Direct loans and health-care reform: two great tastes that go great together

What happened to Sen. Byrd who said that "reconciliation" was inappropriate for Hillarycare? Just wait until the GOP take back Congress and "cut the deficit" using reconciliation (the Dems will start screaming BLOODY MURDER and it will serve them right).

Ezra,

is there something the government doesn't want to run and leave for the private sector?

They run the car companies. They run one of the largest insurers. if some of them had their way they'd run ALL health insurance. They want to run a portion of the banks here.

No concern at all about the government running say, THE BLOGOSPHERE???

What about when bloggers are the "costly middlemen"? Will your take on that change? It doesn't irk you at all?

Why not actually regulate instead of taking over???

Because "regulation" is not socialism.

Doing away with the skimming of student loans by the banks is great and very much needed. It was just a giveaway, like the Medicare advantage subsidies.

Yes, visionbreaker, the government can sometimes do things cheaper and better because it doesn't have to pad costs to cover making a profit for its shareholders and huge compensation packages for its management. It is a myth that the private sector does things cheaper. That is only true if it does them at a lesser standard of quality.

Guaranteed student loans are a socialist plot. It's unchecked lending for higher education that has permitted colleges to raise tuition so high. We need to make these kids start to feel the pain of actually paying for their college tuition, instead of getting low interest loans, so they'll start to make smarter choices. Colleges will have no choice but to drop tuition to compete.

Or something like that.

The government taking over the student loan business is a brilliant plan, and its going to save taxpayers money.

But its not brilliant because of cost savings. The principle that some things shouldnt be exploited for profits is an important stake to drive into the ground, so that it can begin to be expanded in this country.

Health and education are both areas that there's very little reason to rely on for profit corporations to deliver these services to our fellow citizens.

Dont worry, capitalists. No government agency will stop you from buying your salad shooters and DVDs at Wal-Mart.

@ Visionbrkr
"Why not actually regulate instead of taking over???"

Hmmm, I wonder what the sequence would be for that one - I imagine something similar to the way that the financial services industry is "regulated". The GOP gets the Dems to acquiesce to "regulation". They then gut the agency responsible for said regulation by reducing their budget in the name of "Fiscal Responsibility". Thus removing any meaningful chance to enforce regulations.

Mimi and Tom,

exactly where does it end? If the government runs EVERYTHING then we're basically Cuba or Russia in the 90's and we all know how well that works. Please fill me in as to what is OK for the government to nationalize and what is not?

Should we allow the "free thought" of labor unions or is that too "evil" of a conspiracy? I'm thinking you'd be against lawyers being able to sue a nationalized government run ________________.

You really don't believe the government of the $1,000+ hammer runs anything that focuses at all on costs do you? Show me the company that's Trillions of dollars in the red. I'd love to see it.

Jake is a typical winger who can't be bothered to understand what Byrd really said and how reconciliation really works, even after Ezra and others have explained it about 5,000 times. Even funnier, Jake thinks Republicans will actually use reconciliation to cut the deficit! Um, Jake, Republicans have never done anything to cut the deficit in, like, ever.

@VB: They run the car companies. They run one of the largest insurers. if some of them had their way they'd run ALL health insurance. They want to run a portion of the banks here.

You say these things like it was a Dem plot to blow up the economy (that was bush and the repiglicans doing, BTW) so that they could nationalize all major industry. Look, AIG was taken over by the Bush administration. The first round of car bailouts came from the Bush administration.

Do you think that given a choice Obama would be going around nationalizing industries? Really??? Do you think is was good politics to continue to rescue GM and Chrysler? These were unpopular but necessary moves to keep some domestically owned car companies alive and not destroy the supply chain here. Killing the auto industry (or allowing it to die) would have added 1-2% to unemployment in all probability.

The student loan program is a government program. Banks aren't risking anything since the govt guarantees the loans if students don't pay. Why should the banks skim off 15% with no risk? This is not a govt takeover, it is a govt take back of a function that govt can easily handle.

