If The Congress Won't Do It, The EPA Will

Harry Reid is signaling that health care and financial regulatory reform will take precedence in the Senate over the climate change bill, which could push the legislation into next year. The problem with that is the Copenhagen conference coming up in December, and the need for the US to bring something tangible to the table if there is any hope for an agreement. Indeed, the Europeans are already angry at the US approach, and not having some movement on the climate in hand will probably kill it completely. So the Administration has taken the law into their own hands, as allowable under the Supreme Court mandate to regulate greenhouse gas emissions.

The Obama administration on Tuesday formally proposed new fuel efficiency standards for cars and trucks, a move that signals the first federal limits on greenhouse-gas pollution.

In May, President Obama announced in a Rose Garden ceremony that cars would be held to a higher environmental standard. On Tuesday, officials filled in the details, linking fuel economy to emissions from vehicles.

The net effect would be to require manufacturers to ratchet up fuel economy 5 percent per year. In 2016, new cars and trucks would have to achieve an average rating of 35.5 miles per gallon. Cars currently must average 27.5 miles per gallon; light trucks must average 23.1 miles per gallon.

If this is any indication, it's only a first step, leading to other command-and-control measures from the EPA and other regulatory agencies in the absence of a climate deal from Congress. Power plants, one presumes, would be next. In fact, they've already started revising the rules on waste discharges from coal plants.

It's probably not the best practice, but under the current gridlock, it's the only tool available to the Administration. So members of Congress, particularly Republicans, have a choice to make. Legislation or regulation?

Polluting industries certainly didn't give up the fight against legislation in the face of regulation, and they'll continue to fight tooth and nail against the regulation in an attempt to run out the clock and maximize profits. David Roberts says that's why Obama needs to get involved and get a climate bill passed.

The war against EPA regulations will also be waged with aggressive public relations campaigns. There will be great hue and cry about the economy-destroying burden that command-and-control regulations impose on American business. And unlike with a climate bill, responsibility (read: blame) cannot be dispersed. There is no hint of bipartisanship. Responsibility for EPA regulations will fall entirely on Barack Obama and his administration, not on Congress—which is probably how Congress prefers it. If it’s a total mess, or demagogued as one (as is all but certain), it’s Obama that takes the hit. That is yet another reason he’d rather avoid it.

Greens are fighting to preserve EPA authority in the climate bill. Some have even said that it would be preferable for legislation to fail and the EPA to take over. It’s not hard to understand why—something needs to be done about existing coal plants, and there aren’t many tools in the climate bill toolbox to address them. But no one should be under any illusions. The NSR/PSD/BACT approach is grossly suboptimal for the job that needs doing. It might have the intended effect—killing coal plants—but there’s potential for unintended effects as well, including substantial political blowback.

Both sides, greens and industry, have reason to fear if the climate bill fails. It’s terra incognita, a volatile and unpredictable situation. Obama doesn’t need any more problems like that. That’s among the reasons he is likely, this fall, to put some of the time and energy toward lobbying for a good climate bill. From his narrow political perspective, virtually any bill is preferable to catching the EPA tiger by the tail. That tiger eats bunnies.

In this case, the House has already passed a bill, so really we're looking at the Senate as the holdup here. But the dynamic of Senators not wanting to be responsible, pushing all the political liability on to the President, will be difficult to change.

China Can Go Ahead And File A Complaint

I mentioned briefly China's counter-charge against the United States in exchange for extending tariffs on tire production. They have decided to probe US chicken and auto parts sales in China, accusing American exporters of "dumping" (selling goods at less than cost). Marcy Wheeler has a look at this:

I assume China is targeting chicken because our Ag is subsidized and the meat industry has a lot of clout in this country.

I'm more fascinated by China's decision to go after auto parts (and note, some of the announcements on this say "automotive products," which might include cars themselves).

In truth, China imposes huge tariffs on cars coming into its country (and ties permission to import cars to sourcing in China--for example, GM might get to import a certain number of Cadillacs in exchange for sourcing another part of its Chinese-production in China). And the import of parts is often limited to more complex parts that are the same in China as they are in the US. There's not much there there.

