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Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

The media coverage of the auto bailouts has focused on the need for union autoworkers to take big pay cuts, causing them to once again miss the real story. The Fiat-Chrysler deal shows that the pay problem is at the top, not the bottom. At the end of the day, the new Chrysler is still likely to be producing most of its cars in the United States. What the new company will be getting from abroad is technology and top management.

This big story was so easily missed because it runs against one of the main myths that our elites have cultivated about the US economy: that the country has a “comparative advantage” in highly skilled labor. In this story, the United States will continue to lose manufacturing and other “less-skilled” jobs as its economy becomes more concentrated in highly skilled sectors.

This story was convenient for our elites because it meant that the decline of manufacturing was a necessary, if sometimes painful, part of a natural economic progression. It also justified the growing inequality in US society that benefited not just Wall Street bankers and CEOs, but also millions of doctors, lawyers, economists, and other highly educated workers. These people took their six-figure salaries as a birthright, even as the pay of less educated workers stagnated or declined.

While this story of the US becoming a high skills center in the world economy may have been comforting to the elites, and was widely promoted by economists and the news media, there was never much truth to it. Highly skilled professionals did well in recent decades not because they succeeded in international competition, but rather because they were largely sheltered from it.

Trade agreements like NAFTA were explicitly designed to remove any barrier that made it difficult to export manufacturing goods to the United States, thereby placing US manufacturing workers directly in competition with their much lower paid counterparts in the developing world. Most of these restrictions had nothing to do with tariffs. Instead the key issues were rules protecting investment in the developing world along with limits on the ability of the US to exclude imports through safety or environmental regulations.

There has never been any similar effort to eliminate the barriers that prevent professionals from the developing world from coming to the United States and competing directly with their US counterparts as doctors or lawyers or in other highly paid professions.

The economists and the media somehow failed to notice that professionals were intentionally sheltered from international competition and instead just trumpeted them as the winners in the global economy. We were just treated to a beautiful example of this double standard when the media and the economists got all huffy about the “buy America” provision in the stimulus bill that might have protected a few manufacturing jobs in steel and other industries.

While this provision was roundly condemned and eventually watered down, the buy America provision in the Treasury’s latest bank bailout bill went completely unnoticed. This provision requires that any investment manager taking part in the program be headquartered in the United States. Even though the argument against protectionism in financial services is identical to the argument against protectionism in steel, no one bothered to make the argument when Wall Street was the beneficiary of protectionism.

The end result of this protectionism for those at the top is a bloated overpaid sector of top managers, which is what we saw at Chrysler. If we compare wages for assembly-line workers in Europe and the United States, there would not be much difference between the pay of UAW members and their counterparts in Europe. However, there would be a very large difference between the multi-million dollar pay packages of the top executives at the US companies and their European counterparts. The pay gaps persist among the more highly paid engineers and management personnel.

Therefore, it was only logical that a bailout of Chrysler would seek to take advantage of the lower cost management and design skills available at a European car company like Fiat. In Chrysler, as in other companies, the high pay packages for these people are like an anchor dragging them down in international competition. If the US is to be competitive in the 21st century, we must either bring the pay of those at the top back down to earth or we should look to follow the lead of Chrysler and contract out for these services.

Dean Baker is the author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy.”

This piece was first published on Huffington Post.

Michael Hiltzik

Watching people desperately trying to hang on to their little all following a disaster is an experience, as Aristotle would have appreciated, certain to excite pity and terror in the human breast.

If only we didn’t have to spend so much time these days watching bankers and corporate executives do it.

Every day seems to present yet another example of the disjunction between the financial community’s sense of entitlement and the real world occupied by everybody else.

The other day, the inspector general for the government’s financial bailout program, known as TARP, revealed that Chrysler’s lending arm requested $750 million in new money but was turned down because its top 25 executives wouldn’t all agree to the compensation limits TARP requires.

That’s after the government had already given Chrysler Financial $1.5 billion. (Chrysler says, for its part, that it decided it didn’t need the additional money after all. Nothing to do with the pay caps, it says. But of the original $1.5 billion, so far it has repaid only $3.5 million.)

Meanwhile, a passel of Wall Street professionals unburdened themselves to New York magazine about the punitive cuts in pay and bonuses they’re suffering — imposed, to their minds, by jealous people less talented and successful than they.  More

This column was first published April 23, 2009 in the Los Angeles Times.

