Sunday, November 30, 2008

The Lori Drew Case and Prosecutorial Grandstanding

Reactions to the Lori Drew verdict seem to come primarily in two forms:
  • Lori Drew is such a horrible person that even if the law is bent to the point of breaking, or even if it sets a really bad precedent, the verdict should stand so that she is punished for her bad acts (see, e.g., news articles that cover the actual charges, yet still describe this as a "cyber-bullying case"); or

  • It's really bad public policy and a distortion of the law (18 USC § 1030) to criminalize the violation of a website's terms of service, even if you really want to punish the person who committed the violation. (i.e., "Bad facts make bad law.")

There's another side to this: If the verdict does not stand, and there's a good chance that it will not, the shameless grandstanding by U.S. Attorney Thomas P. O'Brien will have expanded the injustice. It will have given Megan Meier's family the false sense that Lori Drew would go to prison for crimes that should never have been charged. Oh, probably O'Brien will harrumph about how he was right, about how Drew is evil incarnate, and how either the trial court or appellate court has unreasonably second-guessed the good men and women of the jury. Such a reaction would be consistent with what this prosecution is about - the furtherance of Mr. O'Brien's personal and political goals.


Had Mr. O'Brien gone to MySpace and said, "I want to set an example for the nation by prosecuting somebody for violating your terms of service", what are the odds they would have picked this case? If they wished to go after people who create accounts to harass or annoy other users, there are people they can document as having created scores of fake accounts for that purpose. If they wished to go after the misconduct that most affects their bottom line, they would have directed Mr. O'Brien to professional spammers who create hundreds or thousands of fake MySpace accounts to spam MySpace users. You want evidence of MySpace's priorities? If you look at where MySpace expends its own money, it's in the pursuit of spammers.

Further, if MySpace were to go to Mr. O'Brien with it's latest stack of TOS violators - no doubt many thousands per day - and ask Mr. O'Brien to prosecute them, he would reject their proposal as ridiculously burdensome. Prior to seeing the opportunity to grandstand in the Lori Drew case, he most likely would have told them to pursue the violations by terminating accounts, or through the civil courts. Realistically, MySpace wouldn't have even asked.

Right now, Megan Meier's family would have the right to feel underserved by the legal system. Her local prosecutor didn't find that any crime was committed, and Missouri's federal prosecutor passed on the case. Mr. O'Brien was able to produce convictions only on a number of misdemeanors. Meier's mother is, predictably, calling for the maximum sentence, apparently out of recognition that this case is really about what happened to her daughter and not what was prosecuted - an offense against MySpace. Assuming that the sentencing occurs, and that the trial judge is not as interested in self-aggrandizement and grandstanding as Mr. O'Brien, her first disappointment will be that Ms. Drew's sentence is far more lenient. A bigger disappointment is probably forthcoming - If the trial court or appellate courts do their job, it is likely that Ms. Drew will end up having her convictions reversed.

Assuming the verdict is upheld, what's the lesson? That we'll see selective prosecution based upon the outcome to a third party, without regard to the magnitude of harm to the ostensible victim (the online service)? That we're going to be held to an absolute standard of knowing the current terms of service of every Internet service we use (hours of reading per day for an active Internet users), at risk of criminal prosecution if we violate those terms? Are we supposed to be reassured that, although far more egregious violations of the statute occur every minute of every day, that a federal prosecutor is not likely to act unless he gets an opportunity for self-aggrandizement? And the only cost is that an occasional, possibly unpleasant person will be dragged across the country for a show trial, at considerable public and private expense, principally for the benefit of that prosecutor? How... comforting.

Saturday, November 29, 2008

Pumpkin Pie, Reinvented

The recipe highlighted here is quite good - it really does garner, "I don't like pumpkin pie, but I like this" reactions - and it's easier to make than it initially might appear. I might try a graham cracker crust instead of a regular pie crust next time. But really, if you're gathering recipes for next Thanksgiving, it's one for the file.

Friday, November 28, 2008

Conrad Black's Lament

You know, for many years Conrad Black and his wife were positioned to do a lot to bring attention to the flaws in the criminal justice system, the manner in which the cards are stacked against a defendant, the dismal state of prisons and the limited chance that they'll inspire an inmate to reform.... And if they were now addressing the problems from an insider's perspective - an inmate and his wife, waiting on the outside - their words might still have some resonance. But their words are lost in a sea of self-pity.

Here's Conrad Black - "From my cell I scent the reeking soul of US justice ". Oh, smell that smell. No really, it sounds like he's in a rather nice prison:
Many of the other co-residents are quite interesting and affable, often in a Damon Runyon way, and the regime is not uncivilised. In eight months here there has not been the slightest unpleasantness with anyone. It is a little like going back to boarding school, which I somewhat enjoyed nearly 50 years ago (before being expelled for insubordination) and is a sharp change of pace after 16 years as chairman of The Daily Telegraph.
Black complains,
US federal prosecutors, almost all of whom would be disbarred for their antics if they were in Britain or Canada, win more than 90% of their cases thanks to the withering of the constitutional guarantees of due process – that is, the grand jury as an assurance against capricious prosecution, no seizure of property without just compensation, access to counsel, an impartial jury, speedy justice and reasonable bail.
He seems to have crossed his constitutional protections - the Fourth Amendment protection against unreasonable search and seizure with the Fifth Amendment's prohibition on taking private property for public use without just compensation. But he gets at some of the complaints against the system, particularly the manner in which the grand jury has been transformed from what was intended to be a safeguard against prosecutorial abuse, into what often amounts to an investigative arm of the prosecutor's office, to the point that Judge Wachtler's observation that a Grand Jury can be easily persuaded to "indict a ham sandwich" is met not with surprise, but with a shrug.

The problem with Conrad Black's laments is that they turn from broad statement to personal lament. Does he share the experiences of other inmates or their families? People far less fortunate than him, with far fewer resources to throw into their defense? No, and from his tone he probably hasn't even taken the time to ask. It's not even apparent that he regards his broad statements against the justice system as being particularly true or salient, except in relation to his own case and his own circumstances. It's all about him.
The US is now a carceral state that imprisons eight to 12 times more people (2.5m) per capita than the UK, Canada, Australia, France, Germany or Japan. US justice has become a command economy based on the avarice of private prison companies, a gigantic prison service industry and politically influential correctional officers’ unions that agitate for an unlimited increase in the number of prosecutions and the length of sentences. The entire “war on drugs”, by contrast, is a classic illustration of supply-side economics: a trillion taxpayers’ dollars squandered and 1m small fry imprisoned at a cost of $50 billion a year; as supply of and demand for illegal drugs have increased, prices have fallen and product quality has improved.
Black rattles off these complaints and statistics without relating them to his own case. It wouldn't necessarily be that hard to do - a weakening of civil liberties and protections offered to criminal defendants in the name of looking "tough on crime" or fighting the unwinnable "war on drugs", but alas, Black isn't offering this out of concern for its having been the wrong path to take. Was there any time during his career, when he could have directed scores of investigative reporters to delve into the flaws of the criminal justice system or hired editorial columnists who would have directed scorn and scrutiny at its flaws and excesses, that he had anything to say about these issues? The argument's still about him; he's tossing in the kitchen sink.

A few months back, I read a similar column by Barbara Amiel, Conrad Black's wife. I created a draft blog post, but let it go unpublished.
Writing about Conrad Black's prison sentence, his wife Barbara Amiel has is concerned about the little people:
So what, you ask. What does it matter if one well-off, elderly white woman with too many pairs of expensive shoes now finds her social life largely limited to visiting her dearly missed husband in a US federal correctional institution? Should be interesting material for her as a writer.

