Does Erie Need a Detroit Bailout?

18Nov2008 Filed under: Economy, Erie, Pa., Manufacturing, Politics, Rust Belt Cities Author: Peter Panepento

Now that it has set aside money to bail out Wall Street, Congress is considering whether it needs to inject money into Detroit to bail out the Big Three auto makers.

In many ways, Ford, Chrysler and General Motors have it coming. They have seen the warning signs for decades and have failed to properly reshape their businesses to remain competitive.

But others argue that a collapse in Detroit would have ripple effects in cities, like Erie, that are home to scores of companies that supply parts and equipment to the auto industry.

What’s a lame-duck Congress to do?

These are big questions, and many are wondering whether Congress will be able to create a plan that will accomplish anything more than prolonging the inevitable.

Consider this quote from the New York Times:

“The problem right now is that everyone is trying to accomplish in a few days something that no one has been able to get the auto industry to do in a few decades,” Mickey Kantor, a former United States trade representative, who was a central player in the Big Three’s negotiations with the Clinton administration in 1992, which also vowed to help Detroit and preserve jobs. “You are not going to protect everyone, find new leadership for the car companies, force innovation — and get Congress home for Thanksgiving.”

What is the best solution here? I’d love to hear your thoughts.

Tags: Auto industry, bailout, Big Three, Congress, Detroit, Economy, Erie, Pa., Mickey Kantor

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23 Responses to “Does Erie Need a Detroit Bailout?”

MGR
November 18th, 2008 at 2:22 pm

Let them file the Chapter 11 and then bail them out. That will break the union contracts and possibly provide a venue for them to rebuild on a profitable business model. The labor force at the big 3 needs to become innovative and performance comp incentivized. The rank and file union work rules and structure does not encourage the type of thinking needed on the floor. Additionally, they must eliminate excess brands, models, and capacity because the financing system will no longer support a 3 year ownership average which always leaves a deficit between value and debt balance for the consumer. Anything less will simply be treating the symptoms and not the cause.
Jim
November 18th, 2008 at 2:43 pm

I believe a lot of this problem goes back to the early 1960’s when the Kennedy administration interjected themselves into the labor negotiations on behalf of the UAW. The federal government had no business in putting the full weight of the government behind forcing a labor friendly contract onto industry management. Once that horse was out of the barn however, there no way of getting it back in. The non productive legacy costs are impossible to meet, whether the industry or the government ends up holding the bag.

In addition the work rules that followed, and the labor pools allowing non producing workers to continue to collect full pay and benefits for no work, forced the manufacturers to either make product they didn’t need and couldn’t sell without discount (thereby reducing resale values) or cease production and continue to pay labor. Either way it was a no win situation. I fault management for listening to government. Its probably to late to save the industry in anywhere near its current form.

The best thing that could happen, is to allow them to go belly up, and rid themselves of the cost drivers that insure failure, essentially like the steel industry did. Hopefully though, what comes out of that process could be American owned, although I’m not sure the government realizes the advantages of domestic ownership. (Profits, currently a dirty word, stay here as opposed to some foreign country.)

We constantly talk about greed in business, and every successful businessman gets tarred with that brush, yet seldom are the unions referred to in the media as greedy. When you look at the total cost of employment differences between the American manufacturers, and the foreign competition operating here, there is no other explanation for it. Those costs coupled with antiquated work rules have increased costs to the point where it is not possible to profitably sell a car against a foreign competitor regardless of quality. And quality is not the issue most like to make it out to be. Ford quality equals the foreign competition.

Rest assured however, with the current makeup in Washington, and it will only get worse in a couple months, the problem is only going to get worse. As for Erie, we have already been suffering with this problem for fifty years. Every down turn, we get hit harder, and experience less recovery, in part because of the lasting harm done to our natural customer base. But, currently in this business challenged climate, the city, county and state (not to mention school districts) are looking at increasing the cost of doing business by raising real estate taxes, and other fees sure to worsen the problem.

What Erie needs to realize is that you can not continue to increase the cost of doing business, and still expect business to provide jobs and revenue to government while operating in a non competitive fashion, when compared to competition.

