How Are We Going to Manage to Do All This

The Obama administration is going to be rebuilding and reconstructing five major sectors of the American t. It has no choice--there is no other option. It has to remake:

• Autos
• Housing finance
• High finance
• Energy
• And the big one—health care

On what principles and through what procedures is this extraordinary exercise in structural economic reform policy going to be accomplished? I get how to do the macroeconomics of Obama administration economic policy. I don’t get how to do the structural side…

Comments

[Leila Abu-Saba]

Good question, and I'm glad you're putting it to the hive mind. I look forward to watching the answers evolve around here.

[SvN]

You can take autos off the list. It is tough to make an economic case that the nation needs the government to "restructure" this industry.

- The current discussion is about restructuring "the big three". Ford would probably survive without any federal govt. aid. The "foreign firms" (Toyota, Honda, BMW, etc.) have not asked for aid. Most of the workers directly employed by automakers in the US do not work for the two firms most at risk: GM and Chrysler.
- Realistically, if markets were allowed to work, GM and Chrysler would fail and the market would lose much overcapacity (which would also help Ford survive.)
- We should stop to consider how much better things will be after spending the 30+ billion currently proposed. There is little discussion of using it to protect jobs in the supply chain or the dealership network (which is where most of the employment and value-added occurs.) There is little discussion of preventing the Big Three from shifting production out of the country (e.g. to Canada and Mexico, which have seen big depreciations in recent months) to cushion the loss of competitiveness caused by the recent appreciation of the US dollar. There is little that will prevent the Big Three from continuing to suffer erosion of market share and chronically returning to the public purse.
- There is no market failure here. The industry is competitive for consumers, suppliers, dealers, etc. This is not about structural reform. This is about macroeconomic stimulation. And there are better ways to stimulate the economy. (e.g. spend it all on worker training, education, relocation and pensions.)

[SvN]

Energy is not that tough. Lots of countries are much further along the curve than the US. The government will impose higher costs (via a carbon tax or auction of pollution permits) on energy and use the revenues to reduce the deficit. There's lots of on-the-shelf technology designed for higher-energy-cost environments (e.g. everywhere except the US, the Gulf States and some developing nations.) People will flock to more economical cars by themselves when they see $8/gal. gas.

Again.....where is the market failure that you want to correct? There's an externality from pollution, okay. Is that it?

[pebird]

Autos - Too much supply. Have GM/Ford/Chrysler rebuild the Los Angeles streetcar tracks they bought up and destroyed in the 40s and 50s.

Housing Finance - No fix until incomes rise. Give homeowners who are current on their mortgages a credit equivalent to 180 days of payments in event needed. This should stimulate some spending from higher income households who are currently not at risk. Go to housing tracts in Las Vegas and burn excess McMansions - sell TV rights to cable.

High finance - Dogdoo economics has replaced voodoo economics. Entice bankers up to 50th floor of bank high rise and push out window. Reestablishes moral hazard.

Energy - Parting Bush Administration winter heating holiday gift - send lump of coal to every taxpayer - they were bad because they didn't spend enough.

Health care - Obama/Clinton health care plan pegged at $250BB. Insurance companies run TV ads saying too expensive and anyway all the good money has already been taken by high finance.

[SvN]

Housing finance: every developed nation that I've ever visited has a housing market. Few have been as badly screwed up as late as the US market (to be really fair, we're mostly talking about markets in the southwest and southeast US.) There's plenty of regulatory models with track records to choose from, most of which would be an improvement over the status quo.

I think the real challenges are financial markets and, especially, health care.

[Cal]

Couldn't we "restructure" the auto industry by not restructuring it at all but replacing the stock of cars we now have by requiring all cars produced by X date to be hybrids and Y date to be non-gas powered. After X and Y date a really high tax placed on gas car ownership it give incentives to replace cars. Give some sort of depreciation tax deduction to those who buy before the date, more valuable the sooner you do buy the replacement car. Current cars could be scrapped and recycled or retrofitted to use the new technology. Give each State University several hundred million or a billion dollars for their engineering and sciences departments to do basic research, draw anyone smart from around the world to do that research at the schools. Make these inventions public domain or set some fixed license fee for the use of new patents that would come from this research. Aren't we talking several hundred million vehicles that would have to be replaced? The trucking industry would become a short haul situation and rail usage would go up (apply the same requirements for trucks). There would be a lot more people hired to make short deliveries. More mass transportation investment. Rail travel would become the better option for a trip from sale LA to Salt Lake, Chicago to St. Louis. Airlines would get more travelers. The air would be cleaner.

[J]

-Autos: Just give them some damn loans. These are durable goods we're talking about. This sector is among the most volatile. We have to remember that these companies just don't make SUVs. GM has a major powertrain division that does all sorts of low-volume niche applications (advanced propulsion technologies, alternative energy versions of proven and reliable powertrain applications) to massive industrial applications (buses in India). Many of the European and Asian automakers use components of American powertrain (Volvo XC90, Nissan, BMW etc). They're reputation is far worse than their actual condition. As long as the government isn't to specific policy-wise and makes simple goals, I think things will be okay. This industry has super long product cycles. A lot can happen quickly during these periods. It depends on credit to smooth out bumps in the road.

-Housing finance: I'm not really knowledgeable in this area, but I will that it appears that we make home ownership way to big of priority. I imagine the solution is just time and waiting for things to purge. I can't comprehend on how refinancing or creative solutions can be done on an en-masse scale. The tax-incentives to own a home are insane. Aren't homes are non-productive assets? I confuses me why anyone thought it was a good idea to build 4500sqft+ homes around almost nothing (that area uses the same schools and supermarkets) several miles North of me while I'm already 24 miles North of a major US city. It baffles me why all those homes still have real estate signs on their properties.

-Energy: Pigouvian Tax. Put a big fat tax on dirty and politically-risky energy sources and proportionally lower other taxes that can distort incentives (income tax) for a zero-sum effect. This stabilizes energy prices and makes alternatives more attractive to invest and develop. There may be need to be tax credits or some sort of transfer to help those out at the bottom of the income ladder while alternative solutions develop.

[John Howard Brown]

I posted this a few weeks ago on dailyKos where it was largely ignored, but I still think these ideas have some merit. They address INCOME DISTRIBUTION, an issue Brad ignored but I feel is the elephant in the room, and Health Care
What appears below is a detailed discussion of three center-left policy ideas that can make America a better place to live. Each of these ideas should be politically doable.

1. Make Social Security's tax a progressive one

2. Reform the intellectual property rights system for pharmaceuticals

3. Reform health insurance in a way that leaves private companies a role but eliminates that pathologies of the current system.

The biggest single problem facing most American's today is stagnant (at best) real income. These proposals address both ends of the real income equation. The first should function to raise nominal income of the lowest quartile of income recipients. The second and third address the most persistent source of inflation in the US economy, the rising real cost of health care. Containing health care inflation will both raise current real incomes and alleviate the genuine looming problems with Medicare funding.

I call these proposals center left because they envision making markets function more efficiently by eliminating some of the current perverse incentives in current policies. At the same time, they should reduce experienced inequality.
1) Make Social Security's tax a progressive one

Social Security has long been a paradox, a system of income redistribution which is financed by regressive taxation. Despite the right wing's desperate attempts to destroy and discredit the program it remains popular and the centerpiece of the American welfare state.