But if the rich and well-connected cannot get justice, what chance for anyone else — a question I asked in columns about the law long before I married Conrad. What chance for the orange jump-suited, marginalised young men I saw shuffling in front of the judge in Chicago, silent while their court-appointed attorneys negotiated their freedom away in that tight little legal world, where a client’s fate never disturbs the bonhomie between lawyers.
I would love to see one of those columns... anybody have a piece of yellow, crumbling newsprint where Amiel set aside her typically right-wing views to fret about the quality of criminal defense services?
If ostensibly privileged defendants like us can be baselessly smeared, wrongfully deprived, falsely accused, shamelessly persecuted, innocently convicted and grotesquely punished, it doesn’t take much to figure out what happens to the vulnerable and the powerless: they land, finally, in the 8:45am courtroom parade that takes place all over “America the Free” — the country that “wins” 90% of cases and imprisons more people than any other in the world.
Ostensibly.... That would mean "seemingly" or "apparently". There's no "ostensibly" about it - people with hundreds of millions or billions of dollars in wealth are privileged. And Amiel's over-the-top comparisons only serve to highlight how she elevates her own situation over that of the jump-suited little people:
In any event, were I a clothes-crazy predator and were my husband the arrogant and pompous caricature of the books and films depicting him, what then? ... If Dreyfus had been a loud and vulgar Jew instead of an officer and a gentleman, would his case have been any the less important or his persecution less unjust?
I'm sorry - she just compared Conrad Black's conviction to the Dreyfus Affair? No, wait....
Conrad had no idea, and one could not convince him, that he was in Salem, in the middle of an American witch-hunt. There is no defence against false accusations in Salem.
He's a witch being burned at the stake after a trial by ordeal!
I'm not sure that responding to this level of self-pity and self-righteousness serves to advance any cause, and it seems to me that if anything, it's probably counterproductive to Black's cause. Black now makes it clear that he and his wife are on the same page.

Are Law Degrees Versatile?

The National Law Journal recently asked, Is the Versatility of a Law Degree Just a Myth? Well, yes and no. If you go to law school without any real desire to practice law, and with no concept of where your career might go afterward, you're probably going to find out that there are many degrees that are far more versatile than law. If you then try to enter a field outside of law, what employer wouldn't be curious as to why you sought the law degree, or how your law degree better qualifies you for the job than the degree of a more typical applicant?

And then there's often the question of why you're choosing a career path that pays less than legal practice. Is your explanation that you're looking for greater job satisfaction, and are willing to take a pay cut for a job you love? Is it, "Legal practice (or at least the practice I was in) doesn't pay what you think"?

When you look around and see lawyers in a wide range of fields, ask yourself how they got there? If they're older, and entered a business field back before the MBA was created, there's no direct comparison. When the degree of preference in a field has changed, the easiest way to enter that field is with the preferred degree. But what of the others? Are they truly there because of their law degree and its versatility, or because they found a way into a field by virtue of their personal interests and skills and, assuming their legal background remains relevant to their job duties, found a way to make their law degrees work for their employer.

I would not suggest to somebody who simply can't decide what they want to do "when they grow up", that they go to law school. For that matter, I would have words of caution for somebody who understands what legal practice entails and wants to join the legal profession. But really, if you're meandering, an MBA is generally going to be cheaper and will likely provide more flexibility (save for getting you a license to practice law). The flexibility I see in a law degree often has more to do with the person holding the degree than the degree itself.

Still, if you're from a modest background and are willing to put in the effort it takes to get through law school, position yourself to get into a well-paid legal position, and work yourself ragged for enough years to build up some capital, it's a slow, tedious way to get to the point that you can afford to truly follow your dreams.

An Ineffective Protest?

As we were driving to my in-laws' house for Thanksgiving dinner, we had to brake to avoid a wild turkey that suddenly flew in front of our car. It had been at the side of the road with a second turkey that, one would hope, had been clucking the equivalent of "Don't do it. Not only is it dangerous, what self-respecting turkey plays chicken?"

Strangely, if you tell people that you stopped on the way to a family gathering for wild turkey, some of them get the wrong idea.

Wednesday, November 26, 2008

Heads Should Be Rolling

Thomas Friedman, following up on this New York Times article, makes the case that the leaders of the financial industry, now reaping the benefits of the gargantuan, taxpayer-funded bailout, are incompetent or worse:
Why? Because in searing detail it exposed - using Citigroup as Exhibit A - how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.
With due respect to Friedman's acknowledgement that responsibility spreads well beyond those financial institutions, and duly acknowledging his focus on the leaders of finance and that he's not defending Paulson's decision to treat them with kid gloves, how can you argue but that those at the top of the financial industry who were either too stupid or too greedy to put on the brakes should be keeping their jobs, even as they get tens to hundreds of billions of dollars of taxpayer money and guarantees for their junk securities?
Also check out Michael Lewis’s superb essay, “The End of Wall Street’s Boom,” on Lewis, who first chronicled Wall Street’s excesses in “Liar’s Poker,” profiles some of the decent people on Wall Street who tried to expose the credit binge — including Meredith Whitney, a little known banking analyst who declared, over a year ago, that “Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust,” wrote Lewis.

“This woman wasn’t saying that Wall Street bankers were corrupt,” he added. “She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale... For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.”
Corrupt? Stupid? Or is it that they are so used to being lionized by a nation captivated by wealth, despite their limited knowledge and skills, and so immersed in a culture where almost anything goes in the name of profits, that they weren't aware that they should even try to look past their greed?

A few months ago, with this crisis looming, Friedman wrote,
Come August, though, I predict both men will be looking for a financial wizard as their running mates to help them steer America out of what could become a serious economic tailspin.
I wish he had "named names", as I am curious as to whether the reputations of the "financial wizards" he had in mind would have survived the past five months.

Tuesday, November 25, 2008

Coordinated Bankruptcy for the Auto Industry

The Times offers an interesting editorial proposing that the federal government facilitate the simultaneous bankruptcy of the "Big Three" auto makers, accompanied by extension of sufficient credit to sustain their operations through that process. This beats the current congressional proposal of, "Come to us with a business plan we like and maybe we'll lend you money," as it would allow the auto companies to address problems they cannot discuss as part of such a business plan - for example, how to eliminate failing brands and close hundreds of auto dealerships. If Ford announces, "We're going to close down Mercury," or even more modestly, "We're going to close it down as an independent line, while making select Mercury models available through Lincoln dealerships", they would create immediate consumer concern about Mercury vehicles, and would be immediately sued by Mercury dealers. If they say, "To control expenses, we need to cut the number of dealerships by a third," again they would be facing lawsuits by car dealers afraid of being among that third.

Meanwhile, the fact is that the manner in which cars are sold and distributed in this country is out-of-date, excessively costly, and anything but consumer friendly. At this point if you want to buy an iPod and only an iPod, you can go online to the Apple Store and buy one. But if you want to price shop or compare the iPod to other brands, you can choose from thousands of online and retail vendors who carry multiple brands of MP3 players. While iPhone sales are more constrained, once again you can find stores that offer contracts through multiple services, so you can go in and choose between an iPhone and a variety of service plans, and similar products from other vendors and service providers.

Try that with a car.

What if you're interested in offering a new type of dealership - a concierge type service that caters to professionals at their offices, allows them to arrange to drive a car model of their choice on their schedule, and offers the full range of makes and models they are apt to want to buy? Good luck with that.

What if an auto maker wishes to take the Saturn model to its next logical level, and build a Dell-style website where customers can pick a model - any model they offer - customize it, and have it delivered in days to a dealership with them with no haggling, no surprises, no post-sale pressure for "paint protection" or similar add-ons, no concern about financing (you've already been approved online) or confusing over rates. Get a good price, don't worry that you're paying more than the next guy or being otherwise hoodwinked, and show up at the dealership to inspect your vehicle, go over any special features, and drive away. The manufacturers are already about 90% of the way there with their "design your own vehicle" features on their websites. But do you think there's any chance that the crucial remaining 10% will get past NADA?

Bankruptcy only touches on these issues - facilitating the dropping of brands and closure of dealerships - but it doesn't do anything to overcome anachronistic, protectionist state laws that prevent innovation in vehicle distribution and sales, reduce manufacturer and customer cost, and increase customer convenience. But really, you're unlikely to hear anything about this from the CEO's of the Big Three.

I continue to favor something similar to bankruptcy but legislated by Congress, as opposed to Chapter 11, as being a possible path to reforming the auto industry with a much lower risk of failure. For those who complain, "Foreign auto makers will think it's unfair," I say, "They're not complaining about protectionism in their own nations, and you know what else - they're welcome to join in." If Congress is unwilling to act, cannot act with sufficient speed (as the authors of the editorial surmise), or forces bankruptcy upon the domestic auto industry, I think it's fair to say that it will be the result of a failure of leadership - in Congress, the auto industry, the UAW, and the nation's auto dealers and their "union", NADA (who are strangely omitted from most discussions of the industry's problems).