David Sirota

By David Sirota
Author of “The Uprising: An Unauthorized Tour of the Populists Revolt”

United Steelworkers President Leo Gerard likes to say that Washington policymakers “treat the people who take a shower after work much differently than they treat the people who shower before they go to work.” In the 21st century Gilded Age, the blue-collar shower-after-work crowd is given the tough, while the white-collar shower-before-work gang gets the love, and never before this week was that doctrine made so clear.

Following news that government-owned American International Group (AIG) devoted $165 million of its $170 billion taxpayer bailout to employee bonuses, the White House insisted nothing could be done to halt the robbery. On ABC’s Sunday chat show, Obama adviser Larry Summers couched his passive-aggressive defense of AIG’s thieves in the saccharine argot of jurisprudence. “We are a country of law – there are contracts (and) the government cannot just abrogate contracts,” he said.

The rhetoric echoed John Adams’ two-century-old fairy tale about an impartial “government of laws, and not of men.” Only now, the reassuring platitudes can’t hide the uncomfortable truth.

Last month, the same government that says it “cannot just abrogate” executives’ bonus contracts used its leverage to cancel unions’ wage contracts. As the Wall Street Journal reported, federal loans to GM and Chrysler were made contingent on those manufacturers shredding their existing labor pacts and “extract(ing) financial concessions from workers.” In other words, our government asks us to believe that it possesses total authority to adjust contracts at car companies it lends to, and yet has zero power to modify contracts at financial firms it owns. This, even though the latter set of covenants might be easily abolished.

According to New York Attorney General Andrew Cuomo, these allegedly inviolate AIG agreements promised bonus money the company didn’t have and were crafted by executives who knew the firm was collapsing, meaning there is a decent chance these pacts could be invalidated under “fraudulent conveyance” statutes. They also might be canceled via force majeure clauses allowing one party to rescind a pact in the event of extraordinary circumstances – like, perhaps, the collapse of the world economy. (Note: Business Week reports that corporations are already citing the recession as reason to invoke such clauses and nix their business-to-business contracts.)

But, then, those legal cases require a government that treats AIG’s shower-before-work employees with the same firmness that it treats the auto industry’s shower-after-work employees, not the government we have – the one that believes “the supreme sanctity of employment contracts applies only to some types of employees but not others,” as Salon.com’s Glenn Greenwald says.

Mind you, this double standard works the other way, too. Congressional Republicans have long supported the laws letting bankruptcy courts annul mortgage contracts for vacation homes. Those statutes help the shower-before-work clique at least retain their beachside villas, no matter how many of their speculative Ponzi schemes go bad. But for those who shower after work, it’s Adams-esque bromides against “absolving borrowers of their personal responsibility,” as the GOP announced it will oppose legislation permitting bankruptcy judges to revise mortgage contracts for primary residences.

Certainly, for all the connotations of fairness inherent in American politics’ “country of law” catchphrases, most of us know that the selective application of legal principles is as old as the Republic. However, lots of us are only now discovering that inequality is so pronounced that the time of day we bathe determines the enforcement and reliability (or lack thereof) of even the most basic contracts. We are just realizing that for all the parroting of America’s second president, we are ruled by a government of men, and not of laws.

David Sirota is a fellow at the Campaign for America’s Future. Find his blog at OpenLeft.com or e-mail him at dsdavidsirota.com.<–>

Leo W. Gerard

By Leo W. Gerard
International President

President Bush took to the TV Friday to announce that he wouldn’t walk past the financial crash of America’s Big Three automakers and do nothing to save their lives.

Refusing resuscitation, Bush said, would be irresponsible during the worst economic crisis since the Great Depression.

A week earlier, 31 GOP Senators, mostly from Southern states, voted to avert their eyes and allow American auto companies to die. They opposed $14 billion in federal loans for GM and Chrysler, revealing that their loyalty lies not with America, not even with their own states, but with South Korea and Germany and Japan.

They are Toyota Republicans.