It looks like China is targeting auto parts because the government is highly involved in GM and Chrysler, and China can using a threatened cut-off of those markets to leverage a scale-back on the tire tariffs. But the problem is that there's a mechanism to settle these disputes called the WTO, and with China as a member this so-called "trade war" will actually be settled by the governing body through a normal resolution process, including whatever retaliation China offers. And on that front, the US action was available under the existing trade agreement, and I can't see how any amount of legal wrangling can deny that fact. In the end, China and the US are symbiotic trading partners, and this tariff raise doesn't have to lead to any escalation at all. We'll see who stands their ground.

Cash For Clunkers, Consumer Savings, Increased Fuel Efficiency And Jobs

With the cash for clunkers program winding down, we can start to measure its effectiveness. And guess what, it was effective! The program sold almost 700,000 cars, many of which would not have otherwise been sold. It saved consumers money in both purchasing the automobile and long-term gasoline costs. Dealers who were facing hard times due to the Chrysler and GM bankruptcies will now have a boost to get them through. Third-quarter economic figures expect to have a .3-.4 increase in growth (from just a $3 billion outlay). And despite naysayers like Edmunds.com, the most tangible impact of the program is the 39,000 jobs it created:

One auto analyst called the program a success, if only because his research showed that it was responsible for saving 39,000 jobs that otherwise would have been eliminated.

"It's really more substantial than we had thought in terms of stimulus," said David Cole, chairman of the Center for Automotive Research. "This is companies putting people back to work."

General Motors announced last week that it will reinstate 1,350 workers and add overtime for about 10,000 at three plants, as the automaker replenishes inventory sold during the government program. Honda also said it will increase U.S. production.

The other big winners in the program were Asian automakers. Eight of the top 10 new cars purchased through the program came from Honda, Hyundai, Nissan and Toyota, which claimed the top spot with its Corolla. The Corolla, Honda Civic and Ford Focus are manufactured in the United States.

I don't know how anyone in their right mind could find the program to be anything other than a fantastic success.

...Joe Romm concurs.

Wildly Successful Government Program To End Monday

The Cash For Clunkers program will wrap up on Monday, a couple weeks ahead of schedule, after fueling a buying boom worth close to $15 billion dollars in sales during late July and August, and leveraging a 5:1 stimulus effect into industrial and local economies, so much so that GM has started to hire back workers. Dealers are complaining that they haven't received their money yet, but that's simply a testament to an unexpectedly successful program.

Critics have complained of administrative confusion and haste in committing the money, and some dealers have expressed concern that they were not being reimbursed quickly enough.

But the White House argued that the speed with which the money has been committed is a measure of the program's popularity.

"This is actually a high-class problem to have -- that we're selling too many cars too quickly and there's some backlog in the application process," President Barack Obama said Thursday during an interview on a nationally syndicated radio show.

I'm sure the dealers liked it better when they went a week without anyone coming on their lots. I'm sure they were thrilled with the status quo of playing Minesweeper for 8 hours a day while trying to figure out how to pay the rent. Manufacturing actually rose in July, thanks to this program.

Government stimulus works. It's as simple as that.

CA-10: An Interview With Lt. Gov. John Garamendi

John Garamendi has been seeking votes in California for well over 30 years. He first took a run for the Governor's mansion in 1982, and was set to do so again in 2010 until the seat in CA-10 opened up, and he was inspired to return to Washington, where he served in the Clinton Administration in the Department of the Interior. He has the most diverse record of anybody in the race, with stints at the federal level, the state legislature, and in two statewide offices, as the Insurance Commissioner and now Lieutenant Governor. In our interview, we discussed health care, lessons learned from regulating insurance, No Child Left Behind, saving the NUMMI plant in Fremont (more on that from Garamendi here), and foreign policy in Iran. I found Garamendi to come at issues in a very comprehensive and thoughtful way, and you can see this for yourself below. A paraphrased transcript follows.

DD: Thanks for talking with me today.

John Garamendi: My pleasure.

DD: So how's it going out there on the campaign trail?

JG: It's going very well. Every day, I feel we're moving along well. You have everything being done that is normally done in these campaigns. We have a strong volunteer grassroots organization committed to getting out the vote. Phonebanking has started, we've hit about 30-40 thousand homes. We're walking in different communities. We just had a meeting in Rossmore, with 300 people turning out. So I think it's going very well.

DD: Your last several campaigns have been statewide, with district-level campaigning being more retail, how are you finding it?

