# Tag Archive for 'GM'

### On the symmetry of employment contraction and recovery in US recessions

A couple of days ago I gave some graphs depicting movements in weekly hours worked per capita during US recessions since 1964.  Towards the end, I gave this graph:

I thought it might be worthwhile to look at this idea further.  Here is the equivalent graph where movements in hours worked per capita are made relative to their actual troughs rather than their actual peaks:

At a first glance, recoveries do appear to be somewhat symmetric to their corresponding contractions, although they do also appear to be a bit slower coming back up to falling down in the first place.

I then identified data pairs that are symmetric in time around each trough (e.g. 3 months before and after the trough) and put them in a scatter-plot:

Points along the 45-degree line here would represent recoveries that were perfectly symmetric with their preceding contraction.  Notice that for five of the six recessions shown, recoveries are in a fairly tight line below the 45-degree line.  By comparison, the recovery following the ’81-’82 recession was especially rapid – it came back up faster than it fell down.

Excluding the ’81-’82 recession on the basis that it’s recovery seems to have been driven by a separate process, a simple linear regression gives a remarkably good fit:

This is a very rough-and-ready analysis.  In particular, I’ve not allowed for any autoregressive component to employment growth during the recovery.  Nevertheless, it is suggestive.

There are more serious efforts in looking at this for the economy as a whole (rather than just hours worked).  James Hamilton is not convinced that it will occur this time.  The oddly rapid recovery in hours worked per capita following the ’81-’82 recession should give us reason to agree with Professor Hamilton, not disagree: it shows that the typical recovery is not guaranteed.  Look back at the scatter-plot of all the recessions.  Notice that the recovery following the ’69-’70 recession was actually quite slow.  It’s fitted line is y = 0.252 x.

For me, the big thing that makes me lean towards Professor Hamilton’s fears of a slower-than-typical recovery is the possibility of zombie banks, or as John Hempton argues, zombie borrowers.  Zombie borrowers should worry us because, if they exist, they are keeping hold of the capital that could (and should) be better placed elsewhere in the economy, which means that those more deserving would-be borrowers are not able to expand and employ more people.

As Hempton argues in the second of his posts, on this basis it is a Good Thing ™ that two of the three US car manufacturers have been forced into a bankruptcy-induced contraction.  Note that Ford only really managed to avoid the same fate by borrowing a huge amount just before the credit markets froze.  It probably needs (from the point of view of the economy as a whole) to follow the same process, whether inside or outside the courts.

But the car manufacturers are by no means the only candidates for the “zombie borrower” epithet.  The really big borrower behind all of the mess in the financial sector is the one at the bottom of all the “toxic” CDOs:  the underwater American households.

### The three best things I’ve read on the US car (auto) bailout …

… are this opinion piece in the FT by Joseph Stiglitz, this brief blog entry by Matthew Yglesis and this blog entry by Robert Cringley.

Stiglitz’s piece makes, to me, a compelling argument for letting the firms go into Chapter 11 bankruptcy, albeit (given the state of the market) with government guarantees for any further financing they may need for restructuring. The following four paragraphs are among the most succinct and clearly written on the US car industry:

Wall Street’s focus on quarterly returns encouraged the short-sighted behaviour that contributed to their own demise and that of America’s manufacturing, including the automotive industry. Today, they are asking to escape accountability. We should not allow it.
[…]
The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do. A variant of pre-packaged bankruptcy – where all the terms are set before going before the bankruptcy court – can allow them to produce better and more environmentally sound cars. It can also address legacy retiree obligations. The companies may need additional finance. Given the state of financial markets, the US government may have to provide that at terms that give the taxpayers a full return to compensate them for the risk. Government guarantees can provide assurances, as they did two decades ago when Chrysler faced its crisis.

With financial restructuring, the real assets do not disappear. Equity investors (who failed to fulfil their responsibility of oversight) lose everything; bondholders get converted into equity owners and may lose substantial amounts. Freed of the obligation to pay interest, the carmakers will be in a better position. Taxpayer dollars will go far further. Moral hazard – the undermining of incentives – will be averted: a strong message will be sent.

Some will talk of the pension funds and others that will suffer. Yes, but that is true of every investment that has diminished. The government may need to help some pension funds but it is better to do so directly, than via massive bail-outs hoping that a little of the money trickles down to the “widows and orphans”.

I would perhaps suppliment Professor Stiglitz’s words by proposing that government support to workers laid-off as part of the restructuring could be improved dramatically over the provisions currently available. They should not only include lengthening the duration of unemployment payments and paying for retraining programmes, but also payments to help with relocation if anybody is willing to (voluntarily!) move to find work. An Obama administration might also be reasonably expected to look to Michigan for skilled manual labour in it’s push for infrastructure renewal/expansion.

Yglesis’ brief note observes a vital co-ordination problem when it comes to restructuring what is genuinely a global industry:

One thing here is that as best I can tell none of the five countries — US, Japan, Germany, France, Korea — with substantial auto industries are willing to let their national favorites fail. And yet there seems to be substantial global overcapacity in car manufacturing. If a few of the existing firms are allowed to fail, then the survivors will be in good shape. But if nobody fails, then all the firms worldwide will be left suffering because of overcapacity problems, all potentially drawing bailouts and subsidies indefinitely.

Finally, Cringely’s piece investigates how a successful US car firm ought to be run by imagining that Steve Jobs (of Apple) was running it.  The idea is not his.  Thomas Friedman briefly mentioned in early November that …

… 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.

It was something of a trite comment, and it was picked up by many people in the IT industry who got a little over-excited when imagining the details of what functionality the iCar should have (for example).  In contrast, Cringely looked at the most important thing that somebody trying to emulate Apple might bring to the car industry:  it’s design and manufacturing process:

… embracing these [new technologies] requires the companies do something else that Jobs came to embrace with Apple’s products – stop building most of their own cars.

There are two aspects to this possible outsourcing issue. First is the whole concept of car companies as manufacturing their own products. There is plenty of outsourcing of car components. Most companies don’t make their own brakes, for example. Yamaha makes whole engines for Ford. Entire model lines are bought and rebadged from one maker to another. But nobody does it for everything, yet that’s what Steve Jobs would do.

All the U.S. car companies are closing plants, for example, and all are doing so because of overcapacity. But what would happen if just one of those companies — say Chrysler — decided that two years from now it would no longer actually assemble ANY of its own vehicles? Instead they’d put out an RFQ to every company in the world for 300,000 Chrysler Town & Country minivans as an example. Now THAT would be a dramatic move.

And a good one, frankly, because with a single pen stroke most of the overcapacity would be removed from the U.S. car market. Chrysler would have to shut down all those plants and lay off all those people, true, but doing it all the way all at once would change the nature of the company’s labor agreements such that there wouldn’t be a whimper. When you are eliminating 8 percent of capacity the tussle is over WHICH 8 percent. When you are eliminating ALL capacity, there is no tussle.

So Chrysler reaches out to contract manufacturers in this scenario and you know those manufacturers would fight for the work and probably give Chrysler a heck of a deal. For current models, for example, Chrysler could probably sell the tooling and maybe even the entire assembly plant for a lot more than they’d get from the real estate alone. But that particular advantage, I’d say, would be unique to the first big player to throw in the production towel.

In this scenario, Chrysler becomes a design, marketing, sales, and service organization. What’s wrong with that? They can change products more often and more completely because of their dramatically lower investment in production capital. They can pit their various suppliers against each other more effectively than could a surviving car manufacturer. It’s what Steve would do.

This is brilliant stuff.