Creating even more "too big to fail" firms

If the stereotypical Republican economic policy error is pandering to Wall Street, then the Democrat one is pandering to labor (usually organized labor).

Andrew Ross Sorkin of the NYT predicts that, in the name of saving jobs, the Obama administration will approve mergers that it might otherwise have rejected. He bases this on an interview with former Clinton era tormentor (now highly paid Democrat lobbyist) David Boies, who says

“Antitrust theory is theoretical. Losing jobs and plants is real.”
…
“Preserving jobs and economic stability will be perceived as more important than preserving competition,” Mr. Boies said.

There’s a huge fallacy in this reasoning: we got into this mess because certain companies became “too big to fail,” so the government decided to intervene to prevent them from failing. Some companies that are broken need to fail: if they don’t, taxpayers are providing an indefinite subsidy to enable management, labor or business model pathologies (e.g. autos).

Letting broken companies be gobbled up by their competitors should mean that new management will run these companies better. But it also means the survivor will be bigger and perhaps has to be bailed out at any cost. The progression of Hudson and Nash to AMC to Chrysler (whose next owners are pressuring GM to bail them out) illustrates the progression.

So allowing a merger to form an ever-larger struggling company is creating a bigger problem that’s deferred into the future. There will be another economic downturn five or eight or ten years down the road, when these troubled companies will again go into crisis mode. Or maybe they’ll skip the next crisis, and it will be 15 or 20 years off before the government is asked to bail out a company that’s “too big to fail.”

In politics, this sort of intentionally short-term thinking is called “kick the can down the road.” Politicians hope is that when the problem reappears they will be gone, or if they’re not gone, that no one will remember their culpability in creating the problem. Exhibit A: is Fannie Mae.

The cumulative effect of such creeping corporatism is to eliminate the financial accountability for managers, employees, directors of privately held companies. This would have to be funded by taking ever-more money from taxpayers to prop up politically favored large companies — while keeping the tax and regulatory burden high on the well-run companies that don’t need bailouts. Heck, why don’t we change our name to the United States of France?

The US test (since the days of Teddy Roosevelt) for rejecting a merger has been: will the new company have too much power to hurt customers? The EU standard (since the days of Mario Monti) has been: will the new company have too much power to hurt competitors? (Such concerns are trumped by a second test: will the merger serve national or EU industrial policy goals?)

The 21st century, free-market standard should be: will the new company be “too big to fail”?

Oxymoron department

Several times today, I saw SJSU employees wearing their “parking services” vests. The service? Handing out $40 parking tickets.

I realize this is a fairly prosaic (and not terribly Orwellian) use of newspeak, but is this a service I can refuse? Given state (and CSU) budget cuts, perhaps we can hope for service cutbacks.

Seeking a less insane auto industry

Insanity: doing the same thing over and over again and expecting different results. — Attributed to physicist Albert Einstein

The WSJ Monday had two incisive analyses of the insanity of the Big Three bailout being discussed by some Congressional leaders.

Former WSJ Detroit bureau chief Paul Ingrassia continues his habit of speaking truth to power (to coin a phrase) in exposing the failings of Detroit’s management, labor, business model, cost structure and overall strategy. In a Monday op-ed, he wrote:

Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.

In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver -- someone hard-nosed and nonpolitical -- should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.

That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.

These are radical steps, and they wouldn't avoid significant job losses. But there isn't much alternative besides simply letting GM collapse, which isn't politically viable. At least a government-appointed receiver would help assure car buyers that GM will be around, in some form, to honor warranties on its vehicles. It would help minimize losses to the government's Pension Benefit Guaranty Corp.

But giving GM a blank check -- which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant -- would be an enormous mistake. The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end.

In effect, Ingrassia says that bailing out GM (or Ford or Chrysler) is like enabling an addict to continue on its a self-destructive binge. Except that these three addicts have multibillion-dollar habits, and billions more that taxpayer might end up paying if the (taxpayer-backed) Pension Benefit Guaranty Corp. has to bailout auto industry pensions.

The unsigned WSJ editorialists take a more political focus, attacking Congress for how mileage standards are calculated and its efforts to protect Big Labor from having to compete in the global market.

In their letter, Ms. Pelosi and Mr. Reid recommend such "taxpayer protections" as "limits on executive compensation and equity stakes" that would dilute shareholders. But they never mention the UAW contracts that have done so much to put Detroit on the road to ruin. In fact, the main point of any taxpayer rescue seems to be to postpone a day of reckoning on those contracts. That includes even the notorious UAW Jobs Bank that continues to pay workers not to work.