Two steps suggest themselves. One has been discussed for years and will probably be high on the agenda in the first Hundred Days of an Obama administration, raising (or better yet, eliminating) the earnings cap. (Currently $102,000) The other is to eliminate the tax on minimum wage recipients and gradually phase it in as income rises.

The benefit of this is that it immediately increases minimum wage workers' take home pay by about 7%. This is sufficient to offset inflation since the last (grudging) increase in the minimum wage. It would also give a tax break to the small businesses that the Elephants rhapsodize about. (But of course, don't really care about.)

The beauty of this idea is that it disarms Republicans by lowering taxes. AT the same time, the revenues gained from adding more workers, working more hours to the tax rolls should largely pay for the cut in Social Security taxes.

Reform the Intellectual Property Rights System for Pharmaceuticals

The economic rationale for intellectual property rights (Patents and copyrights) is that innovators can be rewarded for the contribution to society. By giving the inventor of a drug an economic return on the resources they invest in creating the new drug, more innovators are encouraged to step to the plate. In the current system this is done by granting monopolies to inventors for a limited time period. Intellectual property is virtually the only area of American public policy that explicitly attempts to create monopolies.

Unfortunately, as economists have appreciated for centuries, creating monopoly has all sorts of bad consequences. As documented in Marcia Angell's book, The Truth About the Drug Companies, the result of the current intellectual property rights regime is a) duplicative research, since "me too" drugs of the same chemical class as already patented drugs, can also be patented and introduced into the market without any demonstration of clinical superiority, b) outrageous marketing expenditures to seduce physicians and academic researchers to support particular company's compounds, c) political pressures on regulators to approve drugs of dubious clinical merits, d) continuing pharmaceutical price inflation, which is a major source of medical cost inflation, and, of course, political influence resulting in poor health care policy making.

Of course, the benefits of modern pharmaceuticals are scarcely to be doubted. Statins form an important therapeutic intervention for individuals like myself with high cholesterol. Control of hypertension and type 2 diabetes are also results achieved at least partially through medication. It is certainly in society's interest to provide incentives for the development of new compounds to treat both chronic and acute conditions.

The mechanism to do this is to separate the drug discovery process from the marketing mechanisms that arise to exploit the monopoly granted by drug patents. To do this, every pharmaceutical compound would be subjected to a revised FDA approval procedure. Instead of measuring the efficacy of a new compound against a placebo, as is currently done, the new compound would be matched against the best currently available therapy. Unless it demonstrated a clear therapeutic advantage, or was superior to existing treatments in terms of side effects, or potential costs, the FDA would be forbidden to approve the compound. This step would eliminate the costly duplication involved in bringing to market "me too" drugs.

Once a drug is FDA approved, the agency would conduct a bidding process. Pharmaceutical companies who had received a prior certification of their ability to produce drugs, would be invited to bid for the rights to produce and market the drug. The bidding would occur in two parts. The first part would be a lump sum. The second part of the bid would be a commitment to a cost per therapeutic dose. The bids received would be scored with each part weighted equally. The top four bidders would be awarded the rights to produce and market the drug (along with the chemical's developer.) The lump sum payments would be awarded to the developer as a reward for their development of the new compound. Five firms would be a sufficient number to insure that the market for the drug would be competitive.

This two part bidding procedure provides a market based evaluation of the merits of a new pharmaceutical compound, while insuring that developers are rewarded for their efforts in developing it. At the same time, competition among a reasonable number of suppliers should prevent excessive profits and result in falling prices for the compounds over time as manufacturing processes improve.

Reform health insurance in a way that leaves private companies a role but eliminates that pathologies of the current system.

The root of the current health care crisis is adverse selection. Health insurance companies have a vested interest in offering health insurance only to those who are unlikely to use it. They can offer very attractive rates to the healthy by refusing to insure the unhealthy.

A solution to this, is to have government assemble "pools" of potential insureds. A sufficiently large pool, say 10,000, could be described in terms of a number statistical indicators of health status. For instance, the average BMI (body mass index, a measure of obesity), blood pressure, blood serum cholesterol, (both significant indicators of cardiovascular health) and Hemogloblin A1c (a measure of blood sugar control and thus Type 2 diabetes) are all useful in determining health prognosis. However, these statistics would be reported in aggregate, not individually.

Health insurers would be invited to bid to provide health insurance on the pool for a period of say five years. The winning bidder would collect premium's from the government, after the gov had collected from each pool. Of course, some particularly high risk pools might still require subsidy for the insurance to be affordable. Competition among health insurers should keep rates low. It would also provide incentives for insurers to aggressively act to improve the health status of members of the pool. Since pharmaceutical intervention can reduce blood pressure, serum cholesterol, and blood sugar, all of which impact health, cost savings would result.

[MattYoung]

I doubt any of these industries will be restructured by the Obama administration.

[Neal]

Autos? Admit defeat and roll the retirees into Medicare/Medicaid. Everones 401k just got hit, why not defined pension programs also. Let the market then sort out the winners and losers.

Home finance? Require that loans be held by the originator for a minimum of five years. Re-invigorate the low income housing programs--a jobs gain for a slow economy.

Energy? Eliminate taxation of all investments and capital gains related to development and running of clean, green and renewable energy sources. Institute a tax that increases with time that encourages phasing out dirty, wasteful old ways.

Heathcare? Institute a national set of regulations for private health insurance plans. Declare the surviving insurance companies too big to fail and nationalize. Single payer is the way!!

High Finance? Regulate, regulate, regulate. It's clear that the big guys got their money up front so the fallout means little or nothing. If someone gets "too big to fail", they fall into an area with special regulations with addition surety requirements against failure. Provide oversigt of these companies by competent people who are able to "red-team" their business models.

[bakho]

Autos are too big of a sector to let fail all at once. The Big 3 are the tip of an iceberg that includes suppliers, steel producers, dealers, service centers, etc.

A restructuring that saw GM swallow Chrysler and drop a couple of brands would be a huge hit on many local economies. That is likely to happen and that alone will create a lot of job loss and economic dislocation.

It took 28 years of misguided energy and transportation policy to create this mess. It will take a decade or longer to restructure in a manner that does not destroy a lot of infrastructure along the way.

[christofay]

Ease back on govt consumption in the nat defense and nsa boondoggle. We can't afford to outspend the next 400 countries combined so we have to cut that bill from 4% to 2%.

[Chris]

John Howard Brown,
I am skeptical that your suggestions for pharmaceuticals would be successful.

First, you claim that monoplies are bad (I agree), but then propose doing away with "duplicative research." This "duplicative research" is the source of competition in the market. If you propose to eliminate me-too drugs, you are giving the pioneer company a massive monopoly. Further, I'm skeptical of replacing market competition with a panel of experts at the FDA that will decide which compound should be anointed THE compound in that class. I should also mention that most follow-on drugs are tested against a current standard of care, not a placebo.

Second, I'm not convinced of the evils of marketing. What is the distinction between marketing done by a pharma company vs. that done by Proctor and Gamble? I assume you won't claim that an additional dollar spent on marketing reduces R&D by $1. Obviously, the company spends the $1 on marketing because it yields more than $1.

Third, you claim that pharma companies use political pressure to get dubious medicine approved. I agree that happens. However, your solution gives more power to government structures, which increases the incentives of the companies to employ lobbying.

I should mention that I'm a chemical engineer at a big pharma company, so I may not be completely impartial.

[Palolo lolo]

"...and then a miracle occurred" ?

[Ken Houghton]

SvN: "There is no market failure here. The industry is competitive for consumers, suppliers, dealers, etc."