JG: To me, it's exactly the same, only it's done in a smaller area. I've always believed strongly in retail politics. The only difference is that after the event's over, I don't have to get on a Southwest Airlines plane. We did an African-American church out in Fairfield over the weekend, same as any African-American church in Southern California or anywhere else. It's just easier for travel.

DD: OK, let's hit some issues. First off, health care. August is this time where everyone's making their feelings known about health care in their districts. What are you hearing in yours?

JG: I am hearing a strong element for single payer, or Medicare for All. As you may know, I've led that debate in this state for many, many years. I've always found it the most efficient, most cost-effective way you can possibly do this. Just send your premiums to the Medicare office.

So I hear a lot of individuals trending in that direction. And some of the unions, the California Nurses Association, are also trending in that direction. There is also a concern about the complexity of the legislation moving through Congress. And people want to see at the very least a public option to compete with the insurance companies. Also, with a lot of seniors, the drug issues concern them, both with fixing some of the issues with Medicare Part D and also maintaining what they like about Medicare. So that's the range.

DD: Would you vote for any bill that didn't have at the least a public option that's available from day one, without a trigger?

JG: Well, I've always been a strong voice for Medicare for All. The fallback position is the public option. That's already a compromise. And so the legislation had to have a public option, I can't go any further away from that. The other thing I want to express is that I understand insurance reform, which is a lot of this bill. I was the main regulator for insurance companies in the largest state in the union. So I bring a set of knowledge to this debate that not only doesn't exist among my competitors, but doesn't exist in Congress.

DD: Let's talk about that. Right now, insurance companies are regulated in the states, and so the regulations vary from one place to the next, and can be corrupted by local interests. Do you support a federal role in insurance regulation?

JG: This is something that we have to figure out with insurance reform and with respect to financial regulation. The regulatory mechanisms need some clarity. It simply won't work to write a law saying to the insurance companies, "Take all comers." They will not do it. So you need a police force. Someone to enforce that law. Will that be federal, or based where it is now, at the state level? That's the kind of detail that must be worked out. I mean, we've had auto insurance here in California that's supposed to take all comers, and they find numerous ways to avoid that. And of course, this is why I support Medicare for All. You don't have to worry about any of that. But as long as we're going with health insurance reform, I can add something to that process.

DD: What are the pluses and minuses of putting this in the hands of the Feds?

JG: If it's a federal process, you'd have to set up a massive new federal bureaucracy. In the positive sense. But you have to have a police force, because otherwise, the insurers won't do it. That's a major, expensive undertaking for the federal government. There's an advantage to the existing mechanism in that it already exists, like with Medicare or Medicaid. However, you mentioned some of the problems with how the regulation changes depending on the state. So both options have shortcomings. Either way, if we have a bill based on insurance reform, it has to be dealt with. And I've been dealing with these companies for eight years of my life. I know how to do this.

DD: Medicare for All will apparently get a vote now. Is that helpful?

JG: It's enormously helpful. It got pushed to the side of the debate for too long. Medicare provides about 60% of the care in dollar terms already in this country, and it's very popular. If you bring the rest of the population in, on a per-person basis, the cost would decline dramatically. The money in the private system is good enough to get this done and cover everybody. And the other important thing is that Medicare allows individual choice of provider. Whatever doctor you like, you can keep them. Of course, we know that private insurance restricts your choice of doctor. So this is the big lie in this debate, the idea that Medicare would have government telling you what doctor to pick. That's what happens right now.

DD: Let's move on. I noticed on your website you took a lot of time talking about the need to rebuild manufacturing. We're seeing this cash for clunkers program becoming very successful as an economic stimulus for the auto industry. Is that the kind of incentive-based programs that we can use to bring back manufacturing to America?

JG: Not exactly. The auto industry is not central, but it is important. That's why I'm trying to save the NUMMI plant. 1,200 businesses are direct suppliers to NUMMI. The auto supply industry is one of the largest in America. So cash for clunkers will help NUMMI. But what I'm talking about with respect to manufacturing is an economic theory that I developed in the 1980s. Basically, I figured that you need certain things to maintain the ability to lead as an economic power. You need a world-class education system and a commitment to research and development. Through both of those, you can create new things, with a high profit margin, whatever those things are, but new innovations that people find valuable. Eventually, those new things become a commodity, and once that happens, like all commodities, it seeks the lowest-wage place to be made. So those things get pushed off, and you have to create more new things, to keep feeding that engine. So that's what I'm talking about, high-end manufacturing.

