Tuesday, November 18, 2008

Bailout Needed

Martin Feldstein, a conservative columnist and former economic advisor for Ronald Reagan, is right when he says that a bailout of the Big Three U.S. automakers would require more than $25 billion. The rest of his prognosis, however, is decidedly irrational. He quickly delves into typical conservative union bashing, claiming that the fates of General Motors, Ford and Chrysler would be saved if only their workers were paid less and given less benefits. Let's be clear: the Big Three have not descended towards failure as a result of overbearing union demands, they have begun to capitulate because high gas prices, vanishing credit and a deepening recession have created the perfect storm for a U.S. automaker. The Big Three had bad business models before the economic crisis -- their healthcare costs were overbearing and their products were substandard, and if the companies failed during a period of economic stability bankruptcy would be a boon for efficiency, not a tragedy for the economy. This, however, is not a time of stability, and the well-being of the Big Three is intrinsically tied to the well-being of a large sector of the United States economy. A bailout is needed, but not one that hurts those in most need of help, the workers.

Feldstein writes,
The Big Three pay much higher wages than production workers are paid in
the nonunion auto firms and in the general economy. And the health-care
costs of current workers and retired union members are an enormous
additional burden. The simplest solution is to allow GM and the others to file for
bankruptcy. If the companies file under Chapter 11, they would be able
to continue producing cars, and the workforce would remain employed
while the firms reorganized. The firms would also be able to get
short-term credit under bankruptcy protection.
There is no doubt that the fault of the Big Three's demise lies at their own hands, but in the midst of this economic crisis, allowing three huge companies to default would be catastrophic not just for the auto industry, but for nearly all sectors of the economy. Feldstein argues that if General Motors files under Chapter 11 it can restructure its union contracts, which would result in lowered wages and reduced benefits. His estimation of the situation is an uneducated one, however. The UAW and the Big Three have been making significant strides in recent years towards bettering the efficiency of their contracts. Last year UAW and the Big Three reached an agreement whereby wages for new hires would be two-tiered and healthcare costs would be shared between the union and the company. More than squabbling over the efficacy of the UAW and the Big Three's ability to resolve their inefficiency issues, however, allowing the Big Three to file under Chapter 11 holds broader implications for the economy that in this time of crisis must be considered. First, lowering wages and reducing benefits for hundreds of thousands of workers is detrimental to the economy. As Congress mulls stimulus package after stimulus package for the middle class, a restructuring of union contracts would amount to, in effect, an anti-stimulus. There is no reasonable economist that believes less money for middle class workers, especially those in a struggling region like the Midwest, would be anything but bad for the economy.

Second, filing for Chapter 11 would not simply resolve the Big Three from their serious structural issues. In fact, it is widely believed that the Big Three would not remain solvent under Chapter 11 at all, and wouldl have to file for Chapter 7 bankruptcy, liquidating its assets and shuttering its doors. This is because the Big Three simply does not have enough cash to operate. If General Motors does not have enough cash to buy parts, which it will not if no federal bailout is provided, it cannot produce cars and thus not remain solvent. It would have to shut its doors and put 100,000 out of work immediately. The implications of such a liquidation do not stop there, however. If GM goes out of business, so too do the parts makers and suppliers that depend on General Motors for business. Those parts companies going out of business will result in no parts for other auto companies like Ford and Chrysler, forcing them to liquidate as well. The Center for Automotive Research (CAR) just published a study that predicted a loss of 3 million jobs in the case of such a meltdown, which would raise unemployment nationally by an astonishing third and result in the loss of income of hundreds of billions of dollars. In this economic climate, such a collapse can simply not be allowed if we are to expect our economy to recover.