Far be it for me to argue with the guy down the road apiece, but he's only correct on at most two of three here,* and it's the third that is the =real= story of why the American makers are failing, despite being more than competitive (and improving) on production and price.

Dealerships are =not= competitive, and the "union" that needs to be broken to allow GM to survive (let's ignore Chrysler, the AMC of the Oughts which would fit nicely with either of the other two) is that one.

But dealers, unlike UAW members, are generally Very Wealthy, Well-Connected Individuals within their Community, so it's rude to point out that they are the problem, not the solution.

Break the Dealership control of GM and Ford and you'll see the industry healed.

*There is an argument that the "competitiveness" with suppliers is just supply-chain-squeezing of people who used to work for GM and Ford directly, but let's pretend that's not the situation. (Shareholders of Visteon and Delphi, if they still exist, may dissent from this simplification.)

[Brian J]

I could add my own thoughts about the various categories you describe above, or at least about some of them, like energy. I'll only say something brief: some of the most important steps are also some of the easiest, at least as far as implementation goes. It may not be an easy sell, politically speaking, to install a higher gas tax or a cap-and-trade system, but there's broad agreement that these are two crucial steps. The details will definitely be key, but I don't think that there will be much argument about whether or not such ideas are necessary.

It's definitely harder to nail down solutions to everything else, even in the area of energy. That said, we have an intellectually engaged president who is confident and smart enough to seek opinions from a variety of sources. He's also acknowledged that some problems actually exist, which is certainly an improvement over the last eight years.

The most important step has already been taken. Let's all be grateful for that.

[bigTom]

I think the simple answer is we can't do all of them. We will probably not do triage, ie. just pick a couple and do them well, we will likely do half-assed jobs on each one of them. Then suffer the consequences down the road. Of course if the country listened to Cristofay, and drastically cut defense/security/intelligence we might have enough resources to do three-quarter-assed jobs instead of half. But, I don't think the people are ready to give up dreams of global military domination just yet.

[bigTom]

Since we can't do all of them in a fully funded mode, we have to make a priority of the efficiency (bang per taxpayer buck) of anything that we do do. I would suggest that we look at multiple criteria in evaluating bang. A program which costs say $3M and benefits stimulus, auto, and energy, could be better than three separate $1M programs that hit the individual categories. So we have to avoid, simply dividing up the resources among different cabinet agencies, and letting each optimize their individual programs with considering potential synergistic effects across multiple programs. If we don't spend our resources wisely, the mismatch between need and reality will be greater. I know a bit about energy, and next to nothing about healthcare. But at least regarding energy, and autos, there could be some synergy. I.e. part of the restructuring of the automobile industry will involve reducing capacity (as well as changing the product mix itself). The freed manufacturing and engineering talent, and perhaps physical plant could be directed towards energy programs. Things like light rail, electrical grid upgrades,and solar thermal power plant construction come to mind. In terms of economic stimulus, and energy, perhaps we can generate some needed jobs, by helping to insulate homes, and apartments of the poorer half of our population. A dollar spent making a longterm decrease in a poor persons energy bills, will give the economy a bigger boost over time, than a dollar spent to increase consumption. Perhaps something similar to the Civian Conservation Corps could be created for such purposes. We also need to pay attention to the retail and manufacturing sectors, where there is a lot of inefficient energy usage (think of such things as open freezers in grocery stores). Although here, the amount of training needed per energy auditor is likely to be much higher. There will be battles over what should get funded. Making an upfront statement, that programatic efficiency takes a priority over politics, and public visability would be a good first step in insuring that the result is semioptimal.

[Neil B]

Most important: do all this through the most intelligent people and not a politically oriented process. IOW, the reverse of the outgoing Administration.

[Rob]

At this point we need to bail out the auto industry, if nothing more than to give a soft landing to a big three failure. Likely bits and pieces, maybe even major bits and pieces are likely viable. We cannot afford the even larger cost of an immediate loss of the big three and all the associated jobs involved. $34 billion is likely a bargain.

Medical: Mr Brown's comments on drugs is close to what I came up with. The government/insurance industry comes up with a cost reimbursement plus reward for new USEFUL drugs. Then let whoever manufacture them. Copycat drugs/crap only better than a placebo (as opposed to older generic drugs) need not apply. Citizens need to understand that medical care has to be rationed. Insurance should be available for procedures/drugs that taxpayers are not willing to support. But everyone gets the basics.

energy - see Scientific American article on Solar, $40 billion a year subsidy for 10 years. I have not seen critical assessments of this, has anyone?

housing: could congress pass a bill requiring renegotiating failing mortgages, as a criteria of any federal bailout monies going to financial institues?

[donna]

It's definitely about income distribution. If greed had not been deemed "good", we wouldn't be here at all.

[Matt]

None of the answers here go to the problem Brad was raising. They are, essentially all of them, views on what should or shouldn't be done in various domains. Brad's point was that so much has to be done across so many domains that it will be hard to express or enforce any sort of policy coherence; any set of general principles as to what should be done and why. This doesn't go to bureaucratic detail. Unless you have a "theory"--or at least a game plan--as to how to approach structural reform, you're going to end up with an incoherent effort. I hope Obama is thinking hard about this. I hope Larry Summers is. I hope Joe Biden is. Everyone else, no matter how smart, will be focused on their more particular tasks.

[Alon Levy]

I'd love to see the auto companies shift to making streetcars and trains. Unfortunately, it won't work, simply because trains are too cheap. For example, with reasonable assumptions about the cost of new trains and new cars, renewing the entire New York City Transit rolling stock would cost about $9 billion dollars, which would last for 40 years before needing replacement. The cars the system takes off the road cost about $40 billion and charitably last 10 years, which means they'd generate about 20 times less income to the manufacturers. I don't think the six biggest rolling stock manufacturers combined have the same number of employees as just Toyota.

Personally, I'd say the federal government should bail out GM very publicly and then use its excess money to build mass transit systems and high speed rail. The bailout would cost much less than even a medium-sized transit-based stimulus, and make it more politically acceptable.

[joe]

Why is it so difficult to create a "Wall of Shame" with video clips of all those (rich) pundits who entirely misrepresented the state of our economy (I clearly remember W pushing home ownership... Kudlow must have hours and hours of pro-mortgage commentary).

BTW, how is it that so many Republicans come to be advocates for the extremely rich (top 1%)? How were these public servants and journalists convinced to advocate ridiculous tax cuts for the extremely rich? There's a great tawdry tale here waiting for a skilled scribe to send it to the stratosphere.

[Colin Danby]

Autos are the thing on the list that's not like the others. You gotta have housing, you gotta have institutions that help enterprise raise money, you gotta have energy, you gotta have health care. There are also good arguments that better energy and health systems have positive externalities for new enterprise of many kinds. But the world has too many car companies; Ford and GM have been on the skids for years. No loans, and please no nationalized auto producers -- Austrians are right about some things. Go to bankruptcy, sell off the good bits, absorb the retirees if we have to, and move on.

[Cobb]

It seems to me that the problem with all of these problems is the idea that we can solve them in short order. The very presumption that what's wrong with America - the accumulation of long term dysfunctions that brought us to crisis, can be undone and set right is incompatible with the very concept of 'sustainability'.

I hear in this impatient desire all the requisites for revolution. We don't need a revolution. We need, maybe at least, to go without GM for a while.