DD: Couldn't the NUMMI plant be retooled to serve as a place to manufacture those new things, be they innovations in solar or wind technology or new batteries?

JG: Well, we tried this a few years back. I endorsed a bill in the legislature to provide a specific exemption for sales tax on manufacturing equipment to retool the NUMMI plant for hybrid vehicles. And that probably would have been enough to keep NUMMI open. But it didn't pass. Right now, what we're doing is putting together a package for NUMMI of incentives that will hopefully keep them in California. But it's more complex than that. This is like a divorce. You have GM and Toyota fighting over who owns what widget on the line. So there are legal issues in play now. I think we can get it done, because that's a very efficient plant, one of the most efficient in the country. But we have to manage this divorce.

DD: Education is another issue you talk about a lot. The Department of Education just put out this Race to the Top program to offer money to the states with good outcomes, but they are restricting the funds to states which incorporate student testing into teacher evaluations, and because California doesn't do that, they don't qualify. What are your thoughts on that, and this larger divide between education reformers and groups resisting their reforms?

JG: My question about it is basically, what is the equation between the test and teacher evaluations? Are we talking about just the test score? In that case, do I get to choose the students? Because the students and their backgrounds are a contributing factor to their performance. So it's a complex equation. There's a socioeconomic element to it. And it's very difficult to do to take everything into account. I don't think that testing should be the sole measure of a teacher evaluation. There are multiple factors. My daughter's a kindergarten teacher, and this year she got to school and there were a lot more kids in her class. So is that a factor? I think we need to evaluate teachers, but we must be fair.

DD: Do you support a reform like paying teachers more to go into poor-performing inner city areas?

JG: I've always supported reforms like that. I put up a bill in the 1980s to pay more to math and science teachers, to make sure we were attracting the best of them. And I support sending good teachers into the inner city. We have to pay our teachers better if we want to get the best outcomes.

DD: We are having such a tough time in California, what can the federal government do to alleviate some of the burden here where we are destroying our social safety net during a deep recession?

JG: Well, just to go back to education, one thing the federal government can do is fix No Child Left Behind. It was a great concept, but not good in detail. The reauthorization is coming up, and the Feds had better fund it. You can't place a burden like that on the states and expect them to deliver. So funding, and some reform of the law, has to get done. I don't think testing should be the only evaluation of students. There's a place for it, but we're building a nation of robots by teaching to the test. I have significant concerns about No Child Left Behind that need to be addressed.

DD: What about beyond that. Would you support a second stimulus focused on the states?

JG: I don't know whether there will be a second stimulus. But the problem is pretty elemental. California is the 7th, 8th-wealthiest place on Earth. We have made a decision, and it was a decision, not to invest in education. We have plenty of money to fund it, but we made the decision not to. The leadership has refused to use that wealth in the greatest resource we have, and that's our education system. It's clear to me that the federal government cannot substitute for the effort that California must make for themselves. We need investment, coupled with serious reform, to break the gridlock. Voting to tax students by raising college rates is just insanity. And the regents and trustees refused to support legislation for an oil severance tax to fund higher education. I brought it to them, and they wouldn't support it. We are the only oil producing state with no tax on the natural resources coming out of our ground. The oil companies have been able to take it for free for over a century. It's madness.

So the federal government cannot substitute for California. But I'll fight to bring money back to the state. First by funding No Child Left Behind. And also, there's the issue of medical services. The formula for state participation in Medicaid in California is 50-50, an even split between the Feds and the state. In other big states, that ratio is different. In Illinois, New York, it's more like 60-40, 70-30. Getting a better split in that formula represents a huge amount of money for California. And there are numerous formulas like that. So experience counts in understanding all that.

DD: OK, final question. On your website, I noticed very strong language supporting Israel, and also warning Iran not to continue with their alleged nuclear program. And you advocate for stopping shipments of refined oil to Iran if they refuse to cooperate. Now, I'm assuming that was written before the most recent uprising.

JG: It was, yes.

DD: Do you still believe, given the events over there, that it's a good idea to stop refined oil shipments, when it may hurt not the regime, but the very people in the streets who are resisting it?