Toyota has non-union manufacturing plants in Alabama, Kentucky, Mississippi and Texas – states whose senators led the GOP quest to slay the Big Three American auto manufacturers – Richard Shelby, R-Ala.; Mitch McConnell, R-Ky, and John Cornyn, R-Tx. Here’s the Republican from Mississippi, Sen. Thad Cochran, explaining why he’d vote against the loans, “Things have changed. It’s not just the Big Three anymore,” he said, pointing out that Nissan and Toyota employ more Mississippians than General Motors, Ford and Chrysler. But, he said, the foreign companies would not share “in the benefits of that automobile bailout program.”

No. But Mississippi did give Nissan and Toyota more than $650 million to entice them to locate in the state. GM, Ford and Chrysler didn’t share in those benefits, Sen. Cochran.

The Toyota Republicans are all for helping the rich with tax breaks and shelters, and they’re all for aiding foreign auto manufacturers with billions worth of tax forgiveness and government-paid infrastructure improvements.

But their disdain for the working class couldn’t be clearer as they organized defeat of loans to the Big Three under this command: “Republicans should stand firm and take their first shot against organized labor.”

They haven’t gotten the message sent out by the electorate in November. Voters rejected politicians prolonging the same old policy of protecting themselves and the rich. The nation’s voters want selfless leaders who will perform in the best interests of the entire country. They want change.

Clearly the allegiance of the 31 Republicans who opposed the loan to save GM and Chrysler is not with the United States of America, which would lose 900,000 jobs if just GM closed, and more than 2.1 million if the Big Three did. Those job losses would occur during the worst economic downturn since the Great Depression. In November, the 11th consecutive month of job losses, another 533,000 people were thrown out of work, swelling the pool of unemployed to 10.3 million. The Toyota Republicans were willing to increase that.

They voted against the interests of their own states as well. Consider what would happen in a few of those Southern States whose senators led the charge against preserving the Big Three. If just GM collapsed, Kentucky would lose 20,000 jobs; Alabama, 21,000; Georgia, 23,000, and Tennessee, 29,400, according to calculations by the Economic Policy Institute.

Sen. Cochran just didn’t think it was right for the U.S. government to aid its auto industry. But apparently he’s fine with foreign governments providing subsidies to the transplant automakers in his state. And, apparently, he’s okay with spending state and federal money to help foreign automakers locate manufacturing plants in the U.S.

Korean and Japanese automakers – including Nissan and Toyota with plants in Cochran’s Mississippi – benefit from manipulation of currencies by their governments, a factor that, according to EPI estimates, reduces their costs by between 10 and 20 percent. In addition, nationalized health care in countries such as Japan and Germany serves as a subsidy.

Also, the Toyota Republican opposed federal money for American companies but supported state and federal money for foreign auto makers estimated at $3.6 billion.
Shelby, for example, got $3 million in federal funds to improve roads near the Hyundai plant in Alabama after the state gave $250 million to the Korean automaker.

Shelby opposed loaning one federal cent to the U.S. automakers, though, telling “Face the Nation” that they should die: “Companies fail every day and others take their place. . . There’s not a bank in this country that would loan a dollar to these companies.”

But for foreign auto companies, his home state of Alabama couldn’t provide enough taxpayer cash – more than three quarters of a billion. In addition to the quarter billion it gave the Korean automaker, it handed another quarter billion to German Daimler for a Mercedes-Benz plant, nearly a quarter billion to Japanese Honda and $29 million to Japanese Toyota.

Similarly, Jim DeMint, another senator who led the Toyota Repubicans’ rebellion against the loans to GM and Chrysler, told the “National Review” recently, “Government should not be in the auto industry.” Yet, his state, South Carolina, got into the auto industry with nearly a quarter billion — $230 million – in gifts to a German auto company – BMW.

The same is true in Kentucky, home of Sen. Mitch McConnell, who said of loans for the Big Three, “Government help is not the only option. It’s not even the best option.” But government help was fine when Kentucky was providing grants for Toyota, which got $371 million from taxpayers since 1986.

It’s clear that the real problem was not a philosophical one. All of these lawmakers were willing to flick free market capitalism out the car window like a cigarette butt if their states could use taxpayer dollars to buy a foreign auto plant. No, what really gags them about the Big Three is that they pay good, middle class wages and benefits as a result of contracts with the United Autoworkers.