[Twofish]

The big one you are missing is education. Massive public financing to improve skills and access to education. The big mistake over the last ten years was to have people spend billions of dollars in loans rather than in college degrees. One reason that people go into high paying careers is that you are forced to be a doctor or lawyer after going to college. You go bankrupt if you go to college and then become a fireman, a social worker, or for that matter an astrophysicist.

high finance: The model for this is public utilities. Regulate them to keep capital flowing in the same way that telephone companies and electric companies are regulated to keep power flowing. Another thing is transparency, reduce the culture of secrecy and encourage banks to be more open about what they are doing and how they are doing it.

The basic problem is that the economy has gotten more volatile while at the same time the things that the government can do to cushing against volatility have decreased. The one big argument for government spending on health and education, is that it lets people transition between careers more easily. If you are 50 with a pre-existing health condition, there is no way that you can start your own company because you can't afford the health insurance.

[Twofish]

joe: Why is it so difficult to create a "Wall of Shame" with video clips of all those (rich) pundits who entirely misrepresented the state of our economy (I clearly remember W pushing home ownership... Kudlow must have hours and hours of pro-mortgage commentary).

Because there is no point in rehashing the past. The Republicans have *LOST*. One big mistake that they made was even after getting into power they kept rehashing the past and fighting old battles in their mind to the point that they completely blew the years that they had governing, and didn't notice that the world was changing around them.

[Twofish]

The basic principle is to think about "Joe the plumber" (i.e. the real ones not the McCain faux plumber). Go through the day in the life of various people and think about ways that the government can make their life better. The basic principle is one of "enpowerment". What do you need so that you can do what you want to do?

Health and education is a good start, since without health and education, you can't do very much at all.

[Twofish]

The basic principle is to think about "Joe the plumber" (i.e. the real ones not the McCain faux plumber). Go through the day in the life of various people and think about ways that the government can make their life better. The basic principle is one of "enpowerment". What do you need so that you can do what you want to do?

Health and education is a good start, since without health and education, you can't do very much at all.

[Greg]

I don't think we need to truly restructure most of these. Get a couple of car companies into bankruptcy and guarantee their warranties/debt, let finance shrink down to a reasonable size, and enact a carbon tax. Healthcare is the tough one.

[Cobb]

I'm sure, twofish, you realize how expensive higher education has become. There's a US News article floating out there. Universities have increased their costs something like 450% over the past decade or so. They are not a viable economic model, and they need to be starved. I am seriously thinking about sending my kids overseas somewhere to get an undergraduate degree - it cannot possibly be as expensive as it is over here.

The dynamic is that an older generation (them damned boomers again) have gotten more useful education cheaper - they hang onto power being more educated than the next generation. A little contempt here, a little disrespect for younger people there, and Gutfruend is selling out his company and the rest of Wall Street follows. People my age - mid 40s - who entered the workforce in the early 80s completely missed the era when staying at one company for 20 years was a reasonable idea. Now, nobody knows nothing - least of all some Harvard Lawyers promising to Fix It All.

Call me a skeptic. I don't think there's a such thing as a free lunch. I also don't think there's a such thing as a bailout. We are hikers on Everest - there is no airlift.

[The Raven]

Paging Fredrich Hayek...

Because, the truth of the matter is, you hominids can't know what will work. OK, you know how to run a state health-care service, and a state bank. The rest is all changing very rapidly. It's time to start Al Gore's Manhattan Project for alternative energy. The new urban designs, architecture, transit systems, and, of course, energy systems will all come out of that work. Meantime, prop up what you can, but don't get too attached to it; a lot of it is not going to last.

Well, what did you expect from a raven?

Caw!

[Twofish]

Cobb: I'm sure, twofish, you realize how expensive higher education has become. There's a US News article floating out there. Universities have increased their costs something like 450% over the past decade or so.

What I can't figure out is what they are spending their money on. Most of the undergraduate instruction is done by graduate students being paid slave wages, and there is a reason why astrophysicists end up working on Wall Street.

[SvN]

"What I can't figure out is what they are spending their money on. Most of the undergraduate instruction is done by graduate students being paid slave wages, and there is a reason why astrophysicists end up working on Wall Street."

Guys like me and Brad, actually. We could earn much more by prostituting our talents in the private sector, and we teach far, far fewer students than we could if all we did was teach. Instead, part of our job description is to provide a public good called research. One problem is that the system for judging the research output is very seriously flawed. Another is that after producing some very good work (the DSSW papers have over 800 cites each according to google scholar) you can get away blogging about the media, politics and shrillness.....but I guess that's a public good, too.

[Alon Levy]

Twofish, grad students only teach one class per semester because otherwise they'd never be able to do enough research to graduate; on a per hour basis, the wages work out to quite a bit. As a math grad student at Columbia, I get paid about $110 per instructional hour, or $55 per hour of instruction or grading. However, this only works out to a little more than $7,000 a year because of the light teaching load, so Columbia has to supplement this with an additional stipend.

Postdocs and professors get paid several times as much, of course. So at Columbia, a little more than half the university's spending goes to paying for instruction, and parts of the rest go to important ancillary things like libraries. I suppose the reason for the rise in tuition is that instructional costs have risen, too. Grad student stipends are almost twice what they were in 2000. Professors' salaries have to my knowledge risen too because of competition for the best scholars. (Brad, please let us know whether that's true at Berkeley's economics department as well).

[MattYoung]

On line education up 12% this year.
Cell phone output rises 6%, I think.
On line sales up 10% or something like that.

None of these successful industries are listed in the restructuring list. So government, which still lives in the 1950s, must adapt the industries stuck in the old equilibria and move them into the new. I doubt government can do it until at least government moves to the new operating point. But, who restructures ourgovernment? China I guess.

It is increasingly looking like government itself is the laggard. The industries in the list are all tied to government rules and policies. This is really a case of government, and its closely associated government regulated industries undergoing a restructuring.

Leave the good guys out of it, and hopefully, the good guys can find a better monetary standard (move to China?).

[Colin Danby]

AFAIK "most of the undergraduate instruction is done by graduate students" is false even at places that have a lot of grad students.

[WTF]

Housing Finance: Is anyone still writing "pic a pays" or no docs or subprimes? I think not. Have some show trials. Pass whatever regulations are deemed necessary. Pass regulations that take effect in 20 years when today's institutional memories are fading.
High Finance: Anyone still writing CDO's, financing LBO's or other excesses? Again, I think not. Slowly phase the government out of banking as possible. Regulation needed on CDS's. Mostly just transparency. Reduce the guaranteed portion of the system and apply traditional regulation. Split out non guaranteed parts, make em small enough to fail, and let the market do its work.
Autos: Short term -- ease the pain of winding down. Longer term, fix trade problems.
Health Care: Only solution is technology. Break down barriers to introduction of cost saving technology. Electronic records. Apply proven statistical quality control. Supply chain management. Increase supply by breaking down barriers from rent seeking medical establishment. Government needs insurance companies to outsource rationing -- their current function.
Education: Bust the unions. Won't happen.
Trade: Move from free trade to balanced trade. Quit burdening exports with health care costs, taxes, etc. Move to VAT, etc. Only hope for autos. Korea is now biggest threat to domestic auto makers.

[Lucas M. Engelhardt]

Actually, the answers aren't really that hard... well, they are hard, politically, but as far as what the right thing to do is, it isn't that hard.