The student loan reform is a great idea, but as you said in your post on March 12th, you should give context to the $80 billion by stating the cost/savings in annual numbers.

srw3,

sure they don't want to run the car companies but it works out very well to have the unions running it. The same unions that ran them into the ground.

I'd have been in favor of letting AIG fail personally.

Do you deny that many of the most liberal dems want single payer run by the government so that would put all health insurers out of business? Sure that's not what's happening mostly because of the outcry about it.

I'm not familiar enough honestly with the student loan program but why not take back the subsidies if they're not warranted? How many bank employees will now be laid off because of this? These aren't the corporate fat cats that are making millions per year. These are hard working people that service these loans. Make them be more efficiently but don't put them out of business.

You really don't believe the government of the $1,000+ hammer runs anything that focuses at all on costs do you?

Here is an object lesson for you. Back in the 90's during the heyday of outsourcing, a contractor was hired to build software to handle the new digital data streaming down from a new generations of satellites. NOAA spent millions of dollars and experienced numerous cost overruns and delays, and NEVER DELIVERED A WORKING PRODUCT. Meanwhile, in a govt lab in Boulder, CO. a few GS 11-13 guys were put together a system that they could use to view and manipulate the data until the contractor actually delivered something as a side activity to their normal duties. They actually built the software that NOAA eventually adopted and is now used across the national weather service and at research universities and labs for maybe 10% (and that is probably high) of what the contractor was paid, but never delivered.

Govt can do lots of things (but not everything) better and cheaper than private companies.

@VB: Everytime you say something sane you have to say 3 crazy things to balance it out.

"The same unions that ran them into the ground."

Unions didn't make the decision to build gas guzzlers and not invest in more fuel efficient cars and hybrid technology. Unions didn't kill the first electric cars. Unions didn't waste generations of high profits on dividends and executive salaries when they could have been investing in new technology or keeping a cash reserve so that they could weather this current economic storm. High union salaries are not the issue. In Canada, american car makers are able to produce cars at a profit even with a unionized workforce (cars are cheaper to produce in canada because they have medicare for all, meaning the car companies don't have to pay for health insurance).

"How many bank employees will now be laid off because of this? "

The student loan program does not exist to support bank employees. It is to get money to students as quickly and cheaply as possible. Its not like the banks don't have work to do. My refinance last year took 5 months because (according to the loan officer) the bank had just laid off 1/2 its loan processing staff due to the financial crisis. There is plenty for them to do. Banks just don't want to pay for employees to do the work they have.

I'm not familiar enough honestly with the student loan program but why not take back the subsidies if they're not warranted?

As soon as they do this, banks will no longer accept student loan applications. Banks won't process these loans without the subsidy. Why should students get smaller loans because banks want to make profits on something that the govt can do for cheaper.

srw3,

I don't dispute that individual instances like that can occur and probably fairly frequently but also there are many instances where the private sector is better than the public. Sorry but i've just got a problem with government encroachment. Its probably the fault of the state that I live in (NJ) because I see it (government waste) on a daily basis.

This is TERRIBLE and I'm really disappointed with the progressive blogosphere for ignoring what is being done to the education bill.

Where do you think this "extra money to play around with" comes from? Originally, the direct loan reform was going to be used to finance EDUCATION REFORM. Additional Pell grants are nice, but they don't do anything to reform the basic system. There was a FANTASTIC and IMPORTANT and COMPLETELY OVERLOOKED part of the proposed legislation called the American Graduation Initiative that is now being gutted completely. This would have provided the financing to really change the way things are done at community colleges and help primarily low-income students get the education they deserve, as well as match community college curriculum to the labor market.

Here's how it was described in Obama's July speech at Macomb Community College announcing the American Graduation Initiative:
"Not since the passage of the original GI Bill and the work of President Truman’s Commission on Higher Education – which helped double the number of community colleges and increase by seven fold enrollment in those colleges – have we taken such a historic step on behalf of community college in America. And let me be clear: we pay for this plan by ending the wasteful subsidies we currently provide to banks and private lenders for student loans, which will save tens of billions of dollars over the next ten years. Instead of lining the pockets of special interests, it’s time this money went toward the interest of higher education in America."