Repeatedly, the Toyota Republicans insisted that UAW members bear the brunt of the cost of the bailout. The senators insisted that UAW wages be lowered to match those of non-union auto workers at foreign-owned manufacturers. Toyota Republican Sen. Bob Corker of Tennessee, wrote an amendment to the bailout bill that would have required UAW members to accept pay cuts by a specific date in 2009. When Republicans defeated the bailout, DeMint blamed that on the union, saying, “It sounds like the UAW blew up the deal.”

The Toyota Republicans then conferred the American auto industry to bankruptcy. They said they favored bankruptcy because it would enable the Big Three to break pledges made in labor contracts and promises for health care and pensions made to retirees. The Toyota Republicans want the wages of American workers pulled down. To them, UAW members making an average of $28 an hour, accounting for less than 10 percent of the cost of a car, are earning just too much money.

The Toyota Republicans did not, however, make that claim about the white collar workers on Wall Street who got this country into the financial fiasco that led to the dire circumstances for automakers. And not just for American ones. Domestic car sales declined by 40 percent last month, but Asian producers’ sales dropped too – by 35 percent.

The average salary of white collar, Wall Street employees — workers in “securities, commodity contracts and investments” — is four times that of those laboring in the rest of the economy. Remember, these are the guys who are so smart that they took down Bear Stearns, Fannie Mae, Freddie Mac, Washington Mutual, AIG and Lehman Brothers – in less than a year – and ultimately required $700 billion from taxpayers to bail them out.

The top executives of Wall Street banks receive billions of dollars in year-end bonuses. The New York Times detailed those at Merrill Lynch in a story Dec. 17 entitled “On Wall Street, Bonuses, Not Profits Were Real.” In 2006, the firm gave its top executives between $5 billion and $6 billion in bonuses, which means, for example, a trader earning $180,000 a year got a $5 million bonus.

Merrill’s $7.6 billion earnings that year turned out to be bogus. The company’s losses now have exceeded all of the profits it earned over the previous 20 years. To prevent collapse, it sold itself to Bank of America in September. But then, Bank of America took $15 billion of that $700 billion in bailout money. Despite the gift of taxpayer dollars, the CEO of Bank of American has not publicly announced that he will decline a bonus, and Bank of America plans to tell Merrill Lynch workers the amounts of their bonuses beginning Friday, the New York Times reported Thursday.

When those Toyota Republicans voted in favor of providing $700 billion for Wall Street — including both of Tennessee’s senators, Bob Corker and Lamar Alexander; Kentucky’s Mitch McConnell; Georgia’s Saxby Chambliss and Johnny Isakson; South Carolina’s Lindsey Graham, and Texas’ Kay Bailey Hutchinson and John Cornyn – none asked for high-paid white collar workers to take pay cuts or give up their million dollar bonuses. There was a feeble attempt to limit the pay of chief executives, but that applied only to firms that received federal money under one particular method, and the treasury decided not to hand out the $700 billion that way.

And no lawmaker asked white collar workers or executives who got billions in bonuses based on false profits to return them.

But those Toyota Republicans want middle class, blue collar workers who don’t get year end bonuses, who don’t celebrate with five-figure dinners, to take wage cuts. They want autoworker pensioners to lose the monthly benefits they earned with a lifetime of labor.

And at no time did those Toyota Republicans suggest that they should cut their own salary or top-notch, government-paid health benefits or pensions. Like the reckless speculators on Wall Street, Congress bears responsibility for the crisis condition of the American economy because it deregulated financial markets.

In 2002, during a downturn in Japan, the House of Councillors reduced the pay of Diet lawmakers by 10 percent, and ended the transportation allowance, portrait-painting and  pension given senior lawmakers.

If the Toyota Republicans believe the Japanese way of pay is so great for autoworkers, they should first impose it on themselves.

Leo W. Gerard

By Leo W. Gerard
International President

In 1941, car manufacturer Willys-Overland demonstrated the strength and sturdiness of its new Army scout vehicle – the Jeep — to Congress by driving it up the U.S. Capitol steps.

Invented and manufactured in the USA, the Jeep would become an icon of American ingenuity, durability and mechanical ability. Soldiers loved the lithe little vehicle for its uncanny capacity to go anywhere. The New York Museum of Modern Art would exhibit it in 2002 and describe it as a masterpiece of functional design. Now it’s 68 and constructed by United Auto Workers for Chrysler in Toledo, Ohio.