Autos - Fundamental problem: UAW has a stranglehold on the Big Three. (Note: Honda, Toyota, and Nissan have operations in the US, and are still profitable, last I checked.) Solution: let the Big Three either die, or, preferably, get purchased by other companies who have the freedom to break the UAW's hold.
Housing finance - Fundamental problem: too many bad loans. Solution: prevent bad loans in the future. How? make people take the losses in whatever form it is relevant. Those who purchased MBS should have to deal with it. Those who couldn't pay their loans declare bankruptcy or get foreclosed. Then homebuyers have an incentive to avoid buying homes they can't pay for, and banks have an incentive not to make loans that won't be repaid. Note: this is nearly the exact opposite of what the government is doing... which is encouraging banks to make absolutely stupid loans - the kind that caused the crisis.
High finance - Actually, I'm not sure that this needs restructured at all. Yeah, it's in trouble, in some sense. But, that's mostly because this is where the bad loans ended up.
Energy - All we need to do: not fight rising fossil fuel prices. As these prices rise, there will be a natural incentive to move to other energy sources that aren't as expensive. The danger of subsidizing a particular form of alternative energy is that we might encourage the wrong kind of alternative energy and get stuck with bad path dependency which we just have to fix later.
Health care - this is the tough one. Here's my thought- Fundamental problem: Health care prices are too high. Why? 3rd party payment system AKA health "insurance". Solution: Remove all the artificial incentives (mostly tax breaks) to have health insurance. When people actually have to pay for most of their medical expenses, they'll demand less and prices will fall for the uninsured.
Unsurprisingly, no one (other than maybe Ron Paul) in politics takes these positions.

[bakho]

The Big3 have structures with really high fixed costs. They have over 3 times as many dealerships. They have too many brands. They have more legacy costs. They have higher change over times and costs. Their model depends on making and selling a minimum number of vehicles. When demand drops below that number they cannot be profitable.

Their tendency is to wait out the downturn and try to make money when auto demand returns. They have little room to maneuver because they are stuck with trying to cover their fixed costs. What they really need is creative restructuring (merging dealerships, eliminating brands) and maybe even finding new things to make. However, that is not in their current model.

[kharris]

The auto industry, as it exists and perhaps in any form, is bad for the US and the world in general. Even ignoring environmental costs, the US has far too many resources devoted to making cars. We have too few resources devoted to delivering (as opposed to extracting money from) health care. What does the 101 textbook tell us about moving resources from one activity to another? Don't we expect to fall off the production possibility frontier on the way to a new equilibrium? I'm all for making this as painless as possible, but not at the cost of continuing to produce too many of the wrong kind of cars, consuming too much petroleum, not to mention steel, copper, plastic, and Corinthian leather.

Any effort to short up the economy ought to be arranged to allow adjustment toward our real needs, rather than to impede adjustment. That won't happen, of course. The fact that it won't happen is the best argument I know against the massive sort of effort that DeLong has in mind.

[Cranky Observer]

----- None of the answers here go to the problem Brad was raising. They are, essentially all of them, views on what should or shouldn't be done in various domains. Brad's point was that so much has to be done across so many domains that it will be hard to express or enforce any sort of policy coherence; any set of general principles as to what should be done and why. This doesn't go to bureaucratic detail. Unless you have a "theory"--or at least a game plan--as to how to approach structural reform, you're going to end up with an incoherent effort. -----

Agree with your point on the responses. But disagree with where you take it. I currently work as a program manager in an organization that is stuffed from top to bottom with theory on how projects and work "should" be organized. Every failure, of which there have been many, results in an imposition of more theory and paperwork. In the meantime every individual human being capable of doing productive work is seeking an exit (and would have already left if it weren't for the current depression). Extreme examples of this disfunctionality can be seen in the current status of the Boeing 787 and Airbus A400 projects.

What is needed is capable, experienced, knowledgeable people who (a) aren't overly burdened with the culture of Washington DC (b) aren't buried from day one in mountains of paperwork and "oversight" that prevent anything from getting done. Look at how Harry Hopkins operated for an example.

The Obama transition team put out an open call for resumes and job applications, and has reportedly received a huge response. Let's see if they make actual use of the huge talent pool that it out there in flyover country - or if they stay with the same old tired Washington crew and a different set of Beltway Bandits.

Cranky

[nathan]

many interesting comments

On health insurance: there was an interesting comment on preexisting conditions making it difficult for certain people to start up a biz

On how to get it done: manage productivity, prioritize, focus, treat people nicely, sober judgement, delegation

On what sectors: consider others (education, transportation - public, auto, airline)

[Lucas M. Engelhardt]

---Let's see if they make actual use of the huge talent pool that is out there in flyover country ---

I have serious doubts about whether they'll do that. Obama won because he's a brilliant politician. But, he "is a politician, and they are not to be trusted". - thank you, George Lucas.

[Richard Gregory]

Dumb ideas form a conservative:

1. Replace the regressive SS and Medicare taxes with an Increase in the Income tax of about 4-5%( small help to workers and would slightly lower employment costs).

2. Universal, government funded health care (sorry, but I am convinced it will work. Unless we are willing to let people die that could be saved, the free market approach will never-ever- lower costs in health care)

3. Homes markets - end the unregulated nature of real estate. Realtors and banks conspire regularly to take the public by jacking up prices by keeping information on home values, etc secret (for example, have you ever tried to get actual, independently verifiable sales data from a realtor?)

Require sales information to be posted publicly and be verified by state agencies.

Require realtors to be either buyer or sellers agents. Do not allow both.

Have the government assign assessors and have a required fee to be paid for assessment for loan purposes. Do not allow them to be hired by the buyers agents.

Stop pumping all of the money into the large banks. Pump most of it into the community banks who really do the lending to businesses and individuals.

Impose a liquidity tax on sellers of securities that do not make a certain daily trading volume or have a very low margin requirement. Use the revenues for a "screw-up" fund so that when such securities cause a recession, we have something to fund fiscal spending with...

4. Energy - carbon tax....with tradeable credits. The EU seems to make it work. We can do it to. ohh, and stop spending so much money on making roads work. and spend some on public transportation and funding research.

5. Autos.... Fund a worker retraining program. Stop trying to save the shareholders. They don't deserve it.

Whew...Barry Goldwater is spinning in his grave.

[Aaron from NJ]

One of the issues I don't see in the debate on policy response is that the major problem is all on aggregate demand side, demand has fallen and I don't think we are going to address that by pushing $300-600b to a few industries through fiscal stimulus when 100 industries are going into a fall in AD.

The issue at the heart I think is corporate earnings, which are falling and with demand falling we are in a thrift paradox on the corporate, consumer & public side.

As corporate earnings keep falling, corporate investment falls, employment falls, demand falls etc..

I think we could shock the economy with a 10% of GDP tax cut for 2009.

This will shock corporate earnings side if we had a 2009 only massive tax cut.

Corporate rates taken down to 0 for 09 (corp taxes are only going be $300-400b) in 09 anyways.

R&D tax credit that is huge $400b at $100b a quarter available only for R&D/CapX,/Plant Equip etc..

Cap gains to 0% for 09 only

Payroll tax cut to 0% for all of 09

All of these will stimulate corporate earnings in 09 by 10-30% Equity prices will raise 20-50%, debt prices will come down from 8-18% to 5-10% and drive demand in CapX which will have solid multiplier effects. With large value to the balance sheet.

