February 17, 2012
Motor Vehicle Output and Sales, Three Years after the Deluge
Here is a summary graph of the state of the US motor vehicle industry, as indicated in the last GDP release.
Figure 1: US motor vehicle output (blue) and sales (red), in bn. Ch.05$. Dashed line at 2008Q4 (November 2008). NBER defined recession dates shaded gray. Source: BEA, Table 7.2.6U. Real Motor Vehicle Output, January 30, 2012 release, and NBER.
Posted by Menzie Chinn at February 17, 2012 07:07 PMdigg this | reddit
I suspect that it's also a little hard for Romney to swallow the fact that the government ended up accomplishing what one of Romney's beloved private equity firms (in this case Cerberus) couldn't accomplish. Even more galling for Romney, in bailing out Chrysler the government also indirectly bailed out his competitor Cerberus.
Romney's argument against the TARP bailout reflects a "severely" misunderstood application of the more general argument against government bailouts. It's never a good idea to bailout an inefficient business when the economy is healthy. Doing so crowds out more efficient firms and eventually lowers potential GDP. The argument against bailing out inefficient firms is essentially a supply side argument. And the argument makes sense if it's 1979. But 2009 was not 1979 and the central problem in 2009 was a collapse in aggregate demand and not a binding aggregate supply curve. Just as social conservatives are forever trapped in 1968, so too are economic conservatives forever stuck in 1979. The TARP bailout not only helped support aggregate demand, but it was also an opportunity to adjust the cost structures for GM and Chrysler in a way that private equity firms were not able accomplish. Workers and middle management trusted agreements made with the government in a way that they could never trust a private equity firm. Afterall, Larry Summers even wrote a paper explaining why the real secret to a private equity firm's success is its ability to sucker workers into bad faith agreements.
Posted by: 2slugbaits at February 18, 2012 05:16 AM
I understand your political interest in criticizing Mitt Romney, but it's pretty unfair. Per Ron Suskind's book "Confidence Men", all of Obama's economic advisors were opposed to the auto bailout, but the political calculus won the day (the line was, "What do we do when a worker walks out of a GM factory holding a sign, 'I guess I wasn't too big to fail.'")
So Mitt Romney had similar views in 2008 to Larry Summers et al. Hardly a stinging indictment. Personally, I'd rather have a president who listens to economists rather than his political advisors when making huge economic decisions (though in this case it's looking like the right political move).
Posted by: Jon at February 18, 2012 06:06 AM
A minor correction to my previous comment (since I just reread the relevant section of Confidence Men): Austan Goolsbee and Alan Krueger were advocating "let them fail." Summers initially was with them, but switched sides early during the debate, apparently due to the political calculus (not the economics).
Posted by: Jon at February 18, 2012 06:13 AM
MMMM? Mitt is a leading indicator of an economic rebound in the auto industry. He has some useful function after all.
Posted by: dilbert dogbert at February 18, 2012 06:19 AM
So the market believed Romney and it started getting back on its feet?
Posted by: Johannes at February 18, 2012 07:36 AM
Austen Goolsbee was always seen as a little to the right of most Democratic economic advisors. Larry Summers is a very bright guy and a brilliant economist, but his sense of judgment has always been below average. Summers also forced Romer to downsize her stimulus projections. Summers also showed the bad judgment of believing the GOP would give Obama a second bite at the apple. Summers also misjudged the nature of the recession. He initially saw it as a garden variety recession, in which case a "let it fail" approach would have made sense. Again, Summers' poor sense of judgment led him to misapply his vdeep understanding of economics. I'm a lot dumber than Summers, but even a non-economist like me had a good enough sense of judgment to know a "let it fail" approach was a bad idea in early 2009.
Posted by: 2slugbaits at February 18, 2012 07:44 AM
Re: comment by Jon: don't confuse words with actions. What matters is what was done. Here's a really offensive example: just before Pearl Harbor, the German-American Bund had over 1 million members, held huge rallies and tried to push the US to favor Nazi Germany over Britain. Not kidding. You don't hear about them because the Bund disappeared when we went into the war. I have no idea how many Bund members served but I'd guess it was a lot and that many died fighting Nazi Germany. What matters is what actually happens. If we equate words with deeds, we miss the point of reality.
As to Mitt, understand that his version is being revived in a couple of versions. For example, we see the argument made that Lehmann's collapse didn't matter because no firms failed. That defines a specific context which is detached from the larger reality in which all these other firms stayed alive only because government propped them up. The point of the argument is to narrow the context so much that what you say is true for that specifically defined context, even if it's untrue in general.