So don't play dumb here, Ezra Klein. Including the loan reform in the health care bill is directly at the expense of serious higher education reform. It would have only cost roughly $12 billion and it's hard to describe how excited the community college educator community was about it. Community colleges are vastly underfunded for the huge job they do, and they're the ones being screwed over, once again.

srw3,

as i've said I'm not familiar with the student loan process but it wreaks of takeover. If I'm wrong (and I hope i am) then I'll gladly admit that. I do believe though that unions (through requiring heavy handed negotiation of benefits) did help cause the auto crisis. You can blame it on a lack of a single payer system but either way the unions didn't see the writing on the wall that almost no one gets 100% paid benefits anymore. Especially not when their costs are skyrocketing as they were. Then the rise in gas prices along with credit markets pushed them over the edge.

I'm just worried about the slippery slope that's all.

@srw3: "Unions didn't make the decision to build gas guzzlers and not invest in more fuel efficient cars and hybrid technology. Unions didn't kill the first electric cars. Unions didn't waste generations of high profits on dividends and executive salaries when they could have been investing in new technology or keeping a cash reserve so that they could weather this current economic storm."

That's all true, however none of those are what drove the companies into the ground, if we assume that what drove them into the ground was more cash going on the door than coming in it.

The expenses that drove them bankrupt come from healthcare, pension payments, and labor costs--all agreements they made with the unions. Now, just because the unions asked for those things didn't mean they had to acquiesce, but they did, and the costs eventually became unsustainable--as anyone with a business degree or some skill in accounting should have been able to predict, before they made those deals.

I'd argue that it isn't the unions that drove GM and Chrysler into the ground--of course they asked for the sun, moon and stars, of course they wanted never to be fired whether they worked or not, and of course they wanted Cadillac healthcare plans. Who wouldn't? Who wouldn't want the most generous pension possible? That doesn't mean a responsible business that was thinking about how to service it's shareholders would have ever gone along with such a deal.

While the government may be able to run many things well, and at a savings, every example of central planning, where the government ran everything or almost everything, have been extremely ugly. And horrendously inefficient. So, people who urge us to tread cautiously going forward have a point.

@visionbrkr: I don't mind the government taken over the student loan process per se--a reasonable argument can be made for the public good, etc.

But repayment terms favor those who move into government service immediately after school--thus allowing a whole new crop of future government bureaucrats to avoid being tainted by working in a small business or seeing, up close and personal, how regulations and taxation can strangle innovation (and private sector hiring) on the front lines.

The part where graduates who go into "public service" get a better deal than those selfish creeps who get a job at a small company strikes me as--well, more egregious than extending unemployment benefits or using reconciliation to pass healthcare, to note two things the Republicans are currently exorcised about.

@KW:every example of central planning, where the government ran everything or almost everything, have been extremely ugly.

Building interstate highway system
NASA moon landing project
National Weather Service
National Park System
VA health care system
US military in general

I don't agree that govt running an activity makes it ugly.

"That's all true, however none of those are what drove the companies into the ground"

I would argue that not planning for the future of automotive travel and not keeping a sizable nest egg to weather downturns (instead of paying out lavish dividends, stock options, and exec salaries) is what drove these companies into the ground. Both management and labor were bargaining in their own interest. Don't blame the unions for trying to do the best for their members.

@KW: who move into government service immediately after school

This is mostly for teachers especially those who work in schools in disadvantaged areas.

Subsidizing govt bureaucrats is a story to frighten children.

srw3,

i notice you omitted the public school systems from that list.

and can anyone tell us exactly how much was spent building the interstate highway system? Was it really efficient? Have you seen the contractors that do that work? I could argue that point too.

how is that system working this year and going forward? I notice a LOT of potholes around us because of the state budget shortfalls.

@VB: I do believe though that unions (through requiring heavy handed negotiation of benefits) did help cause the auto crisis. You can blame it on a lack of a single payer system but either way the unions didn't see the writing on the wall that almost no one gets 100% paid benefits anymore.