"If We Keep Throwing Cash On The Fire...."

"... Surely we'll eventually smother the flames."

Watching Paulson and friends scurry around pouring money on one fire after another, with no apparent concern for consistency other than protecting the jobs of their peers and the wealth of stockholders, is fascinating. It's a mad world.

Monday, November 24, 2008

Mad World....

Had Kerry been elected in 2004 and had he initiated a similar "bail-out", can you imagine how Republicans would be responding to the near random manner in which Bush and Paulson are running around, throwing bushels of money at the financial industry? Or that the auto industry's request for $25 billion in federal loans would seem miniscule as opposed to the Bush/Paulson blank check for the financial industry? A year, or even six months ago, could you have imagined a blasé reaction by Congressional Republicans to a Democratic President-Elect's proposed two-year $600 trillion economic stimulus package?

You can blame whomever you want for those aspects of this crisis that predate Bush's tenure. Certainly, financial deregulation that occurred under Clinton played a role in this mess. But it's difficult to get past the top-to-bottom, front-to-back incompetence of the Bush Administration. And despite their lies protestations, the leaders of financial giants like Citigroup knew that they had flushed lending standards down the toilet and were taking enormous risk in the hope of reaping huge profits - and paychecks. I don't want to seem vindictive, but if they've run their companies into the ditch to the point that they need these multi-billion dollar handouts, given that context their CEO's should be tendering their resignations.

As recently as March, we were given projections like this:
You can see this for yourself in Table VI.F8 in Social Security's 2007 trustees' report. Compare "income excluding interest" with "cost," and you get cash flow numbers. (I'm ignoring interest, because it's paid with Treasury IOUs, not with cash.) You see that the system's cash flow is projected at about positive $92 billion this year. Nice. But by 2020 it's negative $96 billion, rising to about negative $280 billion in 2025, half a trillion in 2030.
Oh my.... half a trillion dollars in twenty-two years? Strangely, back in March that seemed like a big number. So what's the cure?
It would be nice to have $2.3 trillion in useful assets in an equivalent of a sovereign wealth fund - but we can't turn back time.

We can still buy time by investing current cash surpluses in non-Treasury assets. But that would require a change in the law and a change in the Washington mindset, neither of which seems to be in the offing.
Darn shame, because if we had invested the Social Security trust fund in private securities that follow the Dow, we would have earned, no wait, lost $800 billion. You know, on paper. I think Social Security privatization is off the table for a while.

What I wonder is, has the scale of this bail-out blown any notion of fiscal responsibility straight out of the budget. What will it take to get us back into a world where a half-trillion dollars is a "big deal"?

Because Without Political Progress....

A reminder from the Kurdish region of Iraq: Without political progress, at least by his original measure G.W. is right - the surge will have been a failure.
Kurdish officials this fall took delivery of three planeloads of small arms and ammunition imported from Bulgaria, three U.S. military officials said, an acquisition that occurred outside the weapons procurement procedures of Iraq's central government.

The large quantity of weapons and the timing of the shipment alarmed U.S. officials, who have grown concerned about the prospect of an armed confrontation between Iraqi Kurds and the government at a time when the Kurds are attempting to expand their control over parts of northern Iraq.
How well is "national reconciliation" coming along?
"Yes, the Kurds have this autonomous region and they're authorized to keep the pesh," one of the [U.S.] officials said, referring to the militia. "But arming themselves and bringing in weapons stealthily like that - if I were the Iraqi government, I'd be pretty concerned."

While violence in Iraq has decreased markedly in recent months, political tension is rising as Iraqi leaders gear up for provincial and national elections scheduled to take place next year, and as they prepare for an era in which the U.S. military will have a smaller presence there.

Of the primary fault lines - which include tension between Sunnis and Shiites and rivalry among Shiite political parties - the rift between Kurds and the Arab-dominated Iraqi government has become a top concern in recent months. Senior government officials have engaged in a war of words, and Iraqi army and pesh merga units have come close to clashing.

"You could easily have a huge eruption of violence in the north," said Kenneth B. Katzman, a Middle East specialist at the Congressional Research Service in Washington. "Nothing having to do with the Kurds is resolved."
And of course, the Kurds welcome us to stay:
Central government officials recently bristled at Barzani's offer to allow U.S. troops to establish bases in the Kurdish autonomous region, saying the regional government had no authority to make such an overture, especially as Iraqi officials are calling for a gradual withdrawal of U.S. troops.
The factions that want us in and the factions that want us out, it seems, are all trying to advance their own agendas. But reconciliation isn't very high on anybody else's list of priorities and... for that matter, may not even be on any list but ours.

Take What You Can Get....

The bad news, for GNR fans, is that the album doesn't seem to be well-reviewed. (If you care about reviews.)

The good news? You can still get free Dr. Pepper until 6:00 PM EST.

For those who love GNR and hate Dr. Pepper, or hate them both... sorry, no good news for you. Unless you count the fact that traffic to is so heavy, and people seeking a coupon are so likely to encounter a problem or error, that this could turn into a public relations boondoggle.

Sunday, November 23, 2008

Mitch Albom Plays Auto Executive

And in their (hypothetical) voice notes,
Ask fair questions. Demand accountability. But knock it off with the holier than thou crap, OK? You got us into this mess with greed, a bad Fed policy and too little regulation. Don't kick our tires to make yourselves look better.
I'm really not a fan of gotcha politics; the grandstanding over auto executives' flying in by private jet was cute, but politicians should remember that turnabout is fair play. If the new rule is that executives of troubled or failing businesses, or those seeking tens of billions of dollars in federal aid can't fly their corporate jets, where is the comeuppance for AIG and Citigroup? (And dare I joke about G.W. having two spectacular private jets, given the mess he's made of pretty much everything he's touched?)

Saturday, November 22, 2008

Like 'Em Or Hate 'Em....

Whatever your personal position on cases like Heller and Roe, today George Will does a pretty good job of explaining how those decisions lead to cases that require judges to substitute their policy preferences for actual interpretation and application of the Constitution. In terms of Roe,
Parental consent? Spousal consent? Spousal notification? Parental notification? Waiting periods? Lack of funding for nontherapeutic abortions? Partial-birth abortion procedures? Zoning ordinances that exclude abortion facilities? The court has tried to tickle answers for these and other policy questions from the Constitution.
In terms of Heller,
Now the court must slog through an utterly predictable torrent of litigation, writing, piecemeal, a federal gun code concerning the newfound individual right. What trigger locks or other safety requirements impermissibly burden the exercise of this right? What registration requirements, background checks, waiting periods for purchasers, ballistic identifications? What restrictions on ammunition? On places where guns may be purchased or carried? On the kinds of people (e.g., those with records of domestic violence) who may own guns? On the number of gun purchases in a month?
Where do I disagree with Will? While he, as a pundit, has fully embraced the notion that conservatives favor judicial restraint, the reality is quite different. Heller is not an exceptional ruling following a history of conservative deference to constitutional language and state and federal legislatures, it's a continuation of an activist history masquerading behind claims of "originalism" or "textualism". For the most part, political partisans either don't pay attention to the other side's judicial excesses, or simply don't care about their own. Will's column suggests that he falls into the former category, but now that he is aware of the issue it's up to him to demonstrate how much he actually cares about judicial activism that advances his own political agenda.
It has been said that the most important word in the Supreme Court's lexicon is not "liberty" or "equality" or even "justice," it is "five." But whereas in baseball a tie goes to the runner, in controversies about the constitutionality of legislation, a tie between serious arguments should, Wilkinson says, tilt judicial judgment to the democratic side - the legislature.
Except if the subject is campaign finance reform? Seriously, when it's your own ox that's being gored, it's really difficult to take a step back and say, "We should defer to the legislature," as opposed to, "Those judges are gutting the Constitution and stripping this right of any meaning." Moreover, whatever the right, there's a point where that will be true. Then what? Do we simply check to see whether or not the legislation under review includes "findings" that nominally support the legislation? Legislatures figured that game out a long time ago.

Will closes,
So, regarding judging, too, conservatism is a house divided. And as Lincoln said (sort of), a house divided against itself is really interesting.
And Will raises interesting issues that, unfortunately, aren't likely to be resolved at any time during the next two centuries of constitutional litigation.