JG: There's no doubt that the effect of an embargo would hit the economy and the people. That's what it's designed to do. I've thought long and hard about this, after watching the events take place, and I still believe in the concept. What you have over there is the current government's legitimacy being questioned. Does that mean they are more willing to negotiate on the nuclear program, to bring something tangible to the people? We don't know. So I think you have to pull together the interested groups, and that's Europe, and Russia, Pakistan, the Arab states, they might be more interested than us. And you create a larger coalition to change the behavior of the government. The uprising actually helps in that regard. And like in any negotiation, you have to have a big stick. So I would not drop the embargo possibility. And again, all of this is down the road a piece. Now another big stick would be bombing their facilities, and I think there are some unadvisable consequences to that. So I'd rather use the other stick.

DD: Thanks so much for talking to me today.

JG: Thank you.

Cash For Clunkers Extension Sails Toward Senate Passage

A rare bit of good news from the Senate, as an extension of cash for clunkers looks primed for passage.

The Senate will approve another $2 billion for the popular "cash for clunkers" program, probably by the end of the week, confident Democrats predicted Tuesday as Republican efforts to block the funding faded.

"We'll pass cash for clunkers. Before we leave here," said Senate Majority Leader Harry Reid, D-Nev. "The vast majority will be voting for this," added Sen. Carl Levin, D-Mich. The Senate is scheduled to begin a month-long summer recess Friday.

Many Republicans, realizing that constituents and auto dealers were pushing hard to continue the program, reluctantly agreed.

"I don't get a sense anyone will block it," said Sen. Judd Gregg, R-N.H., the top Republican on the Senate Budget Committee.

I don't know who would stand in the way of a wildly successful economic program and the first sustained benefit to the manufacturing base of this country in over 30 years. And the statistics on fuel economy are far, far better than anybody thought they would be. Sure, this is not the entire answer to the climate crisis. That's not its intention. The intention is to leverage $5 billion dollars into the economy, and extending the program would leverage another $10 billion. The fuel efficiency issue concerns adding 10mpg to a not-all-that-trivial 750,000 cars. But that was never the main goal.

The country needs a stable economy and job creation. This program provides it, with a reduction in foreign oil as a side benefit. Win-win.

Wild Success Of Government Program Shows How Government Can't Run Anything

Amazingly enough, they're getting away with this message.

The government’s “cash for clunkers” program become the latest political flashpoint on Sunday, with Obama administration officials urging the Senate to approve more money for the initiative and Republicans raising concerns about it [...]

Republicans say the problems with the program are another strike against the Obama administration as it pushes for a speedy overhaul of the health care system that would involve a government-run insurance program. They argue that government involvement in any industry is a recipe for disaster.

Senator Jim DeMint, Republican of South Carolina, said the “cash for clunkers” program was an example of the “stupidity coming out of Washington right now.”

“The federal government went bankrupt in one week in the used-car business, and now they want to run our health care system,” Mr. DeMint said in an interview on “Fox News Sunday.” “This is crazy to try to rush this thing through again while they’re trying to rush through health care, and they want to get on to cap-and-trade electricity tax. We’ve got to slow this thing down.”

Let's number the "problems" with the program:

1) it's too successful and too many people want the rebate
2) the government Web site where the rebates get processed is getting killed because too many people are trying to access it
3) the rebates are going to "middle-class people" who may have eventually bought a car anyway
4) car dealers haven't gotten their rebate checks yet after a week

Are these even rational complaints? They boil down to "the program is too good a deal." I would agree, leveraging $5 billion dollars through the economy in a week is a pretty good deal for those on Main Street looking for some economic activity. There is a residual economic effect to selling a quarter of a million cars that increases hiring throughout the country as well.

While the program could stand with a few tweaks, and I stand with Sens. Feinstein and Collins on improving the fuel efficiency standards, the bottom line is that the program has a great economic multiplier effect, has been unexpectedly strong in increasing mileage rates among new buyers, and has been a boon to the middle class, which gets approximately nothing from their government 99% of the time. Republicans are going to carp at anything Democrats do, but what they are objecting to in this case is revealing. They don't like to see successful government programs that work.

Cash For Clunkers Looks To Be Success

So the government inaugurated that cash for clunkers program this week. How's it going? Well...

The U.S. government will suspend the popular cash-for-clunkers program after less than four days in business, telling Congress that the plan would burn through its $950-million budget by midnight, several sources told the Free Press [...]