Management was at the table too, you know. Don't criticize the unions for trying to get the best deal for their members. Management could have given more wages and less in benefits if they were so worried about health costs, but they didn't to max their short term profits, by getting the tax write off for providing insurance instead of wages. Management influenced workers to not be price sensitive about health care costs.

No blame here, but it is a fact that not having govt health care makes the same cars built by mostly the same people, in the same region of the continent, for the same companies, adds 1-2K to the cost of a car built in the US.

Then the rise in gas prices along with credit markets pushed them over the edge.

You know, we had a gas crisis in the 70's. The writing was on the wall in terms of long term gasoline prices. There was no mystery that gas prices were going to go up in the future (and not that far a future). Management, not labor, totally ignored long term sustainability of their industry for short term profits. Car companies fought higher fuel standards tooth and nail, spending billions on lobbying from the 70's to now to keep their gas guzzlers on the road, instead of investing in new technology with that money. Unions didn't have anything to do with that. It was bad decision making by management nothing more.

*****Just wait until the GOP take back Congress and "cut the deficit" using reconciliation (the Dems will start screaming BLOODY MURDER and it will serve them right).******

I doubt the Dems will scream bloody murder if the GOP wants to cut federal borrowing via tax increases. And the GOP won't be able to engage in substantial deficit-reduction via evisceration of the safety net, because the public won't support it, because the public LIKES having a robust safety net, and if it's one thing we've learned, the Republican Party doesn't love libertarianism enough to risk massive political losses.

*****Is there something the government doesn't want to run and leave for the private sector? They run the car companies. They run one of the largest insurers. if some of them had their way they'd run ALL health insurance. They want to run a portion of the banks here.******

The government's ownership of economic assets has increased recently because free market dogmatism created an economic crisis. This is a temporary state of affairs. If you don't like increasing the government's ownership of productive assets, then start supporting more regulation, so Hoover-style collapses don't occur in the first place.

And with respect to student loans, there's no reason a middle man is required, because, although it does few things more efficiently than the private sector, the government most certainly CAN engage in simple check writing/collections more efficiently than any bank. Republicans, being huge fans of government waste disguised as subsidies to the affluent, naturally oppose this type of common sense economizing.

@VB: Schools are run by the states not the fed.

Some are good, some are bad, some are terrible. This is an argument for more federal control of schooling to eliminate the valleys by equalizing funding. Basing education budgets on property taxes is an insane way to guarantee equal access to education. Property tax based school funding is the best way to ensure unequal educational opportunities.

" I notice a LOT of potholes around us because of the state budget shortfalls."

My conversation with KW was about fed spending not state issues which vary with every state. About potholes, repiglicans have eviscerated the tax structure of both the feds and states. Just because there is no money to do infrastructure projects doesn't say anything about whether govt is efficient.

srw3: "I don't agree that govt running an activity makes it ugly."

I don't know who you are disagreeing with, because that's certainly not what I said. I said: the government running everything. Communist countries being the best example. All the examples you cite of successful government activities:

Building interstate highway system
NASA moon landing project
National Weather Service
National Park System
VA health care system
US military in general

Are examples in the United States, where the government does not, yet, run everything, and are all examples that were either executed or initiated when the U.S. government did, in fact, run much less.

As I think I mentioned, I'm not opposed to the government running certain things, I just think those that urge caution as the government takes over more things are not all frothing-at-the-mouth whackos, and may, in fact, have a point.

"This is mostly for teachers especially those who work in schools in disadvantaged areas. Subsidizing govt bureaucrats is a story to frighten children."

Well, that's good to hear. I hope that's how it works out.

Given the response to health care reform, I tjhink there is no chance whatever that the government will be running muich more thann it is now in what remains of my lifetime.

Unless, of course, the dandy, predatory private financial sector causes another even worse meltdown from its clever, predatory products.

Ansd lets never forget that the huge cost overruns are created by the private contractors building the stuff. The money goes to them, not the lesser-paid government bureaucrats, except in a very few instances of real corruption. Many of the current problems stem from contractors getting contracts for stuff the military doesn't want by making campaign contributions to Congressmen on the key committees. But that is a consequence of private financing of elections, something else the private sector has done so well (for them).