On the individual side
a 2009 payroll tax cut to 0%

a 2009 indiv. tax cut of 20%

both of these will drive large savings, debt payments, bank deposits & better credit ratios, asset prices will rise 401k's, home buying will begin and the consumer balance sheet will be cleaned up

Add the $600b to state & local governments for cleaning up their balance sheets and allow them to cut state taxes

All of these would drive huge aggregate demand shock across the whole macroeconomy and would replace 10% of GDP

I also think we could encourage the G20 to adopt the same policy with 2009 0% of GDP tax cut $4 trillion. This coupled with a US $2Trillion tax cut would jolt global AD.

[ogmb]

Speaking of the Big 3...

Porsche executives have savaged rival carmakers for driving the industry to the brink of ruin and accused banks of forcing financially sound component supplier companies out of business.

Wendelin Wiedeking, the chief executive of the German sports car group, said today it could only be a matter of time before hedge funds took majority control of one of the US car manufacturers that had inflicted damage on themselves with ruinous discounts and hugely subsidised leasing rates.

His outspoken comments against a bail-out of the industry came as the European commission outlined the case for at least €5bn (£4.2bn) of extra funding for Europe's carmakers to help them develop more eco-friendly cars and green technologies.

This falls far short of the €40bn sought by the EU car sector and by the French president, Nicolas Sarkozy, who is due to announce his own plans this week for green domestic manufacturers such as Renault and Peugeot Citroën.

The EC believes subsidies on the scale of the $25bn-50bn sought by the US's big three — General Motors, Ford and Chrysler — are incompatible with World Trade Organisation rules and would provoke official complaints to the Geneva-based body, which is due to rule soon on aid for the rival planemakers Airbus and Boeing.

Wiedeking, the architect of Porsche's strategy to take over Volkswagen and turn it into the world's leading carmaker, accused General Motors of "openly threatening" the US government it would go bust by the end of January without a bail-out. The big three are burning cash at about $2bn a month.

Holger Härter, Porsche's chief financial officer, said small- and medium-sized supplier companies could not press for a government bail-out but were running into hard times "without having made any mistakes themselves simply because banks are terminating their loans or refuse refinancing options. Ultimately, this means that a supplier basically resting on a strong business foundation may go belly-up from one day to the next".

Companies such as Siemens are making forward loans to suppliers to keep them going and Porsche is helping their liquidity with advance payments.

Wiedeking and Härter both urged the authorities to suspend the Basle II rules requiring banks to retain minimum reserves "in order to give companies air to breathe in these difficult economic times". This would be a far cheaper option for governments trying to handle the financial crisis in industry, Härter said.

Wiedeking told Porsche's annual press conference: "We need banks to give credit, not just talk about credit ratings but start real actual lending to companies. These rules are choking us today.

"Stabilisation of the financial system has to take place rather than banks shifting hundreds of billions of euros to the European Central Bank to earn interest. They should be injecting money so healthy companies survive."

Porsche is the world's most profitable car firm with pre-tax earnings of €8.6bn in its last fiscal year — more than its annual turnover of €7.47bn — but it indicated that it, too has suffered from the economic downturn and slump in demand for cars.

Sales in the four months from August 1, it said, were likely to have gone down 18% to 25,000 from more than 30,000 a year ago while turnover is estimated to have dropped 15% to just above €2bn, compared with €2.4bn in the same period of 2007-08.

Wiedeking said there would be a "significant decrease" this year from last year's record sales of close to 100,000 cars but insisted the outlook was so uncertain he could not give any profits forecast.

Porsche's margins, which were more than 20% last year, would remain in double digits, he added.

The deteriorating economy has hit Porsche's plans to take over more than 50% of Volkswagen by the end of the year, but Wiedeking said the goal was still to raise its stake to 75% in 2009 — when VW's share price was "sustainable".

Porsche, which holds 42.6% of VW and has options for a further 31.5%, has been slammed as a giant hedge fund after making the bulk of its profits on VW options trading. But Härter said it was "absurd" to say it had acted to damage hedge funds and blamed short sellers for last month's market distortions.

http://www.guardian.co.uk/business/2008/nov/26/porsche-vw-volkswagen-auto-industry

[Aaron from NJ]

One of the issues I don't see in the debate on policy response is that the major problem is all on aggregate demand side, demand has fallen and I don't think we are going to address that by pushing $300-600b to a few industries through fiscal stimulus when 100 industries are going into a fall in AD.

The issue at the heart I think is corporate earnings, which are falling and with demand falling we are in a thrift paradox on the corporate, consumer & public side.

As corporate earnings keep falling, corporate investment falls, employment falls, demand falls etc..

I think we could shock the economy with a 10% of GDP tax cut for 2009.

This will shock corporate earnings side if we had a 2009 only massive tax cut.

Corporate rates taken down to 0 for 09 (corp taxes are only going be $300-400b) in 09 anyways.

R&D tax credit that is huge $400b at $100b a quarter available only for R&D/CapX,/Plant Equip etc..

Cap gains to 0% for 09 only

Payroll tax cut to 0% for all of 09

All of these will stimulate corporate earnings in 09 by 10-30% Equity prices will raise 20-50%, debt prices will come down from 8-18% to 5-10% and drive demand in CapX which will have solid multiplier effects. With large value to the balance sheet.

On the individual side
a 2009 payroll tax cut to 0%

a 2009 indiv. tax cut of 20%

both of these will drive large savings, debt payments, bank deposits & better credit ratios, asset prices will rise 401k's, home buying will begin and the consumer balance sheet will be cleaned up

Add the $600b to state & local governments for cleaning up their balance sheets and allow them to cut state taxes

All of these would drive huge aggregate demand shock across the whole macroeconomy and would replace 10% of GDP

I also think we could encourage the G20 to adopt the same policy with 2009 0% of GDP tax cut $4 trillion. This coupled with a US $2Trillion tax cut would jolt global AD.

[Barry]

"Because there is no point in rehashing the past. The Republicans have *LOST*. One big mistake that they made was even after getting into power they kept rehashing the past and fighting old battles in their mind to the point that they completely blew the years that they had governing, and didn't notice that the world was changing around them. "

Posted by: Twofish

The obvious tactic for the GOP (and one which they pursued successfully in 1993-4) is one of 100% obstructionism. Any success by Obama is a loss to the GOP. Now, it's trickier to do this during a major recession, but the financial elites have gotten their $700 billion (and counting....), and Obama is in a position where a stalemate will count as a major defeat with people who need some serious accomplishments from him in the next year.

Meanwhile, in case you haven't noticed, the GOP still has a fillibuster core in the Senate, and they're *eager* to use it.

Given that, and the serious opposition by entrenced interests, exposing GOP misconduct could be quite valuable in terms of maintaining political opposition and peeling off a few critical GOP Senate votes.

In addition, if one wishes to avoid a repetition of Bush administration crimes, exposing them now, while they're fresh, is one of the few ways to help prevent that.

[Roger Karraker]

Brad's original question was how to do make these changes structurally. My approach, below, rests on two large assumptions, both arguable:

1.Barack Obama possesses enormous political capital right now. He has, I believe near-dictatorial power. He has the backing of the people (well 60% of them). The public will back almost anything he proposes.

2. The people are terrified, with good reason. They know the previous system and its assumptions, are bankrupt. They realize, if Detroit still doesn't, that what is required is a level of immediate action paralleling the enormous industrial expansion of World War II.

A third assumption is that the economy needs a stimulus of $1-2 trillion over the next 2-3 years.