Friday, November 21, 2008

Remember When We Had a Chance of Turning a Profit?

I'm not sure that Paulson's current plans are any better, but remember when we were told that we should buy up the financial industry's garbage, and could (or, in the mind of some people, inevitably would) even turn a profit after a few years? If you believed it then what do you make of the collapse of Citigroup's stock? The WSJ has an explanation:
Weighing down the shares has been the Treasury Department’s decision last week not to buy troubled assets from banks. Citigroup’s balance sheet includes battered securities and loans that many investors hoped could be offloaded to the government.
Go figure.

Thursday, November 20, 2008

Making a Success of Foster Care

Britain's model of child protection and foster care (which sounds a lot like ours) is compared to Germany's:
Almost three quarters of [children in foster care] will leave care with no formal qualifications. Only one per cent will go on to enter any kind of university education. One fifth of looked-after children are homeless two years after leaving care; 25 per cent of our prison population has been through the care system. Things have to be really bad at home before care looks like a better option.

Yet in other countries the picture is very different. In Germany looked-after children do extremely well, with 95 per cent of children in the German care system going on to vocational education. Crime committed by looked-after children in Germany runs at 5 per cent of the rate of crime committed by those in our care.
This comes at a price:
Money is important. In Germany most looked-after children live in small community homes, with fewer than 16 residents. By contrast, more than two-thirds of our looked-after children are placed in foster families which cost less than a quarter of a residential placement in Germany.
But as compared to the up-front cost of effective foster care, are diminished productivity among foster care graduates and increased cost of incarceration the proverbial "pound of cure"?

To Call This Bad Judgment....

Please, tell me this is a joke....
A couple weeks ago, when I was biking to the store, I saw this one guy with a bike exactly like my boyfriend’s that got stole some time ago. So I rode ahead and stopped in front of him. He end up stop and when I tried to talk with him, he just acted dumb and never say a word. After a while, I gave up and head home to tell my boyfriend about this. Since this guy look easily intimidated and my boyfriend hate polices.
It kinda goes downhill from there. What, with the guy on the bicycle being a hearing-impaired, award winning kickboxer....

Okay, That's Just Weird....

Does anybody know why more than 5,000 people have visited this archive page in the past 24 hours, because they're searching for variations of "pygmy tarsier"? (Yes, I recognize that there's a reference to a "pygmy marmoset" on the page, but still.)

Wednesday, November 19, 2008

Meanwhile in England

Because the domestic auto industry's situation is unique.

I Wonder If We'll Ever Learn....

A few months back, I suggested that Mitt Romney's campaign song should be Everclear's "Everything to Everyone".
A song about a habitual appeaser for a man who will say anything to get elected, even if he said something completely different fifteen seconds earlier. The song is about how appeasement leads to failure, and I suspect that it will prove to be on the mark.
You remember Mitt Romney - the guy who got rich as a corporate raider, trading in no small part on his daddy's name and connections, became governor in Massachusetts, despite being a Republican professed a wide range of beliefs better associated with liberalism, passed a bunch of expensive legislation, and skipped town to run for President before his popularity might be tarnished by its cost. Oh, you can find more flattering biographies, even hagiographies, I'm sure... But from what I saw of the man running for President, I can't see how they're deserved. Oh, I know, his defenders say he never got a chance to "introduce himself", but... why are we still waiting for this mythic figure to step forward and fill the shoes of the doppleganger we have met?
Oh yeah, you do what they tell you to do,
You say what you say,
You try to be everything to everyone...
Not quite a year ago, when campaigning in Michigan, Mitt had this to say:
“If we are going to be the world’s greatest economic power, we must invest in our future. It’s time to be bold.” He continued, “First, I will make a five-fold increase – from $4 billion dollars to $20 billion dollars – in our national investment in energy research, fuel technology, materials science, and automotive technology.”

He said Washington has to invest in Michigan and not just bemoan the high unemployment rate and failing economy:

“Look how industries in other states have thrived from the spin out of technologies from our investment in these areas. So if we can invest in health care, in defense, and in space, why not also invest in energy and fuel technology here in Michigan?”

In a veiled attack on his rival here, he said that Washington is pessimistic about jobs coming back to Michigan, something John McCain has said previously, but has backed away from in the days before the primary:

“Washington politicians look at Michigan and see a rust belt. But the real rust is in Washington.” The former Massachusetts governor continued, “The pessimist will point to an empty factory and a laid off worker and say they have no future. Instead, I see a vital infrastructure, a skilled workforce, and an innovative spirit all worthy of an optimistic vision and deserving of a leader who will work tirelessly to deliver the power and potential of Michigan and the American people.”
In addition to offering to throw as much as $20 billion at the auto industry, Romney took a decidedly anti-environmentalist, anti-conservationist stance, but seemed to stand squarely behind the CEO's of the Big Three with no doubt about their ability to lead the transformation of the auto industry:
He criticized Mr. McCain for backing a bill that would have pushed to cap and trade greenhouse gas emissions, which Mr. Romney called a "job killer." And he promised to bring representatives from the automotive industry, unions, Congress, and the state of Michigan together in his first 100 to come up with a plan to "rebuild America's automotive leadership."
He unabashedly courted the union vote:
"I'm committed to fighting for every good job in this country and Michigan and across the country, and that connection I have to the state is just enough to help bring people who are normally thinking to vote toward the Democratic side to vote for me," he said.
When John McCain offered some genuine straight talk, that there had been a significant loss of manufacturing jobs in Michigan and "some of those jobs aren't coming back", Romney jumped down his throat:
Mr. Romney seized on Mr. McCain's "straight talk" as an example of Washington's pessimism and indifference to Detroit.
"A lot of Washington politicians are aware of Michigan's pain, but they haven't done anything about it," Mr. Romney said. "There are some people who don't think there's a future for the domestic automobile industry. They think the industry and its jobs are gone forever. They are wrong."
But remember, that wasn't the real Mitt Romney - we hadn't been introduced to him at that point.
You know all the right people,
You play all the right games,
You always try to be everything to everyone...
Now, unbelievably, it appears that Mitt Romney is trying to position himself as the heir to the Republican Party. This puts him in a rarefied league presently otherwise composed of Sarah Palin and, yes, Newt Gingrich. So what does Mr. Appeaser do when confronted with a crisis in the auto industry, and finds the leadership of his party suggesting that good manufacturing jobs are gone forever, don't have any concern for Michigan's pain, and have even less desire to do something about it? People he says are "wrong"? Did he hold true to his promise to bring the auto executives together to forge a new path for the industry? You guessed it - he's arguing that we should Let Detroit Go Bankrupt....
First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

* * *

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.
Break the union and fire the management teams for the Big Three? He's not making a policy statement - he's pandering to a faction of the Republican Party that sees little value in maintaining an American industrial base, and sees union busting as a leading civic virtue. As Motor Trend puts it,
"The financial straits that the Big Three find themselves in is not the product of our current economic downturn," harrumphed Senator Richard Shelby, senior Republican on the Banking Committee in a written statement, "but instead is the legacy of its manufacturing and labor force."

Well, yes, GM and Ford Motor Company haven't posted profits for years. And Chrysler, shielded first by Daimler and now Cerberus, is in worse shape. Cerberus has finally dropped the ruse that it's in the car business for the long-term.

Most of us would love just a portion of the UAW's health care benefits. But Shelby is typical of so many of our leaders who don't care about manufacturing, let alone automobile manufacturing. He's senior Republican of the Senate Banking Committee, after all.

Please excuse the following redundancy, but I can't emphasize it enough: making cars and trucks takes loads of time and money.