Disregarding Jeep’s help in securing this country against fascists, conservatives like former Republican Massachusetts Gov. Mitt Romney are calling for its execution. Romney and his conservative compatriots want Congress to deny Chrysler, GM and Ford federal loans so that the Big Three go bankrupt. Using false wage information, these conservatives have persuaded the public that auto workers are overpaid. That has resulted in polls showing 61 percent of Americans oppose aid to the Big Three. And now Senate Majority Leader Harry Reed is saying he fears he can’t muster the votes necessary for a loan.

Congress cannot let the Jeep die in bankruptcy. Congress must not fail the U.S. auto industry. Doing so would be abandoning the core of the American economy – manufacturing. America is not built on Wall Street’s credit default swaps and collateralized debt obligations.  Its wealth and culture are built on and built by middle class workers who construct actual products like steel beams, tires and Jeeps, who operate and repair machines that pull oil and coal out of the ground, who log trees and man the mills that convert them into paper.

Just after the end of World War II, when the Jeep first became a civilian vehicle, 35 percent of workers belonged to labor unions. That’s significant because union members earn 30 percent higher wages than non-union workers and are 59 percent more likely to have health insurance. Those better wages and benefits helped create the great middle class in America. Workers earned enough money to buy refrigerators and homes and cars and, later, college educations for their children. The money they earned and spent churned through the economy and kept it humming.

But over the next half century, union membership declined. So it is only about 12 percent now. Business and industry groups intent on the extinction of unions can claim credit for a good part of that. These are the same organizations that are today misleading the public about auto worker wages, claiming they make $70 an hour when it’s really $28. They’re the same ones advocating auto company bankruptcy because it would allow the Big Three to renege on their contractual promises to workers and to retirees. They criticize auto workers for making a decent living, $28 an hour plus health benefits and a pension. And they denigrate the companies for being decent corporate citizens and fulfilling their health care and pension promises to retirees.

Over the past half century, multinational corporations have shipped a significant number of those good-paying union jobs overseas. With the help of wrong-headed federal policy that encouraged it, the U.S. lost an average of 12,000 manufacturing jobs per month since 1980. Since May this year, the average has been nearly 60,000. Multinational corporations sought cheap labor and lax environmental regulations in places like China and Indonesia, in what has become an international wage race to the bottom. Americans supposedly benefit from the import of cheap goods. But unemployed workers can’t afford to buy them.

Along with the decline in jobs and union membership came a reduction in the rate of personal savings and an increase in household debt. The financial situation of the typical American family became increasingly precarious even as, over the past 25 years, the very richest one tenth of one percent accrued more and more wealth. These were the kind of guys involved in short-selling – a practice through which a person owns nothing but makes money by betting that a stock will lose value – and by selling sub-prime mortgage-backed securities. These were the kind of know-it-all Wall Street risk takers who gave themselves $30 billion in bonuses last Christmas.

You know what happened next. Three months after those bonuses the initial investment bank fell. Bear Stearns got the first big federal bailout in March. Then other financial institutions and a gigantic insurance company involved in the subprime speculation toppled: AIG, Washington Mutual, Fannie Mae, Freddie Mac, and Lehman Brothers. Congress quickly offered up $700 billion to save financial institutions, and giant Citigroup took $25 billion of that in October and another $20 billion in November trying to stave off bankruptcy.

Congress used taxpayer dollars – working people’s money – to save those year-end-bonus awardees on Wall Street. Then it stiffed the working stiff. So far, there’s been talk, but no actual help for millions facing foreclosure. And while unemployment is rising, Congress is dithering over the Big Three’s request for a loan that could save millions of auto worker and support industry jobs.

Unemployment increased to 6.7 percent in November, after 533,000 people got thrown out of work in just those 30 days. Over the past 12 months, 2.7 million people lost their jobs. And finally, what every one of them already knew was officially declared earlier this week – the country has been in a recession for a year.

This nation clearly can’t survive on what is produced by Wall Street – reckless speculation. That took America down.

This country should not be spending all of its financial resources salvaging those who destroyed the economy. America needs to invest in what works – its people. Congress must provide mortgage relief. But, most urgently, it’s crucial that we re-invigorate our manufacturing base. America must be able to actually produce products. Swapping paper is not enough to sustain a strong and stable middle class that will save money and buy cars and homes.