Mitt's argument is a little different: that bankruptcy would have worked because it would have been the same as what happened, except better because then creditors would have done better than workers - which I'm not sure is "better" - and the government wouldn't have ownership. It's sort of like saying my cat is a dog because I call it "Dog".
Posted by: jonathan at February 18, 2012 07:54 AM
The reason behind the rise in sales is due to sub-prime credit tiered programs being re-introduced to form a new bubble...specifically from govt. owned finance companies which forced secondary finance companies to lower their credit tiered thresholds to compete..In the industry...When 500 fica's are being bought on 22K vehicles you have another crisis brewing...Used car market is severely overpriced....
Resource depletion will make a mockery on the very graph you post as people will not be paying those monthly payments when gas goes to $5...
This looks like a classic build and dump before the bust...
Posted by: cd at February 18, 2012 08:18 AM
Romney isn't necessarily wrong in his assessment of the auto industry.
First, despite bailouts, both GM and Chrysler went bankrupt anyway and restructured just like Romney said they should.
Second, because of the bailouts, taxpayers lost billions that will never be recovered; yet got the same end result as if they had not given the bailouts.
Third, the graphic shows normal recession recovery just like can clearly be seen happened after the 2001 recession.
The graphic does not disprove Romney's fundamental premise that automakers need to change their culture and business model to become competitive again.
Whether or not that happens is yet to be seen.
Posted by: azleader at February 18, 2012 08:20 AM
Check out this post on industrial production over at The Economic Populist. There is a graph reinforcing your GDP component on the auto industry, capacity. Auto & Light Truck capacity has dramatically increased. Graph is against total capacity and manufacturing capacity. (I hope this comment lets me link)
The article is: Don't Let the Big Fat Zero for January 2012 Industrial Production Fool You.
Posted by: Robert Oak at February 18, 2012 10:02 AM
azleader Sorry, but you're way off base here. GM and Chrysler did go through managed bankruptcies, but they did not die. They came back. And they came back because the federal government was the ONLY entity capable of providing the credit needed to manage a bankruptcy restructuring. Under normal circumstances Romney's position probably would have made sense. But in late 2008/early 2009 it made absolutely no sense. Romney assumed away the larger problem of a financial system in collapse and then focused on a narrower problem of two firms going bankrupt. This demonstrates that Romney has no sense of being able to put things in context, which is a polite way of saying Romney is unhinged from reality. Advocating policies without respect to context is the hallmark of an ideological mind. Or in Romney's case an empty suit in search of an ideology.
And why are you offering the recovery from the 2001 recession as somehow "normal." Krugman has written extensively on how recent recoveries (i.e., post-Great Moderation recoveries) are very different from your father's and grandfather's recoveries.
It's also appropriate to give credit to the Bush #43 Administration. Strangely, during his last four months in office Bush #43 wasn't half bad. Too bad his previous 92 months were godawful.
Posted by: 2slugbaits at February 18, 2012 10:09 AM
"First, despite bailouts, both GM and Chrysler went bankrupt anyway and restructured just like Romney said they should."
Yes, absolutely right. I can't figure out what planet people are on who are talking about the "auto bailouts". Bush floated them loans, Obama put them through bankruptcy. Romney said they should be put through managed bankruptcies, and Obama did just that. Romney's absolutely right when he says that Obama put them through bankruptcy like Romney suggested.
Where Romney's changing the story now is saying that Obama changed the normal rules of bankruptcy and took the bondholders to the cleaners instead of the workers. He should be calling it a "UAW bailout", which would be right. But it's not a bailout just because the government provided the DIP financing. It was still managed bankruptcy.
Compare that with the banks, which DID get bailed out. No CEOs getting thrown out, stock and bondholders just fine, no loss of bonuses, heck they still got to fly around in their corporate jets. Maybe it's just the SE Michigan perspective, but "managed bankruptcy" and "throwing money" don't seem the same to me.
Posted by: kjmclark at February 18, 2012 11:09 AM
jonathan Mitt's version is even worse than that. Romney could be forgiven if he had simply gotten it wrong three years ago; afterall, plenty of people got it wrong. Even The Economist magazine got it wrong. The difference is that The Economist recognized that they were simply wrong and has admitted they were wrong. But Romney seems to be denying reality and is doubling down. He continues to argue that requiring GM and Chrysler to manage bankruptcy and restructuring through normal private lending channels was somehow a viable option. It's not just that Romney was wrong in 2008/2009; but that he doesn't seem to have learned anything. In fact, he's gotten dumber. Romney should have just admitted that things worked out okay, said Obama made the right choice and then he could have moved on to his carpet bombing strategy against his GOP rivals.
