Philip Greenspun’s Weblog

If you didn’t get what you thought you wanted for Christmas, remember that “Jesus is the Gift” (seen on a storefront church in Fallbrook, California).

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This BBC News article on going through security in Birmingham, England should be helpful for U.S. holiday travelers as well.

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This AP news story talks about how no bank is willing to discuss how it spent its share of the $350 billion in federal funds paid out so far under the TARP program. It seems that no restrictions were put on the money and that there is no accounting mechanism in place. The fear is that most of this money was paid out as executive bonuses. How could the executives of banks pay themselves all of this money? I would think that a better question is “How could the executives of banks NOT pay themselves all of this money?”

Suppose that you are running a bank and it gets $1 billion from the Feds, no strings attached. You could use this to improve the long-term health of the bank. Given the poor economic conditions in the U.S. right now, we would have to assume that $1 billion invested in a bank would yield a long-term return of less than $1 billion, let’s say it is $900 million. Under the best possible assumptions, an executive would keep his job at the bank for 10-20 years and be in a position to collect a share of that $900 million. But the executive might be approaching retirement age or be looking to change jobs. Wouldn’t it be smarter to pocket his or her share of the $1 billion right here and right now?

Why did anyone ever think that any of that TARP money would be used for any purpose other than higher bonuses for employees of banks?

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Now that we have recovered a bit from the shock of having wrecked our economy, our journalists are going to be treating us to a constant stream of articles reminding us of how dumb we were, notably by comparing us to smarter people in other countries. http://www.nytimes.com/2008/12/20/business/20nocera.html is a painful example of what is surely going to be a flood of similar articles. While the U.S. was pouring most of its cash into real estate speculation, India was discouraging the application of its precious capital to this non-productive use. Indian banks financed factories and business expansion. Americans not only financed unproductive construction here in the U.S. but also financed real estate deals in India that the banks there were prevented from touching. Now India is on the verge of making a $2500 car while the average American is looking at paying $2500 in extra federal income tax every few years for the privilege of bragging that GM and Chrysler never had to go through Chapter 11.

[We cannot soften the pain by arguing that India impeded economy growth by forcing banks to be conservative. The CIA Factbook says that India had real GDP growth of 9% last year; the number for the U.S. was 2% (much of that absorbed by our population growth rate of 0.9%, so per-capita GDP growth was minimal).]

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We’re having a second Great Depression. Why not a second Civil War?

Consider the typical Southerner, working at a backbreaking job for $10 per hour. If business slows down or his company goes out of business, he is immediately laid off. What does he read in the newspaper? Wall Street executives have taken most of the $350 billion that they got from the Federales and paid it to themselves as bonuses. Why are they getting bonuses? For a job well done in the past? These guys did their level best to turn the U.S. into Argentina circa 2001. As an incentive for them to stay in their posts? Where else could they work? Who would hire them? You don’t hear about banks in China desperate to bring in a staff of experts from Citigroup, Merrill, or Bear Stearns. You don’t hear about successful companies like GE or Google saying “What we need to do is bring in some of those great minds set free after they bankrupt Lehman Brothers.”

He turns to the next page of the newspaper. The Federal government has been indifferent to all of his friends in the Carolinas who’ve lost their jobs in various mid-sized manufacturing concerns. The potential of GM and Chrysler employees losing some pay, however, attracts the full-time efforts of the U.S. Congress for weeks. Now he reads that George W. is sending a $17.4 billion Christmas present to Detroit. Our Southerner works hard for a $10/hour paycheck with minimal benefits and he is now paying extra taxes to support guys in Michigan who get millions every year to work a desk job (incompetently) or UAW members getting over $40 per hour in cash, health care, and pension benefits.

Incompetence in the South leads to the management getting fired, the workers being laid off, and everyone in the community suffering lower wages going forward. Incompetence in the Northeast and Midwest leads to the rest of the U.S. being taxed so that employees continue to get paid the same, oftentimes regardless of whether or not they show up to work. Now would seem to be a great time for the South to secede.

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Waiting until the last minute to shop for Christmas, hoping that deflation will make gifts more affordable? Short of cash after the market crash?

Idea #1 (if unemployed): Visit Project Gutenberg, download a plain text copy of your favorite book, and email it to a friend as an attachment with “Merry Christmas” in the subject. Authors of today are but literary midgets compared to the giants of American Literature, such as Edith Wharton (start with House of Mirth), so why pay $20 for a book whose merits will be scant next to the works of Henry James, Thoreau, Hawthorne, and others who inhabited this continent before we decided that public school teachers should be certified and unionized. For a foreign author whose work is timely once more, try Knut Hamsun’s Hunger.

Idea #2 (if employed): Use your company’s laser printer to print out a copy of your favorite book from Project Gutenberg. Collect some pine needles from the nearest tree and tape them to a cover sheet. Take bus over to friend’s house and give to friend.

Anyone else have a good idea for a last-minute Christmas gift that won’t cost big bucks?

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One of the proposals we hear for stimulating our economy is extending unemployment benefits. If a worker has been out of a job for 26 weeks, the benefits typically stop. Extending payments for a full calendar year will supposedly improve the economy.