We essentially drove GAF out of town. Now a very vocal group is targeting Erie Coke wanting to put them out of business, while at the same time preventing ERE from ever getting off the ground, and people keep harping against the bio-fuel plant, demanding that it immediately produce hundreds more jobs, or shut down. These vocal anti business opinion makers are hurting us, but I see absolutely no chance of that changing in Erie. It is too entrenched, and we do not have political leadership with the strength to tell people we need to appreciate and support those providing what few jobs are left here.

We do however, have more than enough politicians willing and able to get in line with their hands out asking for “free money” while at the same time raising local taxes.
TonyF
November 18th, 2008 at 3:18 pm

That’s a mouthful, Dan but not wrong. We can’t support the big three if they maintain their current UAW contracts. The auto industry is a big part of the rest of the economy (manufacturing, insurance, technology, banking, etc.). If they go belly up, we are in for a huge economic hit. Can we take the hit? I don’t know. I am not in favor of their maintaining status quo at my expense. There must be labor concessions AND a plan to pay back whatever they are given. With us printing money faster than we can give it away, the US’s path toward socialism seems to be on the fast path.
TonyF
November 18th, 2008 at 3:20 pm

Oops…. Jim, not Dan.
Ed Tonkin
November 18th, 2008 at 4:01 pm

All of you are correct.

Hoover and Roosevelt began interventions into the economy and its been downhill ever since.

If we follow all of the logic of the bailout proponents all the way to its conclusion, we will be the USSA, the United Socialists States of America, with a comand economy of experts and Tzars running our economy and lives. THen after 70 odd years of economic and civil rights disasters, the USSA will crumble into various States and groups of States and the World will enter a new dark age with Russia and China battling till the last man. (Must keep my darkself down)

A return to Constitutional-Free Market government is the answer. But the boys and girls in Washington want to “help.” They will help us into disaster. Obama and Friends will drive the economy further down and blame the market and us for their failures.

Dowsizer Dispatch (DownsizerDC.org) had a great atricle a few days back entitled, “Educate the Powerful.” In there they quote Henry Morganthau, FDR’s Treasury Secretary, speaking to Congress in May 1939…
“WE have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I’m wrong…somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see enough people get enough to eat. We have never made good on our promises… I say after eight years of this Administration we have just as much unemployment as when we started…And an enormous debt to boot!”

We’re headed for an even vaster failure than the New Deal. It took WWII top solve the Depression. God help us from what our masters in Washington will do to get us out of this mess of their making.

Let the bankruptcies laws work. It will hurt, but for a much shorter time than the Great Depression did.
Jim
November 18th, 2008 at 4:31 pm

At the risk of starting an argument, government prior to FDR rewarded success and was neutral on failure. FDR changed that to where government suddenly rewarded failure. Since FDR, government has continued to reward failure, but in addition has targeted success of any and all kinds. When you have government rewarding failure and targeting success the end result is that you end up with a lot more failure, which is exactly what we are seeing.

Obama’s plan? More reward for failure. Outright attack on success, coupled to socialized health care, and now they are talking seriously about nationalizing (confiscating) 401K retirement savings, and having the social security administration (who has that program well on its way to bankruptcy) make investments for us.

As human nature will never allow a majority to vote against perceived handouts, the class war begun decades ago, has now taken over the country. It will never be the same again. Denial won’t change the reality. The industrial revolution could not happen today. So what is making people think that a new industrial “green” revolution, or whatever label one wants to attach to it, will be anymore successful, when the government’s main objective remains to target anyone succeeding.

I suggest that what we are witnessing in the financial markets, is what manufacturing has endured since the 1960’s. Anyone expecting a different outcome in the service industries from what happened in manufacturing is kidding themselves. Attacking success is just as destructive to services as it was to manufacturing, only they perhaps not as effected by such cost drivers as OSHA, environmental compliance, etc. But the end result is the same.

We need a dramatic structural change in government’s approach to the economy to reward the risks taken to provide jobs, and revenue to the government. Unfortunately, that is not going to happen.
Dan
November 18th, 2008 at 5:44 pm

I spent over 20yrs as union worker at American Airlines. In 2002 they came to us and said take this $16,000 yr pay cut OR we go BK. The contracts are thrown out, we impose new rules (worse than this “down your throats” contract offer) and if you want, you work, if not you find another job until we come to terms on another contract. “Beleive us (AA) we will be in no hurry to settle a new contract”..
Times were though for airline workers. Where could you find another job after 9-11. So we Pilots, F-Atends, Av-Tech and Ramp wkrs swallowed the bitter pill. 6 yrs later and most workers are up to what they made in1995 wages.
AA survived as the only old line carrier (SW exempted) and last year handed out bonuses to the senior mgnt. While the front line workers got BONED-US.
If Cong give these bail outs they need to have some stipulations. Such as change in leadership that got the auto indus there in the 1st place. Pay & benifit cuts for ALL Employees and if any profit sharing ever comes in, then it should split EQUALLY and not as a percentage of one’s earnings..
TJ
November 18th, 2008 at 11:33 pm

