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November 17, 2008


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Uzair Kayani

Judge Posner has a very interesting post on the potential ramifications of Detroit bankruptcies. If automakers can't get credit or equity from private sources even after a bankruptcy then we will have simply delayed their dissolution.

I am more concerned, though, that we already have moral hazards playing out in large problem areas. A GM official on the radio this morning was analogizing to the financial industry: "why help them and not help us?" Everyone is going to say this now, and political pressure will make it difficult for the government to draw a line. Detroit, in particular, is a more sympathetic and romanticized figure than Wall Street anyway.

Counter-intuitively, the present crisis might give some companies a longer life line than they would have had in a normal economy. The automakers have been losing ground for decades now, despite government largess. They lag behind their competitors in innovation, cost and marketing. The specter of ripple effects is so powerful that these businesses don't even feel the need to explain their failure anymore. I don't expect them to pay back any taxpayer money that they get.


The UAW needs a little tough love. It derailed the Cerberus deal at Delphi. Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.


Andrew Roberts

What does sense have to do with it? Since when do politicians suffer from this malady? Paybacks are in order. It remains to be seen if the union money injected into the democrat party will pay off. Probably not in this Congress but the bailout is coming. Maybe we call it a loan guarantee or a recovery fund etc. but the simple fact that every congressman is also being bombarded by every car dealer to do something assures us that it's coming.

But you are missing the essencial truth about GM. They are building crap nobody wants, are slow to get to market, have no plan for a future, and have been mis-managed into the ground.

The old UAW union stuff just doesn't hold water. Audi, VW, MB, Citroen, Peugeot, Renault, Volvo, Saab, Jaguar, Vauxhall, Rover, BMW, and every other European manufacturer have an organised work force, that is paid higher than an American UAW member. They are all healthy, and are all building desirable products.


It is not wages that are dragging down the big three, specifically GM, it is healthcare and pension liabilities that will be the downfall of the industry. GM burns about 2/3rds of their cash on these payments (about 11 bil. of a total 17 bil. in 2008), which is just not a sustainable business model.

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