Structurally I think Obama should wrap his initiatives in all of these areas into a single simple, inter-connected bill that eschews specifics (yes, I know this runs in the face of Washington's perceived wisdom that bills must be 1000 pages long and have hidden gotchas).

Obama's proposal should read roughly like the Bill of Rights: short specific statements of policy; details to be hammered out as we go along.

Here, off the top, are a few provisions I'd put in there:

1. Extension of unemployment benefits for up to 1 year. Mandatory job counseling and retraining for the unemployed at community colleges.

2. Open Medicare immediately to the unemployed and the family of pre-school children. Co-pays waived or deferred for a year.

3. Immediate increase in minimum wage to $10/hr.

4. One-year moratorium on foreclosures. Direct payment from Treasury to lender on the loan interest.

5. National wage limits: No salaries higher than roughly 40x the wage of the lowest worker (that's about $400k/yr.)

6. Immediate increase of CAFE standars by 25%. Federal government to order 4 million high-MPG/hybrid cars over 3 three years. Used to replace federal, state, local government fleet. Displaced high-MPG cars sold used to individuals. Gas guzzlers junked.

7. As part of 6, government licenses Toyota's hybrid technology and mandates its use by GM and Ford. Chrysler liquidated, its plants converted to making Toyota-licensed powerplants for transfer to GM and Ford.

8. Big sums spent on mass transit, buses, rail, city bicycle programs. Repair roads. No new road-building.

9. Direct federal financing of the construction of 1+ million new high-density central city homes, especially, apartments and co-housing.

The point of the stimulus is to inject enormous sums of money into workers' hands as quickly as possible. All that I've mentioned would quickly eat up a couple of trillion dollars. That can't be sustained inevitably. In a later post, if anyone is interested, I'll delineate a long-term revenue program to eventually bring things back in balance.

[Twofish]

Levy: Grad students only teach one class per semester because otherwise they'd never be able to do enough research to graduate; on a per hour basis, the wages work out to quite a bit.

I do wonder the structure of research universities relying on graduate students to do instruction really makes sense.

Also I'm not sure that the numbers you quote really take into account all of the time needed to teach. My experience in physics is that one hour of classroom time typical requires four to five hours of time doing things like grading papers, which turns out to be the most consuming part of teaching science.

There is also the fact that the students that need the most help are the ones that require the most time and effort, and so the incentives in math and physics are to focus on the students that need the least amount of instruction.

Levy: Parts of the rest go to important ancillary things like libraries.

The economics of academic publishing are pretty depressing. One thing that has happened in astronomy is that all of the real publication has gone online. One really nice thing about astronomy is that the journals are under the control of the professional societies which prevents a lot of the silliness you see in other fields.

Levy: Professors' salaries have to my knowledge risen too because of competition for the best scholars.

The problem with this is that you end up with a star system like acting and professional basketball, in which the winners make decent money, but the losers make nothing. This might be justifiable if your focus is research, but

1) it sets up a nasty class system which actually goes against some of the norms of academia, and
2) it works badly for things that require large numbers of grunts as opposed to a few stars, like undergraduate teaching.

Danby: AFAIK "most of the undergraduate instruction is done by graduate students" is false even at places that have a lot of grad students.

Actually for some subjects most of the real instruction involves undergraduates interacting with each other.

Professor work is constant for number of students. Basically managing a class of 500 is only slightly more work than managing a class of 50. However grading papers and face to face instruction doesn't scale. You need roughly one teaching assistant per every 20 students. So what ends up happening in large undergraduate classes is that most of the labor ends up being grad student labor.

Once you get out of the lower division classes then the economics changes radically, but it's the lower division classes that really determine future career options.

Personally, if I were to try to restructure undergraduate education, I'd have research universities get as much as possible out of direct undergraduate instruction and create alliances with community colleges to do that. Also, I'd change things so that most college students don't actually go to college until they are mature enough for it. The fact that people are forced to go to college at age 18 rather than 35 causes a lot of problems, since it means that colleges have to do a lot of babysitting.

One thing that seems to be the case is that tuition at colleges subsidizes research. Research has to be done and paid for, but using tuition to do that leads to a lot of dysfunctional situations.

[mpowell]

Twofish: I can't see how it would be more economically efficient to delay college education. Young people can't do anything useful until they get that education, so even though it's harder to do at a young age, I imagine it's better to get them into the workforce faster (and leave more productive years)

[Twofish]

mpowell: I can't see how it would be more economically efficient to delay college education.

That's because the way that we've structured education makes no economic sense. The way it works is that you are supposed to get all of your education and then you work, which means that you don't hit the work force until the mid-20's and only after getting hit with lots of debt.

It makes more sense to have people enter mix work and education. Someone who is 18 can get a job at Walmart, go back to school, work as a plumber, go back to school, and then gradually work themselves up to being a brain surgeon or corporate CEO. The way that we have education structured, if you decide at age 18 that you want to actually work as a plumbers apprentice instead of going to party at State U, you have no major chance of becoming CEO.

The reason for this is that the part of the hidden (or not so hidden agenda) of the educational system was not to *increase* class mobility but rather to reduce it by making sure that the "right people" got good educations very early on, and everyone else would get tracked out. So you have totally stressed out parents that are terrified that "Little Johnny" isn't going to get into Harvard out of fear that if he doesn't get accepted, that he is going to be washing dishes for the rest of this life.

Those fears are partly justified, which tells you how messed up society is. The problem is that whatever skills that Johnny learns at age 20 are may be totally obsolete when he gets up at age 45.

School is life, and life is school, and in order to get anywhere in the 21st century, we just got to get rid of this idea that school is something you get over with.

Young people can't do anything useful until they get that education, so even though it's harder to do at a young age, I imagine it's better to get them into the workforce faster (and leave more productive years)

[lboyd]

I thought I would wait and see what came up on this list. For those pof you who wrote off auto you are restructuring the industry. GM is the largest producer of cars both in the US and internationally. You have decided, based on false premises, to restructure the auto industry by eliminating all, or most of the major U. S. producers. Thereby reducing competition and transferring lots of jobs, and money, overseas. To answer what these false premises are.
1) The UAW, and high wages, are really not part of the problem. And this is nearly laughable if it wasn't tragic. The "average" worker at the big three make $28 per hour in wages and about $15.00 per hour in benefits. Larger numbers, such as the $70-$77 per hour number comes from counting payments to 535,000 employees that are part of the pension plan. The pension plan is a fully funded plan that is NOT pay as you go and it is simply incorrect. The wages and benefits at the big three are somewhat higher ($28 vs. $24) and there are some programs that can be cut but this is not the problem.
2) The idea that the transplant firms are not losing money is laughable. Yes Toyota in the United States is losing money. For whatever reason (analysts say that they tried to develop a product line to close to GM's) but they are in the same boat but have a somewhat larger cash reserve. This comes from other things than merely wages, many states, such as as Alabama have heavily subsidized their car makers.
3) Anyone who states that retirees "can be shifted to Medicaire and Social Security" is simply not credible. They ALREADY ARE enrolled in these programs. Social Security has never been designed to meet all the income need of retirees and what ypou are actually proposing is a massive cut in these peoples living standards, on the order of half.

Here are my suggestions on restructuring the auto industry.