MGR is right–the only way for them to live is to break the union and for us to ensure their debts are covered. Innovation may come with the want to have more in new employees. But that doesn’t mean that they will or can change their ways–especially as fast as they need to.

A company is a reflection of its employees–’nuff said.

There is a big BUT though. Perhaps it is time we freed up that much capital? Poor use of resources doesn’t produce a return. If we do prop up the companies, it will only prolong the inevitable. Perhaps the flow of talent and labor back into the open market will do America some good???

Honestly, I think someone may come along, snatch them up, roll em up and throw away the inefficiencies. They’ll probably make some global supply chain and distribution changes and we’ll have some new industries pop-up from it.
bojosmom
November 19th, 2008 at 2:39 am

Gentlemen,
First, the given is that obviously you all seem to have the business acumen to more than hold your own on this topic. And it is time to face the music for past mistakes in the American auto industry. But I pose the question to the panel, where and when do you feel government should provide tax dollars and/or offer government programs ? I suppose, that is the central question up for debate? Where and when do we as an American people want government programs in place of private systems? You may argue that the auto industry is in shambles for a variety of reasons. But coming from a health-care profession, I do not see private business providing low cost efficient and adequate health care to this nation either. Believe me, this will be a huge another problem in the years to come.
I also want to see some discussion of the ethics in the behaviour of the corporate boards and officers of these companies. There is a certain disconnect between the workers and the management that has contributed to our current situation. The pain of unemployment and hardship will hardly be shared by both parties.
Heavy D
November 19th, 2008 at 10:26 am

The government in most cases is the problem not the solution. Rather than having the government try to figure out who to bailout ( and therefore succeed) they should instead lower taxes and regulations and let the Market decide which company should stay in business.

I have a friend of mine who is all for a GM-Ford-Chrysler bailout. She says it has to be done. She and her husband both drive Toyotas. So the the big 3 automakers are good enough for my tax dollars but not her money to buy a car.

This is like that silly stimulus check we all got. Instead of cutting taxes they give a 1 time payout. Why? because of the power that comes from spending. Lowering taxes reduces the power of government and the politicians won’t stand for it. I am really worried about what kind of country we will be leaving my kids.
MGR
November 19th, 2008 at 10:43 am

Because governments are cumbersome and inefficient, when the fed passes a bulk package, it usually fails to accomplish the stated purpose either because the terms are overregulated or because the money diverts and is used to cover holes it wasn’t intended to cover. The government can act to cover a temporary downturn or to make up a funding shortfall for a particular initiative to give a domestic company a leg up on a foreign one, but the key is that the underlying business model must be viable. Too often we get behind half-tailed reorganizations that won’t realistically produce a global competitor and in those cases, the subsidy is only buying time instead of competitive advantages.

I believe the central flaw in the auto industry isn’t actually the compensation of its employees, it is that the industry must move a tremendous amount of vehicles every year that depreciate at a rate much worse than this year’s stock market. This is a flawed premise and given the increased manufacturing and safety costs, is unsustainable. If I were to rebuild the auto industry, I would make their end products more akin to houses - big price tags, long term financing, all interchangeable aftermarket parts to rennovate, and exceptional quality with a life expection of 15 years in top operating condition. Either that or give me a real innovation like hover-technology. My 10 year old car already has the standard pack of auto junk that every car since 1965 has featured.

Healthcare can be straightened out pretty easily, but we’d have to live with the draconian and uber-liberal measures of forcing food that is sold to actually meet a health standard and probably putting even more controls on cigarettes. The only pres. candidate that had the guts to hit this was Huckabee when he pointed out that 80% of the health cost increases come from treating chronic conditions and our culture is breeding those as fast as we can diagnose them. Throwing more money at a chronic illness will create chronic deficits.