If you work for, or with, the banking or finance industries, you might someday come to realize this (as Cerberus has), but you won't like it. Wall Street, and much of Capitol Hill, likes "industry" to make "financial products," computer software and websites, things that can be made out of thin air or by college grads who don't ask for health benefits. Ask New York Times Pulitzer winner Thomas Friedman, who apparently believes Steve Jobs could have a Chevy iCar on the road in a year if the Apple chief took over GM.
We knew all along that Mitt was most at home in the banking and finance industries; he's apparently now out to prove that, with all of his claims of inherited wisdom about autos, he's not just another anti-manufacturing, anti-union Republican, he's ready to be their leader.
I think you like to be their simple toy,
I think you like to be their clown....
As Motor Trend notes, even those most sympathetic to the auto industry are anticipating significant structural changes, plant closures and union concessions, in all likelihood including the resignation of GM's CEO.
But while many Republicans see the fall of Detroit as just reward for the UAW, Democrats in Congress are ready to impose sacrifice on the UAW as well as automakers, in exchange for loan guarantees. Congressman [Elijah] Cummings [(D-MD)]... told MSNBC he supports bailing out GM, Ford and Chrysler, but that the automakers "may have to change union contracts."
The problem here isn't that Romney has pulled yet another of his flip-flops - his abdications of everything he once supposedly stood for in the name of advancing himself politically. If you've watched Romney at all, you know that the man (again, doppleganger Romney, as we haven't yet met the real one) will say and do anything to advance himself, even if it means repudiating what he professed only minutes before to be his deepest and most heart-felt beliefs. The problem isn't that he's calling for serious reforms by the beneficiaries of federal aid before it's granted (not that he's in favor of granting it... today). It's not that he's stupid. Perhaps it's the opposite. The man has an above-average mind, yet he spews nonsense that betrays either that he's fundamentally ignorant of his area of supposed expertise, or that he's lying.

Let's take a look at his two main criticisms of the auto industry. First, they're supposedly being broken by labor costs, and apparently nothing has been done to address this problem:
First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.
Oh, you mean like, to a substantial degree, what they've already done? If I assumed Romney to be an idiot, his ignorance might be excusable, but he's not an idiot. Also, just because the process of shifting responsibility for retiree benefits and pensions from the Big Three onto the unions isn't yet complete doesn't mean it's not well underway. Does he truly not know this, or is he lying?
That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.
This man has been in business? Truly? If we accept his figure, he believes that costs are fixed per vehicle, such that you should assign the same labor cost to a subcompact sedan as you would assign to a luxury SUV? With no consideration of actual cost or plant efficiency? He doesn't understand that the Big Three aren't building vehicles using $2,000 less in materials per car - they don't build cars for less, which is why on a per vehicle basis they lose money on those sales. As somebody who supposedly knows about business, if he truly believes that the Big Three are producing competitive products with better paid labor for $2,000 less per vehicle, why isn't he championing their management (like he used to) instead of calling for a decapitation?
Second, management as is must go. New faces should be recruited from unrelated industries - from companies widely respected for excellence in marketing, innovation, creativity and labor relations.
That's great idea! Ford should bring in a CEO from a company like Boeing! Oh... They did that? Then Chrysler should get taken over by a covey of Romney-style corporate raiders who can take it private, clean house and... Oh... They did that? Beyond that, did Romney fail to notice, growing up, that his Daddy rose to be CEO of AMC by virtue of his years of experience within the auto industry? Is his present contempt for industry experience, if not feigned, some sort of Oedipal thing? Really, assuming that it's dead wrong to use executives who are experienced with an industry to run or revive that industry, whence Romney's "magic men" from the outside who will achieve a 21st century transformation? According to Romney, after all, Cerberus couldn't find one, and their financial wizards are paying tens of millions in bonuses to hang on to the "failed" team they have in place.
The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, “Getting more and more pay for less and less work is a dead-end street.”
Wait a minute... so forty or fifty years ago his father, either on his way to being or already installed as CEO of AMC, discussed these crucial issues with the head of the UAW, the UAW guy described them as being on an unsustainable path and... daddy squandered the opportunity? Seriously, what am I supposed to make of this anecdote?

I love this part, not because it's not a valid point, but because it's industry-specific:
Get rid of the planes, the executive dining rooms - all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.
Where's Romney's similar call for sacrifice by the financial industry? No more executive dining rooms, corporate jets and the like, until the economy's back on track? There's unquestionably a culture of overcompensation among this nation's executive class, but it's silly to use the issue to attack the auto industry or to pretend that it is somehow unique. Assuming that it truly has ended its post-collapse luxury junkets, has AIG shuttered its executive dining room and grounded its corporate jets? Where's Romney's lament? Scheduling conflicts excluded, has Mitt himself ever declined a ride on a corporate jet or a free dinner in an executive dining room?

As a practical matter, the "fixes" Romney proposes can't go through unless the Big Three go through bankruptcy or something like it. And (assuming he doesn't flip-flop again tomorrow, or hasn't flip-flopped while I was writing this), if we don't put form over substance, I'm on the same page as him in terms of their being a need for some serious changes. But Romney's eager pandering to anti-union factions of the Republican Party, in breach of both word and supposed bond with the state he sort of claims as his own, is pretty revolting. I'm not willing to pretend that his flip-flops and misrepresentations are anything but posturing and positioning, in the hope of advancing himself politically - even if it harms the country.

Tuesday, November 18, 2008

"You Give Me... Money?"

Many years ago when I was in Paris, a young man approached me. He launched into an extensive narrative, in rapid-fire French. When he finished, I indicated to him in my very limited French that I didn't understand him. He paused for a moment then, you guessed it, asked, "You Give Me... Money?"

Some things just don't sound as good in translation.

Executives from the Big Three and the President of the UAW testified before the Senate today. The short version seems to be, "You give us money, and everything will work out." There seems to be a general unwillingness to even admit to some of the structural problems that will continue to cause problems with profitability and complicate the streamlining of their businesses. They were able to identify a lot of problems that could or would result from Chapter 11 bankruptcy, but skipped over the benefits of that process (or a "bankruptcy lite" conducted under the auspices of federal bailout legislation). And while I don't want to understate the amount of progress the Big Three have made in recent years, to overcome years of poor management decisions and business planning, I am left with the question of, "What happens if the economy doesn't pick up (big time) before the money runs out?" And the answer seems to be, a call for bailout, round two.

"Vous me donnez... l'argent?"

I don't want to dwell on the negative, and maybe (as Annie says) the sun will come out tomorrow, but I would have liked to have heard some more candid statements about the state of the industry and those factors that are unlikely to improve without some form of bankruptcy or "bankruptcy lite". Admittedly, it would be very difficult for these executives to discuss those issues in public. How could you discuss the need to eliminate brands or close hundreds of dealerships without creating anger and fear among your dealers, or making customers wary of any brand you mention is on the chopping block (or all of your brands if you are circumspect)?

Yet dealerships aren't going to close without a very expensive buyout and inevitable litigation (as happened with Oldsmobile), unless the closure is part of a bankruptcy process or a federal bill that preempts state laws on manufacturer-dealer relations. How do you admit that a huge factor in your not wanting your company to go through bankruptcy is that the people you work for - be they the shareholders or a private equity fund - and both you and the people you work with (who hold a lot of stock options, and probably also a whole lot of stock), really fear being wiped out? Chrysler CEO Robert Nardelli is apparently willing to work for $1/year, but tell me that will hold true if his equity stake is wiped out.

And tell me it's not about the share values and equity stakes when you have Cerberus "generously" offering to give up its profit in a future sale of Chrysler if it gets bailed out. Here's an idea - go to a Chrysler dealer, buy a car, drive it around the block, then ask them to loan you almost the entire value of the car on the promise that if you later sell it you'll waive your profit. Seriously - they paid $7.4 billion for Chrysler, and now they propose borrowing $7 billion.

My answer to Cerberus, really, is "I would be happier if you paid off your loan and still made a profit". Why? Because that would mean they turned the business around. I understand not wanting to tell your investors, "We lost your entire investment inside of two years," but the bailout should be about helping these companies succeed in the long-term, not just to let them scrabble through a year until they can find a way to dump their stake somewhere near break-even.

This is really tough - I'm not trying to kill off the UAW, and I care about the U.S. economy and industrial base, so I'm not among those who are happy to dig the Big Three a grave. But if we're putting this much (and probably more) taxpayer money on the line, I think we deserve something better than the status quo and the promise, "Even though we haven't changed our business models as a consequence of this unexpected crisis, what we're already doing is working. Trust us." And I suspect that the Big Three need a dose of tough love, something that both enables and compels their making serious structural reforms if they want billions of federal dollars, even if it causes their owners and shareholders to lose some equity, or the unfortunate closure of some plants and dealerships.

