LET DETROIT GO BANKRUPT by Mitt Romney

First a prelude (a rather long one, but worth it),

Very rarely I publish items from Republicans, but I feel that this is important.

In November 2008, Mr. Romney who served as governor of Massachusetts from 2003-07 and had lost the Republican nomination to Senator John McCain in that year’s Republican Presidential Primary authored this op-ed in the New York Times.

Mitt Romney was born in Detroit, MI. His father, George, in addition to being the president of American Motors (bought by Chrysler in 1987) was also governor of Michigan from 1963-69. George Romney would be appointed the first Secretary of Housing Urban and Development by President Richard Nixon. George would serve one term due to the disgusts he had of the political scheming of that his boss displayed.

Though Mr. Romney does make some valid points, his general argument of allowing the America automobile industry die would not only have had a profound effect on the American economy and unemployment rate, but also on the psyche of the nation. There is a sense of pride that the United States of America is one of the few countries in the world that builds and sells automobiles. The American economy had suffered a major setback due to the housing bubble bursting and the global banking crisis. Had the incoming Obama Administration listened to the advice of Mitt Romney, the economic downturn would have gone from a recession and into a full blown depression.

Not only would it have an effect on the automobile industry, but also on the local economies and tax structures. If no one is getting any income, how do they pay of the essentials such as food, clothes, and gas? Those businesses in the community will see a demand for those items dry up due to lack of money. Since no one is paying for things like housing and public utilities, local governments start to see their tax flow dry up and they either have to raise revenue or cut services. Governments seem to prefer the latter since raising taxes is rarely popular.

Oh and about housing, values of homes will start to go down because no one will be able to afford to live in homes at the prices they are at.

Since no more cars are being built, what about the companies that produce the parts for the cars? Workers would have to be released at these other factories since not many parts are being made. You start to think about how it will impact the freight industry and then the economies of those communities. “Letting Detroit Go Bankrupt” does not just affect the economy of Detroit. It also affects the economies where the parts are built and where there are other car plants. Arlington, TX has a General Motors plant. There are thousands of Ford, General Motors, and Chrysler dealerships across the country.

The only people who would have benefited from “Letting Detroit Go Bankrupt” would have been the executives of those companies. The workers would have been released from their jobs with no prospect for work elsewhere. The people who made the decisions that allowed the company to go belly up would have been allowed to walk away without any harm while the ones that get hurt the most will have been those that built the cars.

Mr. Romney advocates in the article that the top wage earners need to make sacrifices. I wonder how Mitt Romney Version 2012.11 would feel about that.

Even though the bailout of the automobile industry is still controversial, I feel that those responsible for putting the economy at risk should be held accountable. The person on the assembly line in Detroit who has a family to care for should not have to suffer due to the risky decisions that placed the economy in jeopardy. Same for those that provides the economic support for that family.

Mitt Romney was proven wrong about the federal government helping out the automobile industry. The economies of Michigan and Ohio are slowly recovering. Ohio is seeing an unemployment rate better than the national rating of 7.9%. The private sector continues to grow.

It should be noted I have never stepped foot in an Economics classroom during my time at college. The only times I have entered the Business Building at UNT is to attend classes that were non-business related (Calculus II and a Political Science class covering the Supreme Court).

I have exposed the flaws in Mitt Romney’s proposal from four years ago and he has a MBA from Harvard Business School.

Again, here is “Let Detroit Go Bankrupt” published in the New York Times dated 19 November 2008 by Mitt Romney:

If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

I love cars, American cars. I was born in Detroit, the son of an auto chief executive. In 1954, my dad, George Romney, was tapped to run American Motors when its president suddenly died. The company itself was on life support — banks were threatening to deal it a death blow. The stock collapsed. I watched Dad work to turn the company around — and years later at business school, they were still talking about it. From the lessons of that turnaround, and from my own experiences, I have several prescriptions for Detroit’s automakers.

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.

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.

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.

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.”

You don’t have to look far for industries with unions that went down that road. Companies in the 21st century cannot perpetuate the destructive labor relations of the 20th. This will mean a new direction for the U.A.W., profit sharing or stock grants to all employees and a change in Big Three management culture.

The need for collaboration will mean accepting sanity in salaries and perks. At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. 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.

Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.

Just as important to the future of American carmakers is the sales force. When sales are down, you don’t want to lose the only people who can get them to grow. So don’t fire the best dealers, and don’t crush them with new financial or performance demands they can’t meet.

It is not wrong to ask for government help, but the automakers should come up with a win-win proposition. I believe the federal government should invest substantially more in basic research — on new energy sources, fuel-economy technology, materials science and the like — that will ultimately benefit the automotive industry, along with many others. I believe Washington should raise energy research spending to $20 billion a year, from the $4 billion that is spent today. The research could be done at universities, at research labs and even through public-private collaboration. The federal government should also rectify the imbedded tax penalties that favor foreign carmakers.

But don’t ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost.

The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.