In shjort, there are things the government does well, things the gov't ought to do because profit makes the system inefficient and/or bloated (I'd put health care here) and things the private sector can do competently, but those usually require regulation to mitigate the bad effects of the desire for ever more money.

srw3,

my taxes in NJ are alive and well, high as ever and are funding gov't bureaucrats and their gold plated pensions that they're now whining about having to give up some of. Sorry no sympathy from me when I scrimp and save to keep my employees and offer them a basic 401k plan. Some of these government bureaucrats need to realize how the real world works now as opposed to 15-20 years ago.

Also while management was at the table if they had not given wages or unions would have struck and forced serious damage to an already damaged sector.

If government was more efficient then they would have funds left over to do projects like filling potholes.

The way the federal loan program is that the Federal government guarantees to pay back the loan if the student defaults, and also (for subsidized loans) pays the interest while the student is in school. In addition, the government pretty much sets the terms of the loan, how much money is lent, what its interest rate is, how it can be deferred, and so on. This is the status quo. The federal loan program has always been socialism, it's just been the sort of socialism that allows private corporations to step in and make money off of it. And with direct loans, the private sector would still continue to play its role in servicing the loans; that is, collecting bills and whatnot.

Truly private loans, where it's just an agreement between the lender and the borrower and whatever cosigners can be found, have existed for a while and are not effected by the bill. In fact, they'll probably continue to grow in popularity, since Federal loans are limited in how much money they provide.

@VB:Also while management was at the table if they had not given wages or unions would have struck and forced serious damage to an already damaged sector.

Well VB, how do you explain the lack of planning for a leaner energy future? Note that in both Europe and Japan, they were ahead of the technology curve, designing fuel efficient cars for decades before the US manufacturers woke up. Can't blame that on labor.

You know, Toyota has a massive reserve, built during the last 20 years or so when they were by far the most popular import from japan with little competition besides honda. The us manufacturers also had a 40 year period from wwII to the 80's when they dominated the market and made huge profits. Where did that money go? Clearly US companies were playing grasshopper and consuming the profits instead of saving them for a rainy day.

And you missed my point. In the pursuit of short term profits, companies gave better health benefits instead of wages because of the favorable tax structure around health care (because there is no universal health care). So employers discouraged price sensitivity for health care by constantly using it instead of wage increases. This is why unions don't want to give up their good coverage. They sacrificed wages to get those benefits.

"In fact, they'll probably continue to grow in popularity, since Federal loans are limited in how much money they provide."

That is fine by me. Govt student loans are capped so that there is money for the most # of kids. Its good to know that the banks won't be force out of business by the govt giving out student loans directly.

@KW: Sorry if I missed your point. Yes a totally centrally planned economy has not turned out to be that successful. Of course, nothing in any of the posts here even vaguely suggests that this is happening or that Obama has a secret plan to make this happen. You will have to go to rightwingnutistan to find those folks. By the same token, some government industrial policy can help direct investment to parts of the economy that will have long term benefits to the country (like the current green, alternative energy technology policy), don't you agree?

@VB: If government was more efficient then they would have funds left over to do projects like filling potholes.

Here in colorado, we have relatively low taxes but our streets and other infrastructure are falling apart. There is not much more efficiency to be squeezed out of the system. At some point, Govt does need revenue to provide services that people need.

srw3,

"You know, we had a gas crisis in the 70's. The writing was on the wall in terms of long term gasoline prices. There was no mystery that gas prices were going to go up in the future (and not that far a future). Management, not labor, totally ignored long term sustainability of their industry for short term profits. Car companies fought higher fuel standards tooth and nail, spending billions on lobbying from the 70's to now to keep their gas guzzlers on the road, instead of investing in new technology with that money. Unions didn't have anything to do with that. It was bad decision making by management nothing more."

Why do you suppose management didn't invest much in smaller cars? The Detroit automakers were saddled with excessive labor costs and thus smaller, cheaper cars were not profitable. It makes sense to fight fuel efficiency standards when your company cannot profitably make fuel efficient cars given its cost structure.