Monday, November 17, 2008

A Culture of Overcompensation

Within the executive suites and throughout the finance industry, a culture has developed that divorces compensation from performance. The rationale is pretty consistent, as described by William Cohan:
The gibberish about needing to pay that much just to keep superstars from fleeing to private-equity firms or hedge funds is just another Wall Street myth. The truth is most of them are lucky to have a job at all and they know it.
Within the finance industry, this has translated into compensation disproportionate not only to performance, but to the value of work performed - "compensation has historically consumed half or more of every dollar of revenue generated on Wall Street".

As for the executive suite, if CEO's truly believed they were worth their salaries, or that they were such hot properties that they could easily get the top job at another corporation, I doubt that they would invest so much energy into fashioning themselves glorious golden parachutes before agreeing to lead a company.
Update: Let me guess... If they didn't get paid this much, they'd quit? And that would be so sad....

Sunday, November 16, 2008

Spinning Conspiracy Theories Is Fun....

But you can be a lot more convincing than this:
Al Franken could win the recount in the Minnesota Senate race.... But odd things have been happening. On Wednesday, the Wall Street Journal noted that Mr. Coleman’s lead has been mysteriously shrinking, even before the recount begins. Election officials in various jurisdictions, mainly liberal, have been discovering “lost” ballots or “miscommunicated” results.
Well, that sounds bad. How about a f'rinstance?
It doesn’t look bright: one very Democratic area has discovered that its ballot-counting machines registered overwhelming support for Barack Obama but somehow didn’t tally any votes in the Senate race. Hmmm. Guess who those will turn out to favour.
Well, you don't have to be very smart to recognize that a district that has any appreciable number of voters, but where zero votes are cast for the U.S. Senate, odds are that you have a bona fide undercount. You don't have to be very smart to realize that in a district that has overwhelming support for Obama is likely to have at least majority support for Franken. And you don't have to be very honest to acknowledge that there's basis for alleging "conspiracy" in the counting of votes that were actually cast but inadvertently omitted from the first vote count.

So, what's the National Post's excuse, other than perhaps a desire to join the WSJ in a "race to the bottom" for editorial page partisan hackery? (And why aren't they obsessing over the vote count in a Canadian riding somewhere? Surely there's a fake scandal they can gussie up somewhere in Canada....)
The result is critical because the Democrats are three seats away from absolute control of the Senate, and two other states - Georgia and Alaska - also remain unsettled. If the Democrats somehow take all three, Republicans might as well spend the next four years on the beach.
For all the National Post's whinging about the possibility of the Democrats having a sixty vote majority in the Senate, I doubt that they would be expressing equal concern over a Conservative majority government in Canada's Parliament. But they should relax. It's extremely unlikely that the Democrats will win all three seats and, even if they do, Lieberman has all-but-promised to join Republican filibusters, so on many important issues they would still really be a seat short.

Corn, Corn, Everywhere....

An analysis of fast food shows that corn is an enormous component of virtually all fast food products. No surprise there. For goodness sake, I'm eating a raw carrot right now but, with the amount of corn in our food supply, I wouldn't be surprise to find out it's somehow made out of corn.

The part that might surprise you, though:
By analyzing the biochemical makeup of the food, the researchers found that 100 percent and 93 percent of the cows responsible for the hamburgers and chicken sandwiches had lived on exclusively corn-based diets.
Let's hope that was intended to be "cows and chickens", because otherwise I really don't want to know how McNuggets are made....

Friday, November 14, 2008

Is It "Unfair" To Let Detroit Collapse

Leave it to a conservative. In comments, CWD raises the question of whether it's fair to allow domestic auto makers to fail given the gargantuan financial industry bailout. Oh, I kid CWD. He actually argues, quite correctly, "I've pretty much always been opposed to the idea that we have to do something stupid and wasteful again just because it wouldn't be 'fair' not to do so".

Certain ideologues who favored the financial industry bail-out, while opposing an auto industry bailout, are engaged in some interesting contortions to avoid admitting their hypocrisy. Charles Krauthammer tells us that one's okay but not the other, because the financial industry is a "utility" - directly analogous to the electrical company. Except the government is not regulating the financial industry in the manner that it regulates utilities - is that something Krauthammer wants? Nor was it ever likely that the entire economy would shut down absent a bailout of the financial industry. It's not clear what would have happened, and fear has played a big role in the size of the bailout and the inadequacy of oversight. And I don't recall the federal government rushing in to save California from brownouts and rolling blackouts back in the glory days of Enron, or rushing in to update the electrical grid after the 2003 blackout.

David Brooks is more poetic in his explanation of the difference,
This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.
Well, no. In the same sense that Brooks contends that keeping the big three from collapsing would retard "creative destruction", so does the choice to prop up large financial institutions instead of letting them fail, or letting them be carved up and sold off in smaller pieces. There's no sense in arguing the glory of "creative destruction" if you're going to simultaneously exempt from its forces the institutions that supposedly drive it. Also, isn't "creative destruction" about more than destruction - what does Brooks propose will be created in the place of the destroyed automobile industry? (One wonders, also, why Brooks isn't spending any time describing how his employer might avoid "creative destruction", beyond suggesting that it should get a bailout if Detroit is rescued.)

In an interesting series of posts at the Atlantic, Megan McArdle takes on the question of fairness, asking in some earnestness if an auto industry bailout means that the government should also bail out companies like Kodak. But that's a slippery slope argument, already implicated by the financial industry bailout. If we can draw a line before bailing out the auto industry, we can draw a line afterward. McArdle correctly argues that the bailout is unlikely to change "business as usual" at a domestic auto company or the UAW. True, but that's not a distinction from the bailout of the financial industry, which is now preparing to shower its workers with generous bonuses and pay dividends to shareholders courtesy of the U.S. taxpayer.

There are also fundamental differences between allowing a company like Kodak to fail because it didn't sufficiently anticipate and respond to the rise of digital technologies and its effect on the sales of photo chemicals, and allowing the auto industry to fail. Sorry, Kodak, but you represent a much smaller, less vital part of our economy. And unlike a context where a dinosaur is allowed to dwindle or die because it didn't respond to the market calling for a different product, this is a failure in competition between companies offering similar products. Suggestions to the contrary aside, assuming for example that GM fails, a post-collapse consumer is going to buy a roughly equivalent car from one of the remaining auto makers.

Hype green technologies all you want, but the consumer's choice is more likely to be driven by gas prices than by the availability of hybrid or flex fuel technologies, and the Japanese auto companies sell trucks and SUV's with gas engines in order to meet that demand. If the big three fail, cars will continue to be made, but the profits from those sales will flow to foreign companies and the instinct of those companies, faced with economies like the one we're in, will likely be to shutter U.S. plants ahead of those situated in the countries where they are based. High tech jobs in the auto fields will filter out of the U.S., so we need to ask ourselves whether those are the jobs we want to lose? (And that's before considering the jobs and businesses that would collapse across the country in the event of an auto industry collapse. No matter how much you hate unions, it's insane to be hoping for the death of the Big Three.)

I'm less concerned about an unlikely future where this leads to our bailing out Kodak, than I am of GM coming back in thee years, or maybe three months, begging for more cash - can we offer this bail-out without doing exactly what Henry Paulson and GW are doing with the metastatic financial industry bailout?

McArdle is correct in suggesting that any bailout should return a net gain to society, and that it is not clear that the current proposal would do so. Would bankruptcy? The fallout from bankruptcy for GM itself may be worse, but what if you instead used that bailout money to soften those consequences, or held it in reserve to potentially help a stripped-down, post-bankruptcy GM? I'm not big on the Thomas Friedman model of trying to force the Big Three to reinvent their vehicle line-up in his preferred image. The priority needs to be on creating viable companies, not on forcing them to incorporate technologies into their fleets that will either require massive government subsidies or price their vehicles far above competing models.

The WSJ proposal that if we're bailing out the auto industry to the tune of $25 billion or more, existing shareholders should be wiped out, seems to be on the mark. If we prefer a bail-out to bankruptcy, make it "bankruptcy lite" - a more efficient, industry focused version of bankruptcy, but with pretty much the same goals in mind. Not long-term stewardship, micromanagement, or redesigning vehicle fleets by committee. If you want to impose green reforms, do them legislatively and impose them on all new vehicles, so that the "new GM" can compete on equal ground. Perhaps more importantly, it isn't clear that an auto manufacture could survive bankruptcy - that they could maintain the cash flow necessary to stay in operation if they're unable to obtain and maintain enormous lines of credit. A specially legislated "bankruptcy lite" might bring about the benefits of bankruptcy without killing the company or impairing its ability to sell cars.