First, the actual cause of GM's crisis relates to the financial crisis. The weak dollar actually had a small negative effect on GM since it lost money currency operations as a result (per its most recent annual report). Consider sales denominated in Euros or Canadian Dollars and their transfer to the US. More importantly, on the one hand it sold its financing arm GMAC to Cerebus (the same people) and it has tightened lending criteria. In general consumers are halving a difficult time finding credit even for car loans. The other side of this is suppliers and producers are having a difficult time finding credit for operations. For example suppliers can no longer use their account receivables as collateral. And when the get credit they are paying more for it. Solving the credit crisis and a return to economic growth would probably solve all of the big threes problems. In the meantime provide them with the loans they need. That's why they are calling it a bridge loan.

Second insure the auto industry is completely unionized. Put a floor under wages and benefits. Unlike the plan being proposed above which restructures by eliminating the union this plan restructures by insuring that auto plants don't compete over minor differences in wages.

Third health care reform. Auto companies, including transplants, have found Canada attractive because it does not "impose" health care costs on them. Honda is building a new plant there rather than in the South precisely for this reason. A reasonable non-employer based health care system would be a great boon. Unfortunately, this is not currently on the table even with the Obama administration.

You will notice that except for providing a loan to the auto industry none of these solutions are specific to it.

Restructure the labor market so unions have a greater voice. Enact health care reform. Macroeconomic recovery and solving the financial crisis needs to be done anyway. Of course if the Big Three actually fail or if GM fails then one cannot say much for the chances of a recovery. Can one? None of those who favor allowing them to fail have quantified the effect on a recovery of not having two or three large manufacturing corporations around to go back to. What you have introduced is not temporary unemployment created by a downturn but long term, massive "structural unemployment" problem. And this will be a really long term drag on any recovery.

[lboyd]

I forgot one more thing. GM has actually been pretty far out there on developing hydrogen fuel cells. It has a car coming into production called the Volt that will be a plug in hybrid that can get 60 miles to the gallon and will run on batteries alone for 100 miles. So you would actually be sacrificing a potential Green technology by letting them fail.

[Roland]

Twofish is right about the mix of work and education.

What hasn't been mentioned here is the "credentials inflation" that has taken place in the past 30-odd years.

Outside of certain highly technical fields, the credentials needed to get hired for many jobs considerably exceed the education actually required to perform the job tasks.

Education has become a bit of an arms race, a bidding war among workers to gain the most credentials and secure for themselves some sort of remunerative employment.

Those who can't afford to stay in the arms race are left with the dismal wages and conditions of the low-end service sector.

Education is important, but I believe our current system of higher education is wasteful and inequitable.

[Twofish]

Roland: Education has become a bit of an arms race, a bidding war among workers to gain the most credentials and secure for themselves some sort of remunerative employment.

Which causes a problem in that it causes universities to focus on technical skills that will be obsolete in five years rather than focusing on critical thinking and liberal arts skills that will last you for a lifetime.

One of the important people in my life was my high school Latin teacher, and he was able to give me an appreciation of Roman history and Latin rhetoric. The problem with the way that undergraduate education is structured is that students don't see the use of studying Roman history, and they don't see (and the teachers don't make it obvious to them) why studying Roman history will make them money.

But personally, I've found that reading Plato and Cicero becomes really useful when you end up out of work, you get up in the morning and try to ask yourself "so what the hell do I do now?"

[Twofish]

lboyd: For whatever reason (analysts say that they tried to develop a product line to close to GM's) but they are in the same boat but have a somewhat larger cash reserve.

They have a bigger cash reserve because when times were good, they put some of their profits into cash, which saves you when times are bad.

lboyd: Solving the credit crisis and a return to economic growth would probably solve all of the big threes problems. In the meantime provide them with the loans they need. That's why they are calling it a bridge loan.

This is the part that I find extremely unrealistic and part of the reason I think that GM is extremely out of touch.

Banks got burned by overlending, and for the next few years they are simply not going to be lending on the terms that they did in the last several years. If GM's plan is to just borrow money and what for the world to return to 2006, this is just not going to work because the world is not going to return to 2006.

What is GM going to do if the world *permanently* goes into a state where there is less consumer credit and economic growth is funded through (for example) government expenditures rather than consumer credit?

To me the fact that the CEO is still talking about a "bridge loan" suggests detachment from reality. What does GM do if the economy *doesn't* improve? What is GM's strategy do if the economy goes into a Second Great Depression (after all it survived the First).

"Hope for the best" is not a viable business strategy, and it really does explain why GM doesn't have cash reserves like Ford or Toyota.

lboyd: Of course if the Big Three actually fail or if GM fails then one cannot say much for the chances of a recovery. Can one?

Actually you can. Chapter 11 bankruptcy exists to save companies not to destroy them.

What happens if General Motors goes into Chapter 11, is that they get protection from creditors and GM gets administered from a bankruptcy court. Both labor and management have made it sound that if GM goes into Chapter 11, we will see the end of the world, but they haven't convinced me of this.

What normally happens when a company goes into Chapter 11, is that banks start lending large amounts of money to it, because a bankrupt company has to pay post-bankruptcy lenders before pre-bankruptcy lenders, and I really don't see why GM should be much different. Maybe it is, but the CEO has done a horrible job explaining why, so maybe he shouldn't be CEO. (Yes, it may be that people won't buy a car from a company in Chapter 11, but if that's the case, they won't buy a car from a company that is near Chapter 11.)

The second that Lehman Brothers went into bankruptcy, they got about $15 billion in loans, and while there were massive layoffs most of the people that worked for Lehman have kept their jobs.

The amount of money that GM is asking from the government is not large in comparison to the amount that banks are willing to lend bankrupt companies. However the one thing is that in a bankruptcy, the creditors are likely to demand and the bankruptcy judge may will give them, the resignations of the CEO and the board.

Personally, I realize the importance of GM to the US industry, and I think it is really important that GM be saved and turned into a prosperous vital company. I just don't think it may be possible with the current management, and Chapter 11 will allow us to discuss firing the CEO.

Banks can play the game of "shoot me and the world falls apart." Auto companies can't.

[lboyd]

TwoFish:

"What is GM going to do if the world *permanently* goes into a state where there is less consumer credit and economic growth is funded through (for example) government expenditures rather than consumer credit?"

Are you serious. Then all business will crash and burn. Keynes when asked about whether there was a similar historical period to the Great Depression replied "Yes, t was called the dark ages and it lasted 400 years." Of course here is no solution if you posit no end to the financial crisis and no return to normal conditions. In a new Dark Age then all companies will fail. Bankruptcy will not lead to a return to profitability. Economic growth ultimately can't happen merely from government expenditures it wil require a functioning credit system.

Two Fish GM also put money into cash reserves. Even recently they have had 7 billion in cash. It was not that they were imprudent but domestic circumstances concerning the credit crunch has led to this situation.

Of course the Lehman example is a perfect illustration of why this should happen. The bankruptcy led directly to our current downward spiral, and a GM bankruptcy will accelerate it.

TwoFish
"Banks can play the game of "shoot me and the world falls apart." Auto companies can't."

It appears they can from the Financial Times reporting a deal has been reached.

Two fish bankruptcy will mean the end of GM. No one will buy cars from a bankrupt company because the depreciation on those cars will be close to 100 percent. This happened with Leyland and Studebaker and others. It a pipe dream to believe that you can have an orderly Bankruptcy filing that pulls GM out of its current problems better than a loan with certain strings attached. Nor does bankruptcy even insure the current leadership will leave.

[AntiquatedTory]

What is DIP financing? A much more financially educated person than myself suggested government-provide DIP financing for the Big 3, because there's too much risk that Chapter 11 would turn into Chapter 7, and because letting them fail would be disastrous.