Posted by: Nicholas Davis | April 2, 2009

Idea for the auto industry: retraining packages

All this talk of bankruptcy and bail-outs in the auto sector (for example an interesting piece on the power of bondholders at the Baseline Scenario here) makes me wonder if there isn’t a way to “throw sand in the eyes of the bull“.

I’m speaking from zero information on this (and so have no idea if it’s a stupid idea or already been debated at length), but how much would it cost the Obama administration to let GM die but simultaneously offer a nice “retraining” package to auto workers below a certain salary? Say, a year’s salary, with a substantial portion to be used specifically in higher education?

The effect would be to let the shareholders, bondholders and top execs bite the bullet of poor business decisions, but recognise the economic costs of frictional unemployment caused by the demise of a major employer and buffer these people with cash.

Pros: targeted, media friendly economic stimulus going to main street in areas which may in fact need it most. Shows industry that Obama isn’t going to be bullied into keeping dying companies or industries alive just because they employ lots of people.

Cons: expectation from employees at other firms in trouble in the economy that they should get the same deal (govt being accused of favouratism), a run on shares of similarly troubled institutions, difficulty determining how much should be given to workers, difficulty determining the cut-off point between execs and workers, a dangerous precedent for the government.

Having said that, it might just be the thing for the government to restore some downside risk to shareholders and decision-makers without making Obama look like a heartless conservative.

Can someone put me out of my misery and explain why this is ludicrous?

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Responses

  1. I like your idea – and there is a further step that could be taken; as it is a huge loss of value to breakdown company into individuals and retrain all of them them, why not retrain whole teams? In the same way banks ocassionaly hire whole desks, I am sure keeping small teams together (5-50 people) and retraining them might save more value – they could start their own businesses with some funding, provide advisory services, go to competitors looking to enhance local operations, move across industries (finance, marketing, HR teams) etc. Obvious problem is that absorption capacity of the economy is somewhat limited at this point.

    However, what to do with all of the suppliers if GM goes bust? There is a whole ecosystem out there…

    • Good point about the supplier ecosystem – I didn’t think of the broader network effects. However unlike employees, who for legal and practical reasons cannot diversify in terms of their employer, auto suppliers are able to diversify in terms of clients and accounts, as well as possessing productive assets that could be shifted to other markets. Which might be an argument for not trying to save the entire ecosystem… but still poses a even tougher question about where to draw the line.

  2. It’s a good idea but there are two problems – employee representatives are part of the problem here. The union has been too successful in GM and is part of the cost-structure problem … so the workers themselves also have to take some responsibility for where the company has ended up.

    Secondly, the point about favoritism is correct: we need horizontal worker bail-outs if we are going to have them; sectoral bail-outs aren’t fair or efficient.

    Either way the idea poses very interesting questions on protectionism- is this a new form of protectionism (all this worker support is ultimately going to aid some company at the end of the day – possibly whatever company replaces the current GM) or just the cutting edge of social security?

    • Thanks Ryan, both good points.

      Re favouratism, perhaps then the answer is to “pilot” an “innovative retraining grant scheme to enhance the competitiveness of America’s labour economy” with specific sectors (i.e. auto workers of a particular profile) by giving them targeted grants and assistance, meanwhile promising to extend this to the rest of the population if it succeeds. That way you get fast, targeted stimulus and retraining for a sector that is being considered too big to fail, AND the opportunity to raise the profile of existing grant schemes for workers which might be being overlooked. Some streamlining might need to be done.

      Re the union issue – I hadn’t thought of it that way, but of course you’re right. But the issue goes back to the inability of auto workers to diversify employment risks – so they turn to union action to achieve guarantees on wages, holidays, conditions and tenure etc. Which of course in turn reduce the flexibility of the company itself and peversely decrease its robustness to a downturn. So we need to find better ways of “insuring” workers…


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