A bailout package for the Big Three would have to encompass policy areas from climate change to healthcare, but the solvency of the companies must be considered first and foremost. Of course, the Big Three cannot continue operating as monolithic companies with arcane business models, and will have to be pared down and made more efficient. Such a restructuring of the firms, coupled with large cash infusions to keep them solvent, would stave off collapse while ensuring that business as usual does not continue. In addition, broader reforms must be made. Instituting a national health insurance program, and allowing UAW workers to buy into it, would both greatly reduce the cost of healthcare and provide more solvency for the Big Three. In addition, tax incentives for production of environmentally friendly automobiles will help modernize the Big Three and ease its transition back to solvency. Additionally, the passage of the Employee Free Choice Act, which would make unionization of autoworkers more viable on a national level, as opposed to a regional one, would ease competitive pressures placed on the comparatively over-unionized Midwest.

Wednesday, November 12, 2008

The Importance of Guaranteed Health Care

It's odd that Max Baucus (D-MT), the centrist Democrat who assisted George W. Bush so much in pushing through his domestic agenda, is the Senator leading the progressive charge on health care reform. His plan, released today, is not a politically ambitious one -- it's essentially Hillary Clinton's health care plan, but its progressive credentials are something to take note of. Clearly the changing political winds have encouraged Baucus to reevaluate his political legacy, and in this election year's liberal wave it is predictable that a politician like Baucus would move to the left. Regardless of intent, that Baucus has submitted a generic Democratic health care policy outline is testament to the ramifications this year's electoral revolution will have on domestic policy.

Health care, especially in the United States, is a strange beast because it pervades so many aspects of social and economic life. Abstractly, a society that takes care of its denizens is one that is healthier not just in terms of protecting against illness, but in promoting a sense of social well being. The collective acceptance of the necessity of Britain's National Health Service in that country is telling, in that it reflects the societal benefits of a health care system that guarantees equal health care to every citizen, regardless of economic standing. Britains complain about the NHS incessantly, and the call for health care reform is strident, but suggest taking away their national health care service and across the board Brits will have a hissy fit. It's not even that the NHS is particularly effective, it's that it provides a social guarantee that has ramifications beyond simple treatment of disease and illness. Baucus does not call for a federally owned and operated health service (that would seem too European and socialist to be politically viable in the USA) but his plan is one that would guarantee health care to all Americans. That guarantee, solely for nominative and symbolic purposes, would be a boon for social and economic health. Take, for example, Americans' fervent support of social security. Social security is a European-inspired federal redistributionist program that has socialist overtones. Yet according to a recent CNN poll, fully 62% of Americans oppose privatising social security, let alone get rid of it entirely. This is astounding public support for a federal program that seems so at odds with the political climate of the day. Yet one cannot view public support of federal programs on an objective basis - rather, support for these programs amongst the public is emotional. This may not seem to be adequate justification for a program, but emotional support may be just as important as objective efficacy in determining the success of a policy.

The present economic situation in the United States is of particular note. There is no doubt that substantial structural flaws in America's financial system have led to economic crisis, yet the American public's lack of confidence in the economy is, by itself, a major contributor to economic decline. Many Americans have not been effected in the least by the financial crisis, but their sense of a worsening economic climate has led them to consume less, take money out of the stock market, etc., which all contribute to furthering the downturn. It's self-fulfilling prophesy at its finest, and a glaring example of the importance of public perception to policy. Classical economics has been thoroughly discredited over the last century because it assumes that humans are completely rational actors possesing symmetrical information. What is being realized now by the economic profession is that psychology has far more importance in determining an individual's economic actions than so-called rationality.

It is in this regard that health care is so important to economic well being. If adequate health care is guaranteed to all citizens, regardless of how wealthy they are and regardless of their employment, economic well-being will be more easily achieved. Individuals who know that no matter what, their health will be taken care of, will be far more likely to engage in the risks and endeavours that have made America's breed of capitalism so successful. Without social security, how many would-be middle-aged entrepreneurs not risk investing capital in their brilliant idea because they feared poverty in their old age? Baucus writes, "In the short term, health care reform would cost taxpayers more than the government can achieve in savings from all reforms and financing changes," which is obviously true. But an on-paper objective cost-benefit analysis is not nearly sufficient in determining the impact of a guaranteed health care program. Rather, it must be acknowledged that guaranteed health care for all Americans will undoubtedly contribute to a more conducive climate for economic growth, and therefore must be provided regardless of the estimated cost.