Friday, December 12, 2008

Detroit's Just End

The Senate just failed to "bail out" the U.S. auto industry. The real blame falls at the feet of the United Auto Workers who refused to accept pay cuts as part of the deal.

This is the just end for an industry that has enjoyed too much power in our country for far too long. Ever since the 1930s, the vast bulk of our public building and planning have revolved around the automobile. Cities were neglected and trillions of dollars in wealth were transferred from rich northern cities to poor areas across the Sunbelt in particular. This process not only contributed to urban blight and impoverishment during the 1970s and 1980s, it also caused Americans to become completely addicted to expensive, inefficient and irrational life styles. It made use voracious consumers of fuel, building materials and -- most importantly -- capital.

With their multiple vehicles, hunting lodges and high-income life styles, Michigan auto workers were perhaps the clearest example of this phenomenon. Furthermore, the culture of entitlement fostered by the union has, in many ways, spread throughout our country. For years, they won ever-rising salaries and benefits, even though many of them never went to college or did anything significant to upgrade their skills. They simply expected the money to be there, regardless of the competition, the quality of their vehicles or the financial strength of their company. They were even paid for not working.

This actually should come as no surprise. One of the great innovations of the auto industry was to pay workers high salaries to make them into a consuming class of customers. This basic economic paradigm, often called Fordism, dominated our society from the 1940s until -- roughly -- now. Of course, incomes have not done terribly well over the last decade or so, but the economy grew ever more dependent on the consumer.

The dark side of this paradigm was debt. General Motors displaced Ford as the top automaker in the 1920s because it aggressively used financing to sell its cars. The dirty secret about our entire post-WWII society is that consumer debt grew a few percentage points faster than GDP almost every year. By the final end last year, debt was all that was driving the economy.

In many ways, GM is a microcasm for our entire country. GM was once a proud AAA rated company, with vast assets, enviable profit margins and a relatively small debt load. Everyone flocked to Detroit for jobs, making the UAW into a political force and a nexus of power and money. The organization bloated into a massive bureaucracy, with more committees, sub-committees and petty commissars than the Soviet Union. Factories sprawled across the Upper Midwest and pretty soon all of the brands were cannabalizing each others' sales.

Between all of its employees, executives and retirees, GM had many mouths to feed. Rather than downsize rationally, they chose to keep growing. The only problem is the Japanese had gotten really good and were now major competitors. The best way to move product and keep things going was to pay customers to buy their cars. Pretty soon, GM was offering 0% financing, or close to it, on their vehicles. Where did they get the money? They mortgaged their entire company.

Given their massive size, and helped by cheap oil in the late 1990s, they were able to keep squeezing more value out of their capital structure for about 25 years. Finally they are at the end of that road.

Now I listen to people talking about the USA. "We can afford a trillion dollars of stimulus," say some. "We have a better balance sheet than European countries," say others. While these statements are true, they reflect the basic problem with all credit-based investing: It's inherently backward looking and insufficiently aware of human culture and behavior. Credit investors only look at assets and liabilities. Unlike equity investors, they are seldom good at seeing where a company is going.

When I hear all of the loose talk about stimulus now, it reminds me a lot about the kind of thinking that ruled for decades at GM. "GM has plenty of money," said the union leaders. For decades, they were right. As a result, they developed a culture of waste and negligence. And, as a result of that, today the opposite is true. GM has almost no money.

The question is whether we will learn from Detroit. Profligate spending never made anyone richer. As Washington gets ready to hurl vast amounts of cash at the US economy in coming quarters, it's almost inevitable that decisions will be made as poorly as they were made in Detroit over the past years.

One last point about waste: Is there any reason why a 150-pound person needs to transport 2000 pounds of steel and fiberglass with them everywhere they go? Would you design a system where ordinary people are exposed to the legal liability of operating such a machine, and forced to pay for maintenance and insurance? Is it logical to borrow money to buy something that loses value the second you own it? Is there any reason why we must live at the end of suburban cul-de-sacs, in giant homes that consume even more energy than our vehicles? Is it healthy to spend several hours everyday in a vehicle, not exercising, earning money or learning new skills?

When you look at it from the big picture, none of it makes very much sense. The car culture is wasteful and, in the long run, unsustainable. But even more important, it draws on the worst in people rather than the best. It doesn't draw out the best in people, but the worst. It doesn't make us aspire to greatness, foster a better sense of community or more productivity. It's rooted in our crassest and most base tendencies.

Nothing embodies that more than the UAW, with its job bank and its calcified culture of entitlement.

When GM finally goes bankrupt, the blood will be on the union's hand. In the end, the truth always comes out.

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