Something that seems to get lost in the noise, particularly the anti-union, "those workers get paid too much" noise, is that it's not only the labor cost differential that makes it hard for the Big Three to profitably sell smaller, cheaper cars. Take a look at vehicle sales in recent years. If domestic auto makers could avoid the discounting they have to offer to make their "comparable" cars competitive with cars from companies like Toyota or Honda, this would be much less of an issue. Instead, the labor cost differential is magnified by the need to offer discounts and incentives to people who are prepared to pay close to MSRP for a "comparable" quality vehicle.

Some painful truths. It isn't clear at this point that a financial industry-style bailout (no strings attached, here are billions to spend on whatever you think is best) would do more for the auto industry than forestall their collapse by a period of months or maybe years. It does not appear that, left to their own devices, the domestic auto manufacturers will get it together to manufacture vehicles that compete in terms of quality, design, or economy (in what I personally regard as an inevitable return to high gas prices) before they again hit a financial wall. But it isn't clear that any bailout, bankruptcy, or "bankruptcy lite" will turn them into viable companies - the context is created for that possibility, but these are sick giants with a corporate culture that has largely fought, tooth and nail, against the type of evolution that is required. Their progress over the past few years gives some hope, but it's only a modest beginning.

But doing nothing, if it leads to the collapse of one or more of these companies, will almost certainly deepen and prolong our recession while effectively ceding a big money, high tech manufacturing industry to foreign companies. So all said, at this point I would argue for "bankruptcy lite", for any of the Big Three that feels it cannot otherwise survive, and otherwise let market forces prevail.

Meanwhile, In Japan

Because the domestic auto industry's situation is unique, and car manufacturers wouldn't be in this situation if they only built more cars like the Prius, right?
Plans to make the Toyota Prius at the carmaker's new U.S. plant in Mississippi are being reviewed by a new emergency task force charged with propping up the company's profits.

U.S. production of the Prius, originally scheduled to begin in 2010, could now be pushed back to 2011 or later, Japan's Nikkei newspaper reported November 14, without citing sources.
Okay, but if had the domestic auto manufacturers focused on quality, smaller, more fuel efficient vehicles, or didn't have so many UAW plants, they would still be rolling in dough, right?
The task force, chaired by President Katsuaki Watanabe, was formed after Toyota booked an operating loss in North America for the first half and slashed its full-year earnings forecast.
What this illustrates is not that the Big Three have been unduly criticized for their bad management and poor strategies. It highlights how, in an economic downturn, even the best run companies can lose money. And how nothing the critics of an auto industry bailout are advocating is likely to quickly, and perhaps not even slowly, turn around the plight of domestic auto makers. Not even if Toyota handed them its hybrid technology and the keys to its Mississippi manufacturing plant.

Meanwhile, let's keep in mind that the Big Three have a point, in that a lot of domestic auto buyers really do want a huge, overpriced, gas guzzling SUV sitting in their driveway. Gas prices are down this month? Do I even need to tell you what that means, or have you guessed - SUV sales are up. If not for the economic downturn, burst housing bubble and credit crunch, the Big Three would probably be seeing SUV sales figures as high as last year's, as if the summer's record gas prices never happened.

Although the Big Three have improved their quality over the past few decades, they still lag behind major foreign auto manufacturers. I don't want to understate the importance of their ceding short- and (moreso) long-term quality to companies like Honda and Toyota. But there's something else to keep in mind: One of the reasons that auto manufacturers coming out of Europe or Japan build compact, fuel efficient vehicles is that's what their domestic consumers want. It's what we want when gas hits $4/gallon - prices comparable to those long seen in Europe or Japan? Is that supposed to surprise us - we truly believed Europeans and Japanese to be alien creatures who love packing themselves into tiny cars? Are we supposed to be surprised that gas prices hit the $4 mark and, despite the current drop, are going to hit and exceed that mark in the future?

The myopia here is not just out of Detroit - far from it. Congress worked hand-in-hand with domestic auto makers to create the context for this crisis. You know what might have forced the Big Three to develop a business model that is more realistic in a world of $4/gallon gas? Not carving out dishonest exceptions from CAFE standards to avoid classifying SUV's as passenger vehicles.

The very same members of Congress who are presently blocking a bail-out are the ones who happily went along with that deceit, concurred with Dick Cheney's notion that doing otherwise would somehow destroy an American way of life in which consumption is king and conservation is for wusses is a "personal virtue", and gleefully chanted "drill, baby, drill" during the presidential race. They're they types who giggled along with caricatures of "Prius-driving liberals". They were backed up by pundits like George Will, who would happily regurgitate any anti-hybrid propaganda, no matter how absurd, such as the fabrication that a Prius costs $3.25 per mile over its lifetime, while a Hummer costs only $1.95. And now they're lecturing the auto industry that they should have been leading the hybrid race? Or that the Big Three exemplify a failure of leadership? Or that they know more about these issues than, say, heads of cabbage? (Not that those who favor the bailout are necessarily any better.)

I know, I know. Building an economy propped up by debt-driven consumer spending and low energy prices was "the free market at work", and preparing for an inevitable future of higher energy costs or reduced credit would have... somehow... been wrong, even if it might have diminished or prevented the present collapse of the economy.

Thursday, November 13, 2008

Joe the Blegger

For only $14.95, you too can help keep "Joe the Plumber" from ever again having to do an honest day's work.

Ain't celebrity grand?

Wednesday, November 12, 2008

The Infuriating U.S. Auto Industry

Living in a state that seems to be in a permanent recession, and where it sometimes appears that the state government's leading solution to decades of economic decline is, "Wait until the auto industry rebounds," it's frustrating to see how short-sighted the domestic auto industry is. The auto industry's decline has been actively abetted by Congress which, rather than pressing for fuel economy standards that make sense in the context of the world's oil supply and demand, has time and time again favored consumption over conservation.

Right now the auto industry is hoping to get its hands on $25 billion in loans, already approved by the Bush Administration, to build more fuel efficient vehicles. How fuel efficient? So that they can meet a 35 mpg CAFE standard by 2020. You know, like the Civic Hybrid's 42 mpg combined average, or the 46 mpg achieved by the Toyota Prius. Oh, let's give the domestic auto industry its due - Ford's compact hybrid SUV's combined average is 34 mpg - they're almost there. Too bad it will take another twelve years and $25 billion to get that extra 1 mpg.

If you approach gas mileage honestly, you already know you don't need hybrid technology to achieve 35 mpg. In 1989, 20 years ago, Honda introduced its CRX HF, which achieved a 45 mpg combined average. The Geo Metro achieved similar fuel efficiency. In fairness, the method for calculating fuel efficiency has changed, and these cars would probably get about 38 mpg combined averages by today's standards, probably a bit less for the Metro, although by the same token we could presently build even more fuel efficient versions of those same cars. What those cars do is demonstrate that if you put a small, fuel efficient motor in a small, light car, you can achieve high fuel efficiency - something that, surprisingly, still needs to be said. This is a context where I'll be the first to admit, the CRX and Metro weren't and aren't the cars for everyone. But let's not pretend it's about technology, as opposed to wanting a large set of features and amenities that increase vehicle weight and decrease fuel efficiency. A huge part of the investment in fuel efficiency is about how to squeeze V8 power out of a V6 engine, or how to reduce vehicle weight without reducing size, performance, or amenities.

Criticisms of the auto industry almost always include a potshot at organized labor, if not an outright call to bust the unions. The history of generous union contracts plays a role in the current plight of the automakers, but not in the way that is typically depicted on the Wall Street Journal's editorial page. The Big Three have actually done a respectable job of paring down their labor costs and raising plant efficiency, to the point where the cost of labor provides only a marginal advantage to foreign auto manufacturers. They are weighed down by their huge obligations to retirees - health and pension benefits. A big part of GM's present cash flow problem comes from its obligation to pay billions of dollars to the UAW, to as part of a deal to transfer pension and retiree health care obligations from its books and onto the union.