Posted by: 2slugbaits at February 18, 2012 11:15 AM
2slugbaits: I will concede that because the credit markets were frozen at the time, GM and Chrysler may not have been able to go through bankruptcy proceedings without the help of the government. But that still doesn't explain why the administration ignored standard bankruptcy laws and screwed bondholders while rewarding UAW members. That's the real rub...the Obama administration decided to reward their union backers rather than pay the bondholders as would have happened in bankruptcy.
Posted by: Brian at February 18, 2012 01:02 PM
Brian Reward union members???? Huh? The UAW agreed to huge concessions. Even the WSJ agrees that the UAW concessions "... would bring the UAW contract at Chrysler closer to the pay and benefits earned by workers at nonunion auto factories operated by rivals Honda Motor Co. and Toyota Motor Corp."
And the UAW made similar agreements with GM and Ford. Bondholders hardly ended up worse off than they would have been if the government had simply allowed GM and Chyrsler to go belly-up.
If GM and Chrysler had been liquidated, then Ford would have joined them, as would all of their suppliers. Is that somehow being fair to Ford's bondholders???
The reason both Bush and Obama agreed to a bailout was because the macroeconomic effects of a GM and Chrysler collapse would have been unacceptable. Sorry, but there is simply no downside on this issue, so I cannot understand why some in the GOP keep lookng for a cloud in the silver lining. Maybe it's because some Republicans like Romney don't know as much about economics as they like to imagine. Posing as some kind of economics wunderkind is one of Romney's fantasies. It's gotta hurt realizing that perhaps he really doesn't have the magic business touch afterall. Maybe he's just another empty suit with a rich daddy.
Posted by: 2slugbaits at February 18, 2012 02:24 PM
Brian: the Obama administration decided to reward their union backers rather than pay the bondholders as would have happened in bankruptcy.
In a bankruptcy liquidation, the bondholders would only be entitled to whatever value the remaining assets could be sold for. But there were no buyers so the assets had a value near zero -- just some empty factories that nobody wanted.
So if the bankruptcy had proceeded, the bondholders would have gotten a few cents on the dollar. The government offered them 20 cents on the dollar instead and 95% of the bondholders leaped at the chance, seeing it as a windfall compared to the alternative.
The deal with the UAW came after the fact of the bankruptcy. The government would have had to bail out the pension funds and instead offered them equity in the new GM company. This saved taxpayers billions of dollars.
Bondholders had no legal right to the new GM company funded by government money. Their rights terminated with the bankruptcy of the old GM company.
Posted by: Joseph at February 18, 2012 04:46 PM
Detroit still hasn't paid the bailout money back, and never will.
If someone stuffed $15 billion in my pockets, I'd be a "success story" too!
Posted by: J B at February 18, 2012 06:18 PM
J B: According to Treasury, of the $79.69 billion obligated and disbursed via TARP to GM, Chrysler and Ally, $35.18 billion has been repaid as of 2/17/2012.
Posted by: Menzie Chinn at February 18, 2012 07:21 PM
Slugs and Joseph: thanks for the clarifications regarding the UAW issues.
Posted by: Brian at February 19, 2012 08:43 AM
Its nice of you to summarily declare me wrong without any backing.
TARP saved the economy from going into a deeper recession or depression.
Most TARP loans have been paid back, but the $79.69 billion in automaker loans being a notable exception.
According to Friday's TARP update The Fed has written off or has realized losses of about $7.2 billion on GM and Chysler. After the writoffs there is still $40.59 billion in loans outstanding.
They should have been left to a natural bankruptcy. Automakers are not "to big to fail".
They would have restructured or been bought by someone else and survived anyway, their jobs retained and U.S. taxpayers would not be left holding the bag for their bad management.
Krugman is insightful and very smart, but unlike some folks, I don't believe everything he says.
Posted by: azleader at February 19, 2012 06:49 PM
azleader: The commenter's name is at the end.
Posted by: Menzie Chinn at February 19, 2012 07:23 PM
Menzie Chinn... Thanks for setting me strait
Robert Oak... my apologies. Sorry
2slugbaits... My comment above applies to you.
Posted by: Anonymous at February 20, 2012 06:40 AM
The lack of imagination in this post is kind of stunning. If GM and Chrysler had not been bailed out, what would the automobile market look like today?
Ford would be making money hand over fist. Companies like Volkswagen, Honda, Toyota, Hyundai, and Kia, with US production plants, would be filling the market with product that is now being "stolen" by the bailed out companies. A few of the stronger models of the bailed out companies, like the minivans and the trucks, would have been bought by weaker players like Nissan, and stayed in production.
Essentially, there is a good probability that we could have the exact same outcome as we have now without all the taxpayer money spent.
