Thoughts on Bailing out Detroit

Thanks to any of you that are still checking in here from time to time. Life has kept me from writing the last few weeks but I hope to be posting more often for the foreseeable future. There certainly is a lot to talk about!

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Despite my lack of writing, I have still been keeping up with current events - particularly the debate over giving GM, Ford and Chrysler another $25 billion dollars.

I guess my summary opinion is this: I reluctantly accept the idea that the current state of our economy makes the failure of GM too dangerous to chance. Therefore, we should hold our nose and guarantee the loans necessary for their survival.

That being said, I take strong issue with the current approach of Congress.


Last week Nancy Pelosi explained Congress's decision to withhold money by saying: "Until they show us the plan, we cannot show them the money".

It is my understanding that Congress ordered the CEOs to return in a couple weeks with a plan to make their companies viable. I have two big problems with this statement and the general approach.


1. Anyone who knows a thing about business should know that these companies won't be able to produce a business strategy worth the paper it's printed on - much less $25 billion - in two weeks. This request for a plan is simply a tactic to provide political cover for what the Democrats have already decided to do.


2. It is stunning to me that there is not a serious discussion about removing the senior management of these companies. I might be persuaded to give some of my children's money to GM (all of mine was already spent on Iraq and Medicare prescription drugs), but not if they are still led by a management team that has clearly failed.



It's important to recognize that GM's current chief executive, Rick Wagoner did not have the misfortune of taking over GM this year or last. He has been the CEO since June of 2000. The company has not been profitable since 2004 and GM's losses during Wagoner's tenure have been almost 5 times their profits. Giving him more money is a horrible idea and it's insulting to the tax payers.



One final thought: it is fashionable right now to blame Detroit's woes entirely on either overly generous union contracts or failure to produce cars with sufficient fuel efficiency. People on both sides of the aisle are using this situation as a hammer to score political points for their pet causes.

This is not surprising, but it is also not very constructive.

Although there is some validity in both claims, I think we should be highly skeptical of arguments that try to simplify the causes of the current situation exclusively back to one of these two reasons.

This situation is very complex - and government will not be able to sort it out. In fact, they could easily make it worse. Their best move is to ensure that fresh and competent leadership replaces the status quo at each of these companies. Detroit's desperate need for this latest cash infusion makes this step easy to execute - if only the political will and wisdom can be found.

Please Share Your Thoughts

I'd love to hear what some of you think about last night and/or what you expect for the next four years.

Say as much or little as you'd like. Multiple paragraphs or mere statements like "I'm happy" or "I'm disappointed" are welcome - whatever you'd like. I know that some that read this blog are highly skeptical of Obama - your perspective is welcome and very valuable.

If I can't talk you into making a comment here, please write down your thoughts somewhere while they are still fresh. Someday, your children or grandchildren will probably ask you about this event.


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I hope you saw Obama's speech last night. You can read it here.

My favorite parts:

This victory alone is not the change we seek. It is only the chance for us to make that change...

It can't happen without you, without a new spirit of service, a new spirit of sacrifice.

So let us summon a new spirit of patriotism, of responsibility, where each of us resolves to pitch in and work harder and look after not only ourselves but each other.

....

Let's remember that it was a man from this state who first carried the banner of the Republican Party to the White House, a party founded on the values of self-reliance and individual liberty and national unity.

Those are values that we all share. And while the Democratic Party has won a great victory tonight, we do so with a measure of humility and determination to heal the divides that have held back our progress.

....

And to all those watching tonight from beyond our shores, from parliaments and palaces, to those who are huddled around radios in the forgotten corners of the world, our stories are singular, but our destiny is shared....

To those -- to those who would tear the world down: We will defeat you. To those who seek peace and security: We support you. And to all those who have wondered if America's beacon still burns as bright: Tonight we proved once more that the true strength of our nation comes not from the might of our arms or the scale of our wealth, but from the enduring power of our ideals: democracy, liberty, opportunity and unyielding hope...

That's the true genius of America: that America can change. Our union can be perfected. What we've already achieved gives us hope for what we can and must achieve tomorrow.

So tonight, let us ask ourselves -- if our children should live to see the next century; if my daughters should be so lucky to live as long as Ann Nixon Cooper, what change will they see? What progress will we have made?

This is our chance to answer that call.

As Emerson once said, the ancestor of every action is a thought. These are just thoughts, but they are the right ones...

Witnessing History

I am almost overwhelmed with tonight's results.

I am overwhelmed by the thought that in my parents' lifetime, African Americans were, in many parts of the country, not able to attend the same schools, use the same restrooms or share the same water fountains.

Many will be disappointed by the result of this election... but I think it is impossible to argue that it does not demonstrate America's extraordinary ability to reinvent and improve itself from generation to generation.

That is something that we can and should be immensely proud of....

... and now the next chapter in American history begins.

First Thoughts on Behavioral Economics

Another fascinating and insightful article by David Brooks. I recommend the whole thing - you can read it here.

His thesis:

....there are four steps to every decision. First, you perceive a situation. Then you think of possible courses of action. Then you calculate which course is in your best interest. Then you take the action.

Over the past few centuries, public policy analysts have assumed that step three is the most important. Economic models and entire social science disciplines are premised on the assumption that people are mostly engaged in rationally calculating and maximizing their self-interest. But during this financial crisis, that way of thinking has failed spectacularly.

So perhaps this will be the moment when we alter our view of decision-making. Perhaps this will be the moment when we shift our focus from step three, rational calculation, to step one, perception.

His conclusions:

...markets are not perfectly efficient, people are not always good guardians of their own self-interest and there might be limited circumstances when government could usefully slant the decision-making architecture.... But the second thing you realize is that government officials are probably going to be even worse perceivers of reality than private business types. Their information feedback mechanism is more limited, and, being deeply politicized, they’re even more likely to filter inconvenient facts.

Brooks seems to be leaving us with a very valid yet very intractable dilemma. I read him as saying that our capitalist system needs a very small amount of outside intervention in limited circumstances to ensure the national welfare. However, the government - the only institution with any meaningful resources at its disposal that is dedicated to the public good - is woefully unlikely to perform the needed actions effectively.

So what do we do (assuming that he is on to something here)?

I don't know. A couple of thoughts though:

1. Brooks mentions in the article that the emerging field of behavioral economics may be able to provide some insightful theories and frameworks that could improve our economic policies and institutions. I have limited experience in this field to date, but based on what I have studied, I think he is right - and the possibilities are quite exciting.

2. If we are going to resolve this issue as a society, we are going to have to abandon much of the political and economic dogma that has defined much of the last 50 years. I suspect that this exact same essay - if written by a self-described liberal like Paul Krugman instead of the respected conservative Brooks - would be immediately dismissed as an argument for bigger government and a more centralized (i.e. socialist) economy.

This is not what Brooks is saying at all. He is merely acknowledging that there is probably a set of very specific circumstances in which the government should intervene and provide guidance on the economy. He is not advocating an alternative to capitalism and free markets - quite the opposite - he is discussing measures to make them function more effectively and ensure their long-term viability.