Why does it make the U.S. more competitive and vibrant if we tax working Americans to give money to non-working Americans? In a cyclical recession, an unemployed guy in Michigan could reasonably wait around for a year until things picked up and he could find a job again. Those extra 26 weeks of unemployment benefits enabled the guy to stay in the same house and be available when his skills were needed, oftentimes by his former employer.

Whatever we’re in right now, however, doesn’t seem to be part of a business cycle. We handed over most of society’s wealth to our least productive citizens (realtors, mortgage brokers, Wall Street mediocrities). We raised taxes until business moved offshore. We dumbed down our schools until companies could find better educated workers in countries where people live very comfortably on $5,000 per year. Do we seriously believe that Michigan is going to bounce back within our lifetimes, much less within the proposed 52 weeks of extended unemployment payments?

An unemployed worker in Michigan needs to move somewhere with a lot of new jobs being created and not too many highly skilled unemployed people competing for those jobs (state-by-state statistics). Certainly he is going to have to move to another state. Possibly he may need to move to another country. Handing out 52 weeks of cash instead of 26 weeks seems likely only to delay the inevitable. The guy will be a bit better rested when he finally does move, but he will also be out of practice from not having worked for a year.

Could it be that extending unemployment benefits is a sensible practice that worked in cyclical recessions, but we’re now trying to apply it after a major structural shift in the U.S. economy?

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I was listening to a BBC talk show this evening and they broadcast something that I hadn’t heard from domestic news sources: the voice of an actual autoworker. He said “I worked for Chrysler for 10 years and I never got laid off until now.” He described how his union contract required Chrysler to pay him for 36 hours per week indefinitely even if he never went back to work. “Now I’m worried that they’ll run out of cash and stop paying me,” he plaintively concluded.

One wonders why we don’t hear from too many actual autoworkers. We hear from the union, various politicians, the managers of the Detroit automakers, but almost never the workers whose jobs are supposedly the focus of any bailout.

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If we believe what we read in the newspaper, for the past few weeks we have had all of our top legislators and executive officials occupied with the challenge of saving GM and Chrysler from the indignity of a Chapter 11 reorganization.

Stepping back from this waste of time and effort there are a few question worth asking…

Question 1: Given that our government can’t run its own core functions efficiently, why did we think that a government-appointed “Car Czar” was going to be able to solve GM and Chrysler’s problems? The federal government is going to spend $400 million for each new presidential helicopter that it buys. Under a cost-plus contract, the $30 million Augusta/Westland EH101 morphed into the Lockheed Martin VH-71, a machine with nearly identical specifications and appearance that costs more than a Boeing 747. Are we paying for speedy delivery? The first EH101 flew in 1987. Lockheed Martin is currently scheduled to start delivering the VH-71 presidential helicopter in 2017. The folks who worked who worked on that project are supposed to show GM how to compete with Honda?

Question 2: Could our politicians be working on things that are likely to yield better results for the overall economy? While we dither about GM and Chrysler, our schools continue to be the most expensive in the world while producing mediocre results. Per-capita, our goverment spends nearly as much on health care as any other country in the world… while covering less than half of the population.

Question 3: Does preserving GM and Chrysler in their present forms address our most serious transportation issues? As discussed in my economic recovery plan, unclogging America’s streets and highways with smarter networks and congestion pricing would be a lot more valuable to business than getting everyone out of a Toyota and into a Dodge. To encourage development and sale of electric cars we will need to install power outlets in a lot of Burger King parking lots (more). Who is thinking about that?

As of 2:30 pm, Wall Street has greeted the probable Chapter 11 filings of GM and Chrysler with a yawn. The S&P 500 is down less than one percent. It seems that GM and Chrysler reorganizing do not constitute a national emergency.

Could we possibly generate the same kind of excitement that we’ve seen around GM and Chrysler about bringing our public schools up to internationally competitive standards? Children graduating today are educated to only a fraction of their potential, which would have been a serious waste 100 years ago. Now that our least able citizens are in direct competition with the most able workers in Mexico, China, and India, the situation would seem to merit some urgency.

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Now that the Republican Scrooges in Congress have denied GM and Chrysler a $14 billion Christmas present, perhaps it is time to step back and ask what lessons we can learn from this mess.

Lesson 1: When you’re running out of cash, don’t advertise the fact. Now that GM and Chrysler have said that they can only last another month or two, who is going to buy their cars? Surely those cars will be cheaper after they file Chapter 11. What about suppliers? Will they continue to extend credit? Employees? Wouldn’t any who had sufficient skills to find a job on the open market already be packing up their desks?

Lesson 2: When traveling to Washington to ask for taxpayer funds, share one Gulfstream or learn how to use Travelocity or Expedia to book an airline seat on one of the many daily non-stop flights from Detroit to Washington, D.C. It may be painful to buckle a seatbelt that hasn’t been gold-plated, but we all have to make adjustments in these tough times. (Save the bizjets for when you’re visiting a supplier or factory in an obscure town that lacks commercial airline service.)

In the history of American business, it is tough to find an example of any company that managed its own demise this badly. Most management teams keep up a cheerful patter right until the morning that the Chapter 11 filing lands in the bankruptcy court’s lap. Customers and suppliers are the last to know and employees get hints at best.

Realistically, how can taxpayers help companies that can’t even go bankrupt competently?

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