Although forcing healthcare to become a govt. bureaucracy would be a mess, it would be entertaining to watch the clash of the titans when the trial lawyers come up against a govt. healthcare system regarding tort reform. I have a funny feeling that suddenly the government would quarantine the trial lawyers lobby.
Mark
November 19th, 2008 at 11:13 am

I have business experience with the big 3 auto builders…and I am amazed that they lasted this long! If the general public knew of the behind the scenes waste, and corporate politics that are ingrained in the American system of building cars, I think Toyota, Honda, Hyundai, Kia, etc. would have long ago taken over the US market.

I have also done business with the afore mentioned foreign auto makers and can say from experience that it is not at all surprising that they as a group continue to grow their share of the US market, while the big 3 continue to lose theirs.

Do you as a consumer like quality?
A tested and thought out designed auto?
A company that will honor their warranty?
An efficient and streamlined manufacturing process?
How about a personal follow up by the maufacturer on your experience with the dealer and your thoughts on the car design and over all quality?

These are the things any consumer wants, and expects from any manufactuer of anything you purchase. You haven’t got them from the US auto makers as of yet, but now they want MY money to help them out of their own mess. NO WAY! They deserve whats coming to them!
Shane
November 19th, 2008 at 5:01 pm

How about we think outside the box on this one:

What if instead of handing over billions of our tax dollars directly to the automakers, that instead we put the power back into the hands of the people.

What if the government offered a tax break to businesses and individuals of up to $10,000 if you were to purchase a new automobile (personally I would not restrict it to the big 3, but I might limit the amount of the tax break to$5000 for foreign owned automakers).

Further, I would recommend the government with all of it’s newfound banking ownership, incent the banks to work with the automakers on the (secure and responsible) financing of these auto purchases with the government using some of the proposed money to guarantee some of the loans.

Additionally I would have the government encourage the banking industry to lend money to the Big 3 at favorable rates and loosen some of the tightening of the commercial credit markets that has occurred.

this has the potential to help more than one struggling industry and would create income along the entire automotive and auto financing supply change, rather than give it all directly to folks who have proven a recent track record of bad financial planning.

Not a perfect plan by any means, but better than what I have been hearing.
TonyF
November 20th, 2008 at 8:09 am

I feel that Detroit has to change. A tax incentive that Shane proposes would generate activity and temporarliy bail out the US auto makers. It would also perpetuate the waste and greed that permeates Detroit. Thus, pospone the eventual “cleansing” needed.

Also, I don’t want to buy a car now. If I didn’t buy one, I wouldn’t get the tax break. That isn’t fair.
Dan
November 20th, 2008 at 2:06 pm

What a country. when youngest turned 18 next year they enact a $600 earned income tax credit or something that I don’t qualify for.
I work extra hrs to pay off both my modest homes. I didn’t overbuy. So now i should get punished bec I’m not in debt. Hell, even all 3 of my cars I paid cash for.
Now they want to bail out workers who make more than I ever dreamed about. What a country!
Phil G
November 20th, 2008 at 11:36 pm

At risk of sounding inflamatory, let them fail. I know this would mean a significant shock to the economy. Long-term growth potential is my concern.
For example, Japan bailed out large Japanese companies in the 1980s. In the 19 years leading up to today, the market capitalization of Japan has floundered with little growth, still far from the market cap. in the 80s. In other words, if we take away the risk (by saving companies with large economic consequences), the entire US economy will lose its reward. So, if it looks bad now, image that you are 20 years in the future and the stock market is still where it is today.
TonyF
November 21st, 2008 at 10:25 am

It’s too bad Washington doesn’t have the wisdom and common sense that we all seem to posess. They’ll probably bail out Detroit and get an extra few billion for each of their home districts. After time, we’ll see that the bailout didn’t work but they got their money. Then they will reward themselves with a pay raise and increased pension benefits. We’ll re-elect them because we recognize their names.
George Vietze
November 21st, 2008 at 11:35 am