The Jeep helped us win World War II. What has Wall Street actually done for you? Saving the Jeep – and Chrysler, GM and Ford – would be a symbol that America understands manufacturing is key to a strong economy and financially brawny workers.

Jeep owners should let Congress know they’re prepared to drive up the Capitol steps to support loans for the Big Three and investment in American manufacturing.

Leo W. Gerard

By Leo W. Gerard

International President

Congress drove the Big Three CEOs out of Washington, D.C. last week, ordering them not to return with their tin cups until they could guarantee their companies would be viable after a $25 billion bailout.

Just days later, Citigroup, a bank that had already received a $25 billion bailout in October, held its hands out for more. Within 48 hours, federal officials approved giving the bank another $20 billion and providing backing for $306 billion in its risky loans and securities. Even though Citigroup was failing just weeks after getting its first government bailout, Congress didn’t subject its CEO to the public lecturing and demands for business plans that it did the Big Three.

The message here could not be more clear: Washington will bailout out those who shower before work but not those who shower afterwards.

Washington, D.C. is a white collar town. President Bush and members of Congress understand their suited counterparts on Wall Street. In fact, several prominent figures in the banking industry – including Citigroup’s Robert Rubin, a former Secretary of the Treasury, and UBS Investment Bank’s Phil Gramm, a former Texas Senator, – worked in Washington first, aiding and abetting the current crisis by de-regulating the financial markets and everything else they could.

Detroit, by contrast, is a blue collar town. It’s a place where workers at the Big Three earn thousands of dollars — the average production employee making $67,480 last year — not hundreds of thousands, and certainly not Wall Street’s millions. The Citigroup CEO credited with overseeing the bank’s ill-fated investments, Charles O. Prince III, was forced out a year ago as the bank’s massive sub-prime losses began mounting but the board of directors still gave him a $12.5 million bonus, $68 million in salary and accumulated stockholdings, a $1.7 million pension, an office, and a car and driver for up to five years. Heading the board executive committee at that time was Rubin, who would briefly serve as chairman and receive $17 million in compensation as the bank declined further into financial ruin.

Detroit is a place where workers are unionized; Wall Street is not. And right-wing Republicans and conservative pundits have made it clear they want the union workers to suffer. They want federal aid denied to the Big Three so that the firms go bankrupt. Then the companies can renege on pensions they guaranteed to retirees and can break salary and benefit promises to workers in current contracts.

Senate Minority Whip Jon Kyl writes on his web site that Chapter 11 bankruptcy would be best for the Big Three because it would enable them to break their pledges to retirees receiving health care and other benefits earned over decades of service, what he calls “legacy debts”: “Like many other industries, including the airlines, the goal under Chapter 11 is to gain temporary protection, reorganize in a way to reduce legacy debts, and emerge as a more viable and competitive company.”

Conservative columnist George Will, similarly, wrote: “Do nothing that will delay bankrupt companies from filing for bankruptcy protection, so that improvident labor contracts can be unraveled. . .” Will’s fellow Washington Post Columnist Martin Feldstein blamed all of Detroit’s problems on the unions, writing that the basic reason the Big Three can’t compete: “is labor costs imposed by union contracts.” He said if Congress gives the Big Three a loan, it must require “that the unions accept reductions in wages and benefits to levels that allow the firms to compete with imports and with non-union U.S. auto firms. The trustees of retiree benefits should be required to accept reductions in those benefits.”

They want the unions broken. They want retirees’ benefits slashed and union workers’ wages and benefits cut, which, of course, will enable the foreign auto makers – whose U.S. plants are non-union – to reduce their wages. It’ll be an all-American race to the bottom, rather than the preferable opposite, where workers and retirees are treated with dignity and respect for their hard labor.

None of those conservatives, however, is calling for Citigroup’s Charles O. Prince III, who took down Citigroup at a cost of untold billions to taxpayers, to return his $1.7 million pension, office and car and driver.

Unlike Citigroup and the other Wall Street banks, which have their very own inside-the-beltway apologists in the form of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson to argue their case before Congress, the Big Three CEOs had to appear before Congress to plead for themselves.