Management could have tried to negotiate more reasonable compensation for UAW workers back when times were better, but it's not as if the UAW would have taken that lying down - especially if the cost cutting occured when the automakers were profitable. I'd wager a guess that forcing a strike and slashing compensation back in the 1990s would have attracted the ire of liberals, who would have pounced on management for caring only about profits and destroying the livelihood of working families or something along those lines (not that management should have been concerned about that, simply an observation).

As for Detroit's healthcare costs, somehow I doubt that the UAW would have settled for high deductible health plans for its members, no matter what the salary concession.

That all said, I am willing to concede the point that if single payer had kept health care costs down, then the automakers would have been financially better off with it in place.

@ justin84 Why do you suppose management didn't invest much in smaller cars? The Detroit automakers were saddled with excessive labor costs and thus smaller, cheaper cars were not profitable.

If I were a conspiracy theorist, I would say that is was collusion between the big oil companies, tire companies, and automakers, trying to maximize profits of all three industries.

Remember how this unholy alliance basically destroyed mass transit in many cities after WWII. Many trolley and bus companies were bought out and killed by this group of industries to increase demand for cars, tires, and gas.

Perhaps they were not as profitable in the short term, but that is not an excuse for not investing in the technologies of the future. Remember, Detroit made millions for 40 years. Maybe they could have afforded a short term loss to retool for the next generation of cars. Instead they just hunted short term profits.

"It makes sense to fight fuel efficiency standards when your company cannot profitably make fuel efficient cars given its cost structure."
This is a nonsensical statement. There is no reason for not improving efficiency of cars no matter what their size. You insist that the cost structure wouldn't allow that, but there is no reason why Detroit couldn't build more fuel efficient cars no matter what their size or cost. Basically US automakers fought innovation in fuel efficiency through bribing congress.

And it certainly doesn't justify the billions that could have gone into improving productivity (American workers are the most productive in the world and have been for quite some time), new technology, or reserves against the very rainy day (that they could see coming), instead of lobbying for the unsustainable status quo. Again, it is putting short term gain over long term viability. What did all that money buy them? It put them years behind Europe and Japan for the market of the future, ie efficient cars.

"As for Detroit's healthcare costs, somehow I doubt that the UAW would have settled for high deductible health plans for its members, no matter what the salary concession."

Again, detroit taking short term gains (tax advantage of giving expensive health care) instead of wage growth which would have cost more. Who knows what might have happened. We know what detroit did and how it worked out.

Srw3,

"Well VB, how do you explain the lack of planning for a leaner energy future? Note that in both Europe and Japan, they were ahead of the technology curve, designing fuel efficient cars for decades before the US manufacturers woke up. Can't blame that on labor."

I'm not sure about the union situation in Japan, but lots of Japanese cars are built in the U.S. with non-union labor. Japanese cars (well until recently) had developed a strong repuation for quality too, allowing them to sell for premium prices. American cars developed reputations as clunkers (and that has to be at least partly the fault of the guys who put them together), and so not only was there a cost disadvantage, but small cars had to be sold at a discount to import brands. As for German cars, yeah the Germans have strong unions but they too successfully created a premium image around their export brands, and could sell them at a higher price (and in Europe, there is demand for premium small cars which simply didn't exist in the U.S.). Europe also made good use of pigovian (gasoline) taxes, which depressed the demand for heavier passenger vehicles, whereas the U.S. saw a huge demand for them from 1990-2006 or so. The basic story was that foreign cars could either be built cheaper, or sell at a premium, or both - for small, cheap, low margin vehicles, this basically prevented the big 3 from effectively competing in that space.

Another comment on union/management negotiations, I was always under the impression that the unions would use very aggressive tactics, particularly historically. The UAW would target one of the companies when contract negotiation time came around, and basically threaten to have a strike at that company only, letting competitors take all their sales - then when that deal was concluded, the UAW would impose that deal on the other firms. Even if those deals occured a long time ago, the compensation trend for workers is path dependent and hard to take away - it was only when things got bad that management was able to negotiate any serious concessions.