The decision to suspend the plan came after auto dealers warned the government today that it was in danger of losing track of how many trades had actually been made.

The plan offering owners of old cars and trucks $3,500 or $4,500 toward a new, more efficient vehicle has proven wildly popular, with 22,782 trades certified by federal officials since Monday. But the National Highway Traffic Safety Administration told dealers Wednesday that a vast majority of transactions submitted were being rejected for incomplete or illegible paperwork.

A survey of 2,000 dealers by the National Automobile Dealers Association, the results of which were obtained by the Free Press, found about 25,000 deals not yet approved by NHTSA, or about 13 trades per store. With 23,005 dealers asking to be part of the program, auto dealers may have already arranged the sale of more than the 250,000 vehicles that federal officials expected the plan to generate.

OK, so some problems with implementation. But in general, you're talking about a wildly popular program. I think that the speed of the deals shocked those carrying out the rebates, but I expect that to get ironed out soon enough. And you're basically talking about $1 billion dollars leveraging about $4-$5 billion dollars through the economy within four days and saving an unspecified amount of oil through the sale of almost a quarter of a million more fuel-efficient cars. The fuel efficiency standards could have been higher, no doubt, but taking out a quarter of a million crappy gas guzzlers is great, and $5 billion in economic activity where none would otherwise exist is an excellent mini-stimulus.

I also like DiFi's stand, after Michigan lawmakers vowed to seek additional funds for the program, that she would block anything unless the fuel economy gains were boosted. The taste has been offered to Detroit, and now they'd be hard pressed to say no.

Now, let's offer money to people to paint their roofs white.

Genetically Modified GM

In just a little over a month, a bankruptcy judge approved the sale of GM to essentially itself, which took effect in a record amount of time.

General Motors Corp. sped toward a record-short escape from bankruptcy protection Thursday when a judge's order approving the sale of most of its assets to a new company went into effect.

The order, delayed four days to allow time for appeals, became effective despite a last-minute appeal from plaintiffs in an Arizona product liability case against GM involving a Chevrolet Malibu.

GM spokeswoman Julie Gibson said U.S. Bankruptcy Judge Robert Gerber's order allowing the sale became effective at 12 p.m. EDT. GM lawyers are working on paperwork to close the sale as quickly as possible, after which GM would leave bankruptcy protection.

Once the world's largest and most powerful automaker, GM will become a leaner and greener company, cleansed of debts and burdensome contracts that nearly dragged it into liquidation.

But it faces brutal international competition and the worst auto sales market in more than 25 years.

Emerging from bankruptcy in 39 days, considering the size of the company and the nature of the tangle of debt, is pretty remarkable. Some predicted 6 months.

The question becomes, "Now what?" Nobody's buying cars, and GM still has some significant legacy costs, particularly in that little thing called health care, which we want to reform so American businesses can actually compete on a global stage. Sadly, keeping the employer-based system largely intact won't do much for GM. Sadly, I don't think Congress is taking into account the importance of how what we'll see on the other side of the health care debate can help businesses and manufacturing.

...the geniuses in Congress want to reverse the closing of thousands of auto dealerships, saddling GM and Chrysler with costs they cannot possibly manage and basically kissing billions of taxpayer dollars goodbye. Great move, guys!

The Real Numbers On TARP

We hear all about these $700 billion dollar bailouts for the banks. And to be sure, they're awful. But they are somewhat less awful than advertised.

The Congressional Budget Office has put out its latest calculation of the loss taxpayers will take on the TARP bailout.

CBO estimates that the subsidy cost of the transactions (broadly speaking, the difference between what the Treasury paid for the investments or lent to the businesses and the market value of those transactions, including repurchases of preferred stock) amounts to $159 billion.

The automobile bailouts look particularly grim. Of the $55 billion that went out the door, CBO expects $40 billion will never be returned.

Also, $50 billion of this goes to the foreclosure mitigation plan (although this needs some scrutiny, because the money does not appear to be getting to people who need it), and $35 billion for AIG (although a lot of that was a pass-through to the banks). That's $125 of the $159 billion. Just the straight payments to the banks are being recouped at a fairly high rate, although there's no way they could be considered "investments" - all of them will come in at a loss.

Considering the big banks largely broke the system - a system which is still broken, by all accounts - giving them ten cents doesn't please me. And the Treasury Department looks like they're offering a bad deal for taxpayers for the shares entitled under TARP. But this really is significantly less money than feared, and certainly not the budget-buster assumed. Relative to the stimulus, which provides a lot of money to real people and creates jobs, the TARP bailout is looking smaller.