There, legitimately, lawmakers grilled them about flying to the hearings in expensive private jets and about their multi-million dollar compensation packages. Still, none of the lawmakers has asked Citigroup’s CEO, Vikram S. Pandit, to take $1 for next year’s compensation, as they did the auto executives. Nor have they asked any of the CEOs from the nine banks that shared $125 billion in bailout money in October to sell their private jets, as they did the auto executives.

Conservatives also argued that the Big Three should be left to die because in a free market, that’s what happens to poorly operated companies offering inferior products.

Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, said, for example, “I do not support the use of U.S. taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers.”

Shelby made this accusation while part of the Congress that ran up the largest federal deficits known to man and allowed Paulson to broker a deal to sell troubled Wachovia bank to troubled Citigroup – a bank that so far got two bailouts, the first of which arriving within weeks of the failed Wachovia marriage.

Shelby, of course, has a lot to lose if Michigan does well. His home state of Alabama gave tax breaks to foreign car companies Mercedes-Benz, Honda and Hyundai to locate factories there – hardly a free market approach.

So, like many conservatives, he twists reality to suit his circumstances. He’s right that American car companies made mistakes. In October, GM’s sales were off 45 percent from the year before, Chrysler 35 percent and Ford 30. But he’s wrong about that being a result of mismanagement alone, well, unless he thinks his precious foreign car companies made the same mistakes. Toyota was down 23 percent, Honda 25 and Nissan 33 for the same month.

And if aid denial is based on bad products, Wall Street definitely should be the first refused. Its firms built and sold what are now being called “toxic securities,” products so defective that they took down banks, the U.S. economy and international financial stability – creating the deepest economic crisis since the Great Depression. Now that’s mismanagement for you!

When the representatives of blue collars went to Congress hat in hand, lawmakers insisted that to get loans automakers would have to present viable business plans. Congress didn’t impose similar conditions, however, when Bernanke and Paulson went to Congress seeking grants for reckless white collar firms.

In fact, they gave $125 billion to nine big Wall Street banks in October, contending the direct infusion of money would melt frozen credit. It didn’t. The firms apparently didn’t lend the money, and the deal didn’t require them to. There’s a viable business plan for you!

Paulson and Bernanke gave insurance giant AIG $85 billion. And when that didn’t work, they forked over more until it all added up to $150 billion. Now, it’s not clear that will be enough to resolve AIG’s problems. Sen. Jon Kyl, the Republican from Arizona who voted for the Wall Street bailout, didn’t demand a viable business plan for AIG or Citigroup, yet said this about the auto industry request: “There’s no reason to throw money at a problem that’s not going to get solved.”

This year, as Wall Street’s recklessness destroyed the American economy, a million Americans lost their jobs. It’s no wonder no one is buying cars. It’s not just that they can’t get credit. It’s also that they don’t have money to spend or they’re afraid to spend the money they have.

Some of those furloughed had been on Wall Street. Citigroup announced recently it would cut 52,000 jobs by early next year. But of the million jobs lost so far, 100,000, or one in ten, have been auto workers or employees of auto suppliers. Unemployment in Michigan is 9.3 percent – while in the rest of the nation it is 6.5.

Just like Paulson who couldn’t see that Citigroup was too weak to buy Wachovia, the conservatives intent on denying the Big Three loans are shortsighted. They don’t see that 2.3 million jobs in and dependent on the auto industry could be lost. They don’t see the effect of slashing the wages and benefits of people who get their hands dirty for a living.

It would mean even more mortgage foreclosures and even more credit card debt unpaid to those struggling banks. It would mean the Big Three defaulting on the $100 billion they owe to those weak banks and bondholders, some of which is secured, some not.

It’s the big circle of economic life. If Congress spits on the autoworkers and the millions whose jobs depend on the Big Three, the lawmakers may find themselves using more and more taxpayer dollars to scrub new blood off Wall Street.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

Henry Paulson’s main claim to fame is getting just about everything wrong in his tenure as Treasury secretary. However, he now stands to gain lasting notoriety as the person who destroyed the domestic U.S. auto industry, and the economies of the Michigan, Ohio, and Indiana along with them.

The story is that the big three automakers are struggling with record sales declines. This collapse in car sales in turn is the fallout from the collapse of the Greenspan-Bernanke housing bubble. While the domestic automakers have been hit hardest, all manufacturers have seen sharp drops in sales. Toyota’s sales were down 23.0 percent compared with its year ago levels. Honda’s sales were down 25.2 percent, and Nissan’s sales fell 33.0 percent.