If their attacks on labor appear partisan (or futile) in the Obama Era, the editorial writers end up with the same conclusion as Ingrassia — Detroit’s way of doing business must be wiped out, with a clean slate, if there is any hope to making the American auto industry self-sufficient ever again:

If our politicians can't avoid throwing taxpayer cash at Detroit, then they should at least do so in a way that really protects taxpayers. That means handing a receiver the power to replace current management, zero out current shareholders, and especially to rewrite labor and other contracts. Anything less is merely a payoff to Michigan politicians and their union allies.

Perhaps the call to wipe out shareholders is why GM stock fell 23% today, down 87% for the year.

If we accept Einstein’s definition of insanity, then Ingrassia’s penultimate paragraph demonstrates the insanity of funding the auto companies on the trajectory they’ve maintained for decades:

Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. “Since the mid-Seventies,” one Detroit manager recently told me, “I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out.”

Change is hard, and dinosaurs that fail to change deserve their eventual fate. Ingrassia notes that the post-9/11 government bailouts of airlines brought at least some much-needed change. I think we (i.e. taxpayers and our “public servants”) need to be more ambitious for the auto industry, if we only get one chance every 50 years to fix things.

We want our BART! (We just don't wanna pay for it)

This morning, the Merc’s transit writer Gary Richards officially pronounced dead the proposed 0.125% BART sales tax increase for Santa Clara County. Approval by 66.41% of the voters won’t be enough to meet the Prop 13 2/3 requirement, and the remaining ballots are unlikely to change the result.

The proposed 16 mile extension at BART’s southeast corner is an addition to the (already funded) 5 mile extension to Warm Springs in Fremont. Together, this would be the first addition to the 35-mile East Bay stretch along the Nimitz Freeway (from Richmond to Fremont) since 1972, the first year the system was open. With extension, the electric rail system would serve five counties — the original three counties (Alameda, Contra Costa, San Francisco) plus San Mateo (home of SFO) which was added in 2003 and Santa Clara County.

However, this would not be the first time county residents were taxed to pay for BART. In 2000, a thirty-year, 0.5% sales tax increase was passed that promised to “Connect BART to Milpitas, San Jose, Santa Clara” as well as add rail connections between existing rail and San José airport. The latest plan remains controversial.

The failure to deliver on the 2000 promise made voters skeptical as to whether the latest tax increase would be enough to deliver on these (existing) promises — or whether politicians would come back later for even more money. As Merc columnist Scott Herhold wrote 10 days ago:

How much will BART cost? The official estimate is $6.1 billion. But BART has a rich history of cost overruns. The extension to San Francisco Airport wound up costing nearly 40 percent above its initial estimates ($1.5 billion-plus instead of $1.1 billion). Delivering BART on budget is made much harder by the task of tunneling under downtown San Jose, which has a high water table. Ex-BART board member Roy Nakadegawa puts the cost at $9 billion to $10 billion. The truth is that there are huge unknowns.

Timing is everything. If the vote had been held in July when gasoline prices were still over $4/gallon, the measure would have easily won. As booster-in-chief Carl Guardino proclaimed that month:

"We are sitting in a time where gas prices are on the way to $5 and people want an alternative to the automobile," Guardino said. "That's the reason why we are doing this."

Time to polish that crystal ball, Carl. Gas is approaching $2.50/gallon and everyone is feeling poorer and in less mood to pay a tax.

It sounds like the failure of the ballot measure is a good thing for all concerned. Since the election, Richards has been floating a compromise plan being promoted by local politicians and transit bureaucrats. The idea would be to drop the $2 billion, five mile tunnel under San José and instead leave BART above ground to East San Jose. The Milpitas stop would connect to San José’s light rail system while Alum Rock is right at Highway 101, allowing commuters easy access to BART for trips north. (Right now, the Fremont station is several miles inland). As our mayor, Chuck Reed, was quoted by Richards:

"I'll advocate that we build it as far as we can with the money we have. If that takes us to Berryessa, fine. If it takes us to Milpitas to light rail, that's fine."

This seems like a no-brainer: build what you can now, and find funding for the more ambitious goals later on. I suspect politicians worry that building BART without the tax increase will raise questions as to whether it was necessary. I think during this era of financial (and business and government) overreach, getting smaller results sooner with less resources is the way to rebuild voter confidence.

Reboot your gPhone

ZDNet has an amusing report on how Android monitoring keystrokes can also be used to reboot your phone. Try it on your T-Mobile G1 — if you have firmware RC29 or earlier, kablooee.

Ed Burnette notes the linkage to open source:

Because Android is open source, the problem was quickly tracked down by users to a couple lines in the system file init.rc. My guess is that this was accidentally left in during device debugging. Thankfully the fix is trivial; you can probably even make it yourself if you’re so inclined (just comment out the offending lines described in the reports above and reboot).