Friday, November 14, 2008

More on the American Economy

WE'VE MOVED! Democratic Convention Watch is now at

I wrote yesterday on foreclosures, and the day before about bailing out the economy. I don't pretend to really know much about economics, I just was very lucky that during my Introduction to Economics course in college, our guest lecturer for a week was Paul Samuelson. Although I didn't understand a lot of what he spoke about, it piqued my interest and I've tried to keep up with things.

But someone who does know a lot about economics is Robert Reich, and he wrote an interesting piece on his take on the economy. The Clif Notes version of his masterful piece is that whereas everyone is focusing on credit issues, that's not the problem. Demand is. He uses the basic demand structure we all know from Econ 101:

Demand = C + I + G + exports
C = Consumer (about 2/3 of spending)
I = Investment
G = Government
He rightfully points out that consumers aren't buying, and if they don't buy, business has no reason to invest even if capital is available, since there is no market. Further, he posits, the rest of the world isn't buying, either. That, he contends, rightly, leaves government.

He makes a strong case for massive government spending on infrastructure, health care and child care. He even points out why the right-wing arguments against such spending are specious. I highly recommend you read the article.

Reich's article made me think: should we really save GM or does that buy us additional heartache? There are two perspectives here: political and economic. From a political perspective, I cannot recall any Democratic administration, nor Democratic Congress doing anything the unions would find as abhorrent as NOT saving the American auto industry. Their side will say that jobs will be saved, and jobs are what it's all about.

The other political perspective is the massive migration that could occur if GM failed. Asian and European car manufacturers produce predominantly in the South. If GM actually went out of business (which is quite different from going into bankruptcy and then emerging) the foreign companies would need to ramp up production when the buying economy returns. We could see a shift of workers to the South to work those plants, similar to the industrial migration from the South to the North during the early part of the 20th century. Both the demographic and political ramifications of such a migration could truly change the face of America. I'm not saying anything pejorative, just pointing out that things would change.

Forgetting about the political perspective for a moment though, what would a GM bankruptcy really mean in the long run? No individual nor corporation goes to bankruptcy for fun. Before doing so, the petitioner does everything possible to avoid it. For business, this means laying-off personnel, attempting to work interim deals with creditors and suppliers, cutting all unnecessary expenditures (often including R&D), and taking every possible action to avoid filing. GM has indicated it will do everything possible to avoid bankruptcy.

GM has two major problems. First is Reich's demand side issue. If people will not buy GM cars, it doesn't matter if they produce 100 cars or 10,000 cars. If you were going to buy a car, which comes with a warranty, would you be more or less likely to buy that car if the company may not be around to provide warranty service?

The second is a capitalist concern. GM (and Ford and Chrysler) cars are more expensive then Toyota (or Honda or Nissan) because of the amount added to cover the generous benefits the Big 3 provide. I've seen varying statistics, and they lead to a range of an additional $1000 to $1500 per car added to the cost to cover the US automakers' obligations for health care benefits to existing workers and retirees. Should the government step in to support that model, or instead, let GM go bankrupt? If we get universal health care, the wage and benefit disparity will go away, and GM could emerge from bankruptcy leaner, and more able to develop the green cars we all want.