These huge plunges in year over year sales by the world’s top car manufacturers can’t be blamed on the industry. Responsibility for this plunge lies with Mr. Paulson and other economic policy makers, and their Wall Street friends.

The basic arithmetic is simple. General Motors saw its sales fall by 45 percent compared to its year ago levels. That means its revenue has been cut nearly in half. While it has made some reductions in employment and can ease back its production, there is no way it can reduce its expenses by the same amount. Many of its expenses, like interest costs, property taxes, and health insurance for retirees are largely fixed independent of short-term fluctuations in output.

As a result General Motors is now losing close to $2 billion a month. At this rate, it will burn through its capital in around 2 months and be forced into bankruptcy. Chrysler and Ford are in somewhat better shape, but the basic story is the same. Furthermore, the fallout from a GM bankruptcy could sink Chrysler and Ford as well, as common suppliers shut down and credit for the industry vanishes and customers flee to manufacturers with longer life expectancies.

There have been analysts, presumably including Henry Paulson, who think that bankruptcy is a reasonable solution for the auto industry. This is yet another of Mr. Paulson’s famous mistakes. (Remember, this guy missed the housing bubble completely, thought its impact would be small when it burst, didn’t see a problem with letting Lehman Brothers fail, and thought the TARP [RIP] was a good idea.)

Bankruptcy would allow GM, Ford and Chrysler to more quickly cut back their bloated dealer networks and adjust their car lines with current market demand, as its proponents claim. Bankruptcy would also void union contracts, which will thrill the millionaire bankers by forcing workers earning $57,000 a year to take pay cuts. And, all those lazy retirees will see the health care benefits that they worked for taken away.

That’s the good part. Realistically, bankruptcy is likely to kill all three manufacturers, taking down much of the region’s economy with them.

First, some folks may recall the credit crunch. Lenders are extremely reluctant to take risks. In the absence of government guarantees, it is unlikely that any banks will step forward to provide GM and the others the money they need to keep operating in bankruptcy. In other words, bankruptcy is very likely to mean a complete shutdown of the Big Three.

Let’s say that the anti-bailout crowd suddenly gets a soft spot and decides to guarantee loans to the firms operating under bankruptcy protection. There is still the problem of selling cars. Customers will be very reluctant to buy cars produced by a manufacturer in bankruptcy, since they won’t know if a dealer and supplier network will exist in 3 or 4 years so that they can get their car serviced and buy replacement parts.

While people don’t mind flying an airline in bankruptcy, buying a car is to some extent an investment in the company. Many fewer customers will be willing to invest in a bankrupt car company.

But let’s assume that the investment financing is arranged and that customers are still willing to come through the doors. The bankruptcy itself is still likely to be devastating to the economies of Michigan, Ohio, and Indiana, the three states where Big Three employment is concentrated.

Bankruptcy protects the firm from its creditors. The creditors of these firms are thousands of suppliers who are heavily concentrated in the same states. In most cases, the Big Three manufacturers were their major customers. These suppliers have already been squeezed by falling demand and lower product prices. If they cannot collect the money owed them by the Big Three, there will be a whole chain of secondary bankruptcies.

The impact in these states is potentially huge. According to the Center for Automotive Research, auto related employment accounts for almost 7 percent of total employment in Michigan, 6 percent in Indiana, and 5 percent in Ohio. Losing 7 percent of total employment in Michigan would be equivalent to losing more than 9 million jobs nationwide.

That is Mr. Paulson’s latest plan for the auto industry and these three states. This will be quite a legacy.

There is one last point that should really gall just about everyone. Mr. Paulson has argued that he does not have the legal authority to use the money appropriated for TARP for bailing out the auto industry.

This claim is outrageous for two reasons. As many of us who opposed the TARP argued, it gave Paulson a virtual blank check, and that is pretty much how he has interpreted it, using the money to bail out a wide range of non-bank institutions.

The other reason why this is so galling is that this is an administration that has taken pride in claiming virtually unlimited powers in a wide range of areas, including the conduct of war and holding of prisoners without charges or trial. It would be incredible if they allow Detroit to sink because they claim that they don’t have the legal authority to save it.