Obama has created a situation in the automobile market not unlike the airlines. Strategic bankruptcy has made the airline industry an un-level playing field, with companies that have gone through strategic bankruptcy able to outcompete those who have not. Not only is this economically inefficient, it's not fair.
Posted by: Buzzcut at February 20, 2012 07:21 AM
Buzzcut: To my knowledge, there is no counterfactual included in the graph, or accompanying text. Please correct me if I am wrong. You do seem to be a bit touchy, if I may be so bold.
Posted by: Menzie Chinn at February 20, 2012 10:35 AM
Any readers got an economic comment to make about the auto industry - like marginal cost, fixed vs variable, percent of disposable income spent on capital goods, financial comparison to prior recessions and recoveries, capital expenditures and efficiency ?? I thought this was a blog for economic commentary.
Posted by: Mike Laird at February 20, 2012 02:53 PM
The industry itself was unsustainable and in need of severe downsizing, instead it got propped up and dusted off for the cameras.
These companies are saddled with the same dealbreaker which drove them into insolvency, even if the labor costs are much lower. Their sales are still dependent on continued flow of cheap oil, and they're not going to get it.
Recent commercials proclaim "The SUV is back." Great. Just what we need right about now. Can't see any real problems on the horizon there...
It's a disaster. The taxpayers of course are left holding the bag.
Posted by: Robert Hurst at February 20, 2012 05:30 PM
You do seem to be a bit touchy, if I may be so bold.
You may be, and I am. I'm a car guy, and a former automotive engineer. It is more than numbers to me.
The automotive market is exactly the same as the airlines. There is too much capacity, but the bankruptcy system never pares it back. GM and Chrysler are like Delta and United, the issues are the same. Obama did no one any favors by bailing out those two.
Posted by: Buzzcut at February 20, 2012 07:10 PM
Buzzcut: My first job was as an RA working on the microeconomics of autos, airlines (and steel).
Airlines thus far are not subject to much international competition in domestic flights; autos are.
Posted by: Menzie Chinn at February 20, 2012 07:52 PM
I must agree with Buzzcut. I would add, government intervention always results in inefficient market dislocations.
I am a Petroleum Engineer and can speak for the various ways, typically but not excluively Dems but I hope this site is more interested in efficient market discussions than Political Football, like subsidizing the Steel Workers Unions' inflated wages and benes thru 35% import tariffs on much cheaper Chinese Oil Country Tubulars, etc.
Incredibly, these same folks have no qualms with AAPL utilizing slave wages and environmental rape thru Chinese FoxConn to achieve 40%+ Profit Margins but scream and kick when the major US Oil Cos, and small mom-and-pops like mine, make 7-10% Profit Margins while risking massive Capital - very unlike AAPL.
We can't have it both ways and Ross Perot was damn prophetic in his warnings re: NAFTA, World Trade, etc.
When the taxpayers of this country accept the facts and demand action from our Pols equally, we may regain our status - until then we will be left to fight amongst ourselves in the Private Sector for the scraps left after the Public Sector squeezes us to the point that we wake up one day as the USSA.
Posted by: Mark L at February 21, 2012 05:35 AM
Why is it that people who scream the most about the economy always use Strange Upper Case notation in their postings?
Just wondering. Carry on with your rants.
Posted by: Dan at February 22, 2012 08:36 PM
OK, we probably shouldn't take Jon's assessment of how decisions were made within the White House or azleaders assessment of the likely outcome of bankrupcty without government assistance at face value. In addition to Jon having to climb down regarding Summers, there is also the fact that the argument made for bailing out Chrysler and GM was an economic argument that relied on comprehension of the web of connections in the factor sector that relied on the Big 3. The argument was that if the supply network is stressed badly enough, it will fail, and auto producers that would otherwise survive would fail. A point less often made but equally true is that GM and Chrysler would have had a heck of a time coming out of bankruptcy without a supply network to support production. If Obama's calculation proved correct politically, it also proved correct economically, and that's what we pay him for.
Yes, Romney called for bankruptcy, and GM and Chrysler went through bankruptcy. That's Romney's talking point, thanks very much. Romney wanted finance during bankrupcty to be handled in the conventional way, during the worst credit crunch since the Great Depression. That bit of his advice was ignored, and very likely made the difference between success and failure for auto parts suppliers, and so for GM and Chrysler...and Ford, and Toyota, and every other car maker with plants in the US.
There really is more to this story than Romney's talking points. Please, don't pollute discussion of critical economic issues with talking points made to cover up Romney's political vulnerabilities.
Posted by: kharris at February 23, 2012 10:59 AM