But unions do remain a part of the problem, in that their lobbying efforts have largely followed those of the Big Three. When the Big Three were making a lot of money selling inefficient, high margin vehicles, the UAW had their back. Big profits mean profit sharing checks, and a possibility to negotiate higher wages during the next round of contract negotiations. I don't find that insidious, so much as short-sighted. It's their job to try to get more money for their members. But while the auto manufacturers themselves bear responsibility for lobbying (and obtaining) fuel efficiency standards and exceptions that let them "build the cars people want" (when gas is less than $4/gallon), and let them avoid investing in the technologies that might allow them to build comparable cars with much greater efficiency, I think that a union has an obligation to look at the long-term as well. Unions are often very willing to ignore the long-term financial picture for an employer or industry, and to sell out new members in favor of obtaining preferential treatment or benefits for their existing members. A union has an obligation to negotiate for the benefit of its members, but UAW-type negotiations seem to focus on existing membership (often at the literal expense of future members, and sometimes also of retirees) over the short term, without regard for the long-term effects on the employer or even themselves.

Is it needless to say? The UAW has joined GM in its quest for a federal bailout. Getting billions in federal money lets everybody avoid making tough decisions, while avoiding the consequences of decades of selfishness, short-sightedness and incompetence. Many opponents of the bailout suggest that it will simply enable "business as usual", and there's little reason to doubt that's what GM and the UAW most desire.

Fred Wilson, a venture capitalist focusing on technology companies, suggests that we should break up the Big Three instead of bailing them out. Unfortunately, it's not that easy. There's no clean way to divide any of the auto makers by product line, let alone to maintain supply contracts and product distribution by product line. I think that forcing the auto manufacturers to become smaller, more nimble, and able to quickly develop and manufacture new products is a good goal; I just don't see that it can be done by breaking them into smaller manufacturers. (If it were feasible to divide a major auto manufacturer and there were buyers willing to purchase individual car brands, I suspect Cerberus would already be taking bids for the various Chrysler brands.)

Thomas Friedman endorses a WSJ-style solution - and I mean that quite literally. He endorses a proposal by Paul Ingrassia, former Detroit bureau chief for the WSJ, as published in the WSJ (and as linked above).
In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver - someone hard-nosed and nonpolitical - should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.

That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.
To me, that proposal seems silly. I am not aware of the magic wand you can wave over a major corporation to replace its upper management with "better people" and instantly transform the company into something lean and competitive. If Ingrassia were honest about it, he would be admitting that's what the Cerberus acquisition of Chrysler was supposed to be about - brilliant financial wizards take the company private, install new management, streamline operations, and transform it into a dazzling success. Yet Cerberus has failed in that effort, and Chrysler stands alongside GM and Ford in seeking a multi-billion dollar handout. It also seems absurd to me that a supposedly conservative, pro-business paper would be suggesting yet another socialization of major American companies, with government-appointed management being the cure-all for the failures of the market. The contempt for contracts is also a curious phenomenon - why are WSJ-brand conservatives so quick to call for the shredding of contracts, when the entire business world revolves around reliance on contractual relationships?

Ingrassia should also be aware that the problem with the Big Three's contracts with suppliers is not that they're overpaying. It's that they've always focused on price, and the squeezing of price concessions out of their suppliers, as a first line approach to cost savings. While a company like Toyota works closely with its parts suppliers to increase efficiency and quality - to save money while maintaining or improving quality - the Big Three have had little regard for anything but the bottom line. Even assuming that the suppliers are able to stay in business after a WSJ-style shredding of their contracts, where's the evidence that turning contracts into confetti will translate into even a penny in cost savings? Similarly, given that the largest burden imposed by union contracts has already been incurred and the cost of labor is no longer much higher for the Big Three than for their non-unionized (or largely non-unionized) competitors, how much will the shredding union contracts actually help? And, as with shredding contracts with suppliers, what of the risk that it will disrupt their ability to make cars? Finally, if the shredding of their contracts is of such import, why not refer them to a bankruptcy court where they can do that through a Chapter 11 filing?

Friedman also has some demands of his own:
Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol.
I'm not sure what that means. Is Friedman proposing that all new vehicles incorporate those technologies? That they have the capacity to be "upgraded" to hybrid/flex-fuel vehicles? If he wants those technologies built into every new car, does he believe that the path to prosperity involves increasing the cost of every vehicle by a couple of thousand dollars, while we operate on the assumption that ethanol production will become more green (and be less subsidized) in the future? Seriously, I applaud efforts to increase fuel efficiency, achieve energy independence, make cars cleaner and greener, etc., but I don't see much point in creating a context where the government has to grant a multi-thousand dollar subsidy for pretty much every domestically manufactured vehicle in order for it to be price competitive with imports.
Lastly, somebody ought to call Steve Jobs, who doesn’t need to be bribed to do innovation, and ask him if he’d like to do national service and run a car company for a year. I’d bet it wouldn’t take him much longer than that to come up with the G.M. iCar.
This is cute, but it's a bit like a simplified version of Ingrassia's receiver who will magically replace the upper management of the Big Three with people who know how to run car companies. (People from other industries?) Friedman believes that a culture of innovation (let alone a culture of quality) can be instilled in a company simply by switching it's CEO, but how often does that actually happen? History suggests that the opposite is more likely - an ill-suited CEO will damage or crush a culture of innovation (see, e.g., Hewlett-Packard, Yahoo!, Apple during the non-Jobs years, etc.) Also, sometimes those creative, brilliant leaders bring quirks to their companies that can be as problematic as having boring, conservative, rule-by-committee CEO's. (Remember the period when Apple wouldn't build a desktop PC that required an internal fan?).

Although something of an aside, whatever criticism may be fairly directed at GM's leadership, or to idiotic statements on global warming, this assertion by Friedman seems like a cheap shot:
Nothing typified this more than statements like those of Bob Lutz, G.M.’s vice chairman. He has been quoted as saying that hybrids like the Toyota Prius “make no economic sense.”
Lutz is more fully quoted as saying that Prius-style hybrids make no economic sense because their price will never come down. As I interpret his comments, he was simultaneously talking up GM's plug-in hybrid technology (i.e., the Chevy Volt), talking down a competing product (the Prius) and noting what is pretty obvious: current hybrid technology comes at a premium price and, if you can't eliminate that premium, you're unlikely to get the type of market penetration that people like Friedman supposedly want. Further, he made the comments several years ago, and related them specifically to the price of gas at that time.
It just doesn't make environmental or economic sense to try to put an expensive dual-powertrain system into less expensive cars which already get good mileage, Lutz said at the North American International Auto Show.

* * *

"Hybrids are an interesting curiosity and we will do some," he said. "But do they make sense at $1.50 a gallon? No, they do not."
It seems unlikely that Lutz was arguing that there's no place for current hybrid technology in the GM line-up, as it's offered in a number of models and he was suggesting at the time that it would be added to GM trucks. It may turn out that Lutz is incorrect, and the current hybrid technologies come down in price, but it's also possible that he's correct and the best and cheapest way to bring hybrid technology to the mass market is through plug-in hybrids. But it is clear that in the four years (actually, almost five years) since he made the statement, current hybrid technologies have not come down in price and you continue to pay a significant premium for hybrid cars. That's why, even with record gas prices driving record sales, hybrids make up only about 3% of the U.S. car market.

What do I want to see for the domestic auto industry? I want to see private capital deliver on its promises, rather than "yet another display" of the supposedly brilliant financiers behind companies like Cerberus getting a public handout when they screw up an investment or prove that they're even less capable than the former managers of the companies they're supposedly rescuing. I would like to see GM find a way to get private money to finance its way through this crisis, even if that means making some unpleasant concessions. I would like the auto manufacturers and their workers to internalize the lesson that you can't make up for deficits in quality by creating a context where new car buyers reliably trade in their cars every two years, passing along the defects to the next guy, while your competitors make cars that are remarkably reliable for people who prefer long-term ownership. Yeah, right.

Finally, the one thing I don't want to hear is anybody who supported the financial industry bailout oppose an auto industry bailout on the basis that the domestic auto industry has collapsed due to incompetent management, greed, poor planning, badly designed products, or overpaid employees - that's a distinction without a difference.