"Perhaps they were not as profitable in the short term, but that is not an excuse for not investing in the technologies of the future."
- Srw3

Yes, because the future is completely certain in advance and good central planning can always create the best outcome. Unfortunately, no firm can go around telling shareholders "hey, we're not going to make any money in 1998,1999,2000,2001,2002,2003 or 2004, but when gas prices start to rise in 2005 our small cars which will have finanlly developed a reputation for quality will be there!" Remember, Japan could build cars for the U.S. market without expensive union labor, and Europe had a premium small car market and so even high cost labor wasn't a huge problem there.

"It makes sense to fight fuel efficiency standards when your company cannot profitably make fuel efficient cars given its cost structure." - My comment

"This is a nonsensical statement. There is no reason for not improving efficiency of cars no matter what their size." - Srw3

Really? I wasn't aware that companies should include features for which there isn't much demand. No one cared about fuel economy in the 1990s. If you had limited R&D dollars, and you had to choose between increasing the highway mpg of the Chevy Cavalier from 31 to 33, or build a new V8 for your Silverado so that it can remain competitive with Ford's F150, the obvious choice is to go with the Silverado's V8.

It's not as if nothing was ever tried either. GM created Saturn to build cheap small cars, and wanted to use an affordable cost structured, which had amongst its problems UAW opposition:
http://www.newsweek.com/id/192458/page/1

At the end of the day, it's a lot harder managing a company in real life and in real time, then monday morning quarterbacking it from a blog. Investing in small cars with the U.S. cost structure 15 years ago didn't make economic sense. It didn't make economic sense because demand was low and foreign competitors had strong competitive advantages in the small car space, and so GM/Ford/Chrysler ceded it. If labor compensation was a lot lower, history might have turned out a little differently.

justin84: You put all of your effort to absolve management of decisions that made the company less competitive and blame it all on the workers. Workers don't say what to build, how much money to give to shareholders and executives, or what the company should invest in. Toyota built up a huge reserve fund when it was very profitable. No US car company took the long term view and built up their reserves when they dominated the market. Is this the fault of the workers? Fundamentally these are the decisions that determine the long term viability of a company.

"Europe also made good use of pigovian (gasoline) taxes, which depressed the demand for heavier passenger vehicles, whereas the U.S. saw a huge demand for them from 1990-2006 or so. "
You say this like auto companies sat passively while gas taxes stayed low in the US.
Auto companies fought bitterly against higher cafe standards and against any kind of gas tax that would have made more efficient cars better sellers. They may have lost some market share in the short term by supporting fuel efficiency standards or gas taxes but they wouldn't have been so far behind if they had bitten the bullet then.

justin thankfully makes a much more compelling argument than me. Both of you have valid points and both management and unions to me are to blame for the state of the US auto industry.

back to taxes srw3,

i'm up to here in taxes. I'm in NJ. By conservative estimates i spend at least 40-45% of my income in taxes. Federal, state, property, payroll. I'm sorry but I can't take much more and see our local abuses here. Our property taxes here are more than some people's mortgage payments.

Any future state employees and teachers if you're going to be required to pay for them should be forced onto medicare supplement plans and Part D plans. no more of these gold plated benefits for life. Same goes for public sector employees. that'll save billions. Also everybody and their mother here in NJ is in the pension system and its falling apart. Part-time workers, workers double dipping. The abuses are rampant and have been for generations. I have no problem cutting back, paying more but not when the abuses and corruption are going on. I have no problem paying for someone who can't afford to but not while the system's being abused. Sorry, I can't condone that.

Srw3,

I'll admit I got a little bit carried away. I don't want to convey the belief that the big 3 management teams were perfect. They absolutely made mistakes. Corporate dysfunction within the big 3 is fairly well documented.

I do however believe that high labor costs were a very severe constraint on management's ability to compete in small cars, which ultimately was problematic. As you state, the big 3 could have decided to lose money while aggressively investing in efficient small cars, but at the time those investment decisions needed to be made, in the late 1990s, no one knew what a debacle the 2000s were going to be. If gasoline prices had remained fairly low, and had there been no housing bubble, then the SUV strategy might have remained profitable until present day, and the company which switched to a small car strategy would have done quite poorly - quite possibly with the management team thrown out as a consequence.

