we are bailing out a foreign company. They are multi-nationals just like GM. Besides, we have to find funding for bailing out home buyers, home builders, airlines, the Cities of Detroit and Philadelphia, New Jersey, California, Medicare and Social Security. And get ready to bail out Richie and Chi-Town (and we still have to fork over some big cash for his 2016 "gift to the people of Chicago")and G-Rod and the crew of the SS Minnow down in Champaign. Everyone has one hand out and one hand up. I have both hands on my wallet.

8:21 AM  
Blogger David said...

Lots of your points are very good. However, some parts do require clarification:

GM's dough has been eroded by several quarters of tremendous losses. Sales do result in profits, and they did. However, corporations generally do not retain all of their profits. They pay dividends, reinvest in the Volt, etc. etc.

GM will not cease to operate, but its suppliers may be wiped out. As will their suppliers. And theirs. Don't kid yourself. If this were only GM it would not be a big deal. It is the entire manufacturing infrastructure of the middle of the country.

Honda and Toyota are already supported by a semi-socialist business structure in Japan. They do not need help from U.S. taxpayers. While they do have significant U.S. production, they are also generally in the non-union south, and don't generate nearly the tax payer base that GM does. No help for them.

Cities and states will not be bailed out with Federal dollars. Why would bail Detroit out NOW and not in the last 30 years? Chicago does not need a Federal bailout, and the Olympics will cost close to nothing compared to one Citigroup managers' retreat that we will all pay for. And U of I? Really? A trillion for banks, but not a cent for education!

All of your points sounded better before the bailout of Citibank last night. There's a bank that has acted badly over and over. They didn't build cars that people wanted. They bought finance vehicles without keeping track of their own risks. See the New York Times from November 23 to see what a disaster that place is. Now we are holding the bag for those tools. I'd at least rather bailout people who work for a living, instead of a-hole bankers.

12:00 PM  
Anonymous Anonymous said...

Many of GMs suppliers have already been wiped out and filed bankruptcy (Delphi). GM was a pyramid scheme that could only survive selling more and more cars & SUVs in order to continue paying those crazy union benefits and manager salaries. A GM bankruptcy does not necessarily result in the bankruptcy of the direct and indirect suppliers. Yes, it will certainly have a significant and possibly disastrous impact. But the idea of the suppliers also going bankrupt requires the assumption that the suppliers are as poorly run and financed as GM. Also, I think that people are under the wrong assumption that hard asset producers like the auto industry are the backbone of the manufacturing economy. It's not. It's technology. I agree that my argument was better before the second bailout of Citigroup. But the failure of Citigroup has a far greater consequence to the domestic and global economy than the bankruptcy of GM. Yes the bankers have all behaved badly and I despise the idea that they are being bailed out. But wouldn't a bailout of GM result in the same semi-socialistic business structure in the U.S.? Isn't it ironic that the non-union autoworker from the south that generates the lower tax payer base will be helping to fund the proposed bailout of their union member cousins to the north?

7:56 PM  
Blogger David said...

For some of these issues we will have to agree to disagree.

I am curious about the statement that "technology" is the backbone of the manufacturing economy. Do you mean utilizing technology, or manufacturing technologically advanced articles? If the latter, you are correct, but that manufacturing economy is in China.

Also, if you are a Big Three supplier it is very unlikely that even if you are well-managed (and the bankruptcies at Delphi and Dana, with Visteon's near miss make this proposition seem very unlikely) there are other customers. There are a ton of small companies that supply discrete components to the Big Three and they will go down in flames. They will take the manufacturing economies of Michigan, Ohio, Indiana (when they stop buying steel), Illinois, and Wisconsin down with them. That would be catastrophic.

Also, with respect to your last point (i.e. the irony of southern, non-union auto workers bailing GM out), let's be honest for a second. A combination of Chinese workers, Japanese workers, and high-wage Americans (unlike southern auto workers) is going to fund that bailout. Some will create the current account surplus that is used to buy government bonds, and some will pay taxes, but $14/hour auto assemblers in Alabama are NOT going to fund the bailout.

And we agree that we are both sickened by bankers getting government bailouts, so that's something.

9:10 PM  

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