Throwing money at an already broken economic model of the auto industry will only prolong a systemic problem. The business model is broken and needs to be updated completely. The market is telling the auto industry that they will not purchase vehicles that do not service current market conditions at uncompetitive prices. If we are to continue to be a “free market” economy you have to pay attention to the requirements of the market. The auto companies will be forced into bankruptcy and will either be re-organized into lean, mean competitive companies or will be liquidated unless the government decides to socialize this industry, in which case it will add trillions to our already
outrageous national debt which will have to be monetized by printing of more devalued dollars. Sadly, it looks as if our government has chosen a more socialistic path of subsidizing private industry with an attempt for government to oversee and regulate, which history reveals our government lacks the expertise necessary to efficiently administer
this responsibility. A political answer to a business and economic problem will only prolong the agony of the inevitable devaluing of the dollar and the inflation that will result when we print money without the assets to support the value. Gold is not worth $800-$2,500 per ounce but it may take that amount of US Dollars, or more, to convince the market to sell you an ounce of gold. Unless that games changes and we get back to an efficient free market system where efficiently managed profitable companies survive and the poorly run unprofitable companies do not we are headed for some sort of semi-socialistic economy regulated and managed by politicians which if history is a judge, is less than optimal at best and disasterous at worst.

The auto industy has failed to plan and now plan to fail. There is no perfect storm in this world wide economic crisis, as bad as the economy is in the U.S. it still is a consumer driven economy that drives the rest of the world, even China as large as its economy is it still is export driven and is not consumer driven at this point, we still drive the world economy, which is why the balance of the world is effected by our current economic problems.

Erie is as good a place as any in these troubled times. Erie is moving forward after years of moving in the oposite direction. Erie’s real estate market is in better shape that most places. Erie’s balanced economy of manufacturing, education, tourism, medical and insurance is healthier than most places in the U.S., the current gas prices has the result of a major “tax cut” for energy and transportation costs. If Erie can address the political constraints of being more “business friendly” and implement and support a “comprehensive master-plan” that can be used as a marketing package it can make use of these slower economic times to get ready for the inevitable up-turn in the economy whether that economy is a more efficient productive “free market” system or a more “inflationery” economy as a result of political direction, either way Erie’s future looks brighter than many other options.

I am currently in San Diego, although the weather is milder here, the economic climate is much worse. Real estate value are down almost 40%, unemployment is over 7%, the City has major economic problems, the State has worse economic problems, the air is dirty, black and sooty, the traffic is crazy, housing is still unafordable to most people and jobs are harder and harder to find. Arizona, Florida and Nevada are facing similar problems mostly exasterbated by real estate values. I sold my real estate and stock two years ago and moved to Erie and purchased land and have buyers backed up to purchase well located land at Erie prices recognizing that hard assets at good prices is an investment in the future. If you do not believe that, how are your 401K’s and stock portfolio doing compared to your investment in Erie real estate? Thank your blessings that you are in Erie and if the auto manufacturers do not get an infusion of money and a million jobs are lost in the Detroit area, believe me, Erie may not look too bad.
The grass is not always as green as it is in Erie when you looks at all the pros and cons of other places. The snow will melt and the grass will be greener in Erie, Pa. where the air is cleaner and water is our biggest asset.
Mike
November 21st, 2008 at 12:29 pm

Maybe Erie County should apply for some bailout money also to cover for some of their missteps. They could keep the Presque Isle library open and pay the penison funds and not raise taxes to the point where people lose their houses to tax sale, plus Divecchio can get his $4 million office.

My question with this auto bailout is: If we bail out the auto industry, where it is going to stop? Are the credit card companies going to need a bailout too? Maybe the airlines need a bailout. A lot of industries could make the case that they need bailout money.

If this bailout is approved, it takes away the incentive for companies to change their ways and adjust to the changing times. All a bailout essentially does is postpone the problem, since the behavior that got the said companies in the rut to begin with isn’t going to change if government keeps picking up the tab on their mistakes.
TonyF
November 21st, 2008 at 1:23 pm

Obama owes the UAW a lot. If Pelosi and Reid don’t bail them out, Obama will make it happen.
Phil G
November 21st, 2008 at 3:28 pm

Two quick comments:
How did the big 3 CEOs get to Washington? In 3 private jets.

The comment about Divecchio is priceless.
Dale
November 21st, 2008 at 3:36 pm

I hear DiVecchio’s office comes with a built in shower!
Phil G
November 21st, 2008 at 3:39 pm

That’s criminal.

How soon can we get rid of him?

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About 'Outside Erie'

Peter Panepento After more than six years working as a journalist in Erie, I'm now the web editor for the Chronicle of Philanthropy in Washington, D.C., and the publisher of GlobalErie.com. I still maintain close ties to Erie - a community that I care about deeply. I hope this Web site can help inspire a better future for Erie.

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