Cash For Clunkers

Included in the supplemental war funding bill passed by the House yesterday was a measure providing $1 billion in funding to a program called "Cash for Clunkers," which essentially works like this: the government will offer vouchers of up to $4,500 for car owners to turn in their inefficient vehicles for a new model which improves on that fuel efficiency. Ultimately, the program would spend up to $4 billion to get 1 million "clunkers" off the road.

There's actually been a lot of criticism from environmental advocates over the program, but it seems to me that its primary goal is to induce $10-$15 billion dollars of economic activity. The government offers $4,500 or so to leverage $15,000 or more of spending per car, and that goes to dealers, suppliers and manufacturers. The environmental impact is a secondary characteristic of what amounts to a micro-stimulus. Now, there have been some very compelling articles about how this particular program doesn't go far enough - although I would add that getting vehicles that offer 18mpg or less off the road and putting those people into any kind of car that gets half-decent, even below-average mileage saves a LOT more gas than putting people from a Honda Civic into an electric car. That's just a mathematical fact. So while it seems like nothing switching from a car that gets 18mpg to 22mpg, as the program incentivizes, you save more gas that way than switching from 50mpg to 100mpg. You can see if your car qualifies for the program here.

But again, the primary goal of this program appears to be getting $15 billion dollars cycled through the economy. Hiding that money in holes and allowing people to dig the money up is similarly wasteful, inefficient and inequitable - but it would be precisely what John Maynard Keynes would proscribe. Auto spending is the largest purchase that non-wealthy consumers make outside of housing, and incentivizing that activity would have a stimulative effect. Plus, considering that we own a lot of GM and Chrysler, this would in effect allow the government to pay itself.

Again, the details of this particular cash for clunkers plan may not be ideal. But putting it into the stimulus tells me two things. One, the Administration knows that we need economic stimulus. The economy continues to fall apart, with double-digit unemployment just around the corner, and even a leaky stimulus measure makes a lot of sense right now. If it reduces emissions - and nobody questions that it does, just not enough - that's gravy. The White House probably sees the prospect of a big stimulus unlikely in the short term, and so sneaking this cash for clunkers measure into the war spending bill at least leverages a nice piece into the economy.

Two, I think this means Waxman-Markey, the climate and energy bill, is in a lot of trouble. Despite the fact that it would actually reduce the deficit, the concerns about cost have caught fire on the right, mainly through persistent lies. The bill had to be seriously gutted to get passage out of the Energy and Commerce Committee, leading many on the left to slam it, sometimes in misleading ways, as David Roberts notes (Waxman-Markey does NOT give away 85% of carbon allowances to polluters). But cash for clunkers initially made its way into Waxman-Markey. That the Administration took it out and sped it up does not speak well for their beliefs about its passage in the short term. Maybe they just want to kickstart the auto industry faster, but it seems to me there's a lot more talk about things like painting everybody's roof white than passing a comprehensive climate and energy bill. And that's a big worry.

...so I'm providing the concerns with this iteration of the bill, the trigger point for vouchers can be as lot as 1mpg; there is a sense that poor people who need a car wouldn't be able to get one with such a voucher and should be able to step up with used cars (in other words, buy a used vehicle with better mileage than their current vehicle, kind of a clunkers-for-super-clunkers); and Japanese automakers would have a better time of things with this bill than American ones.

There's Bankrupt And Then There's Bankrupt

It was practically the same scene at the White House today, the same anxious tableau behind a President making the claim that the bankruptcy of an American auto giant actually signals a new beginning and a road to profitability and respectability.

General Motors filed for bankruptcy on Monday morning, submitting its reorganization papers to a federal clerk in Lower Manhattan in a move that President Obama said marked “the end of an old General Motors and the beginning of a new General Motors.”The bankruptcy of a once-proud auto giant that helped to define the nation’s car culture and played a part in creating the American middle class immediately rippled across the country, part of a process that the president said would take “a painful toll on many Americans” but lead ultimately to a strong company ready to compete in the 21st century.

Then comes the fine print. General Motors apparently had $82.3 billion in assets and $172.8 billion in debts. $172.8 billion! I don't know how you rack up that much debt