As an aside, I'm not sure that switching to small cars would have saved GM or Chrysler. It would have taken a long time to develop them, and they probably would have been money losers until gas prices got high enough (07, 08) for small cars to command premium prices. So GM might not have lost as much money in 08 and 09, but it might not have made as much from 98-07, and perhaps the result would have been quite similar. That being said, I do agree they would be better positioned today had they invested more heavily in cars in the past (although I must say that by 2008/2009, the American small car portfolio was certainly improving already).

I do agree with you that Congress should generally ignore special interests when setting fiscal policy. I'm a huge fan of taxing things that we want less of, as opposed to things we want more of. You'll find no disagreement from me that auto company lobbying of Congress against the gas tax prevented the big 3 from shifting slowly into a high gasoline price environment and instead saw them suffer a sudden gasoline price shock and watching their SUV/truck business lines implode.

@Justin
Thank you for your more reasoned response. I realize that labor contracts did put constraints on some management decision making, but I do not believe that labor costs were determinative in the decline in the US automakers.

"If gasoline prices had remained fairly low, and had there been no housing bubble, then the SUV strategy might have remained profitable until present day, and the company which switched to a small car strategy would have done quite poorly - quite possibly with the management team thrown out as a consequence."

Again, you are taking too short a view. In the 1970's (I don't know if you were old enough to remember this), there was a severe oil shock and at that time the first estimates of peak oil (which we are about to hit, probably in the next 10 years) were being made. That was the time to start redesigning cars, not in 1990, although 1990 would have been better than 4 years ago. That was the time that the effects of air pollution were being verified and that large inefficient cars were a big part of the problem. There were many factors that should have pointed US car makers to begin the long term planning and development of more efficient (not necessarily smaller) cars. This is when our global competitors began their retooling for the future.

The housing crisis and temporary gas hike were just the match that ignited the fire. Whether now or 5 years from now or 10 years from now, gas is going to get way more expensive. This is not rocket science. US auto companies thought like you, that squeezing a few years of short term profit making suvs is a better strategy than planning for the future 10 or 20 years out. The only explanations why US auto companies didn't plan is the pursuit of short term profit and willful ignorance of what the future would probably look like.

@Srw3,

I am too young to remember either the 1970s or 1980s from personal experience. I do recall that in the 1990s gasoline prices were very low, there was strong demand for larger vehicles and more powerful enginges. The financial incentives for the big 3 (and other automakers - foreign automakers also began getting into the truck/SUV space) were to build large, fuel thirsty vehicles for American consumers.

I do agree that by lobbying against the gasoline tax, which would have increased the market demand for premium small cars and (probably) allowed GM/Ford/Chrysler to compete effectively in small car space, having to endure another gasoline price spike was in part a demon of their own design. It's easy to get comfortable when the profits are pouring in, even if the same business model blew up a generation ago.

As things were, its hard to spend too much money on small cars in an era in which demand is low. It's not as if no attempts were made, but after the difficulties faced by projects such as the new Saturn brand, it probably became increasingly difficult to justify throwing money into efficient small cars which simply were not profitable in an era of $1/gallon gasoline.

I think we largely agree on a lot, it's just that I place a little more blame on high labor costs created by monopoly (or near monopoly) provision of labor constraining management and you place a little more blame on poor management decision making in general. If there had been a gasoline tax correcting for carbon emission externalities and generating a premium on small cars (and a market for premium small cars), the big 3 would have been able to make generate large profits on small cars and 2007/2008 would have gone a lot better.

@justin. WE do agree on many things and those things that we don't agree are more issues of degree.

. It's easy to get comfortable when the profits are pouring in, even if the same business model blew up a generation ago.

Yes it is easy, but theoretically that is why execs make the astoundingly big bucks, to not take the easy way. Siphoning off profits to shareholders and execs, instead of investing in new technology and being future focused was a complete management breakdown and workers suffered (and continue to suffer) for it.

Quick Ezra, go and fetch you betters a juicebox!

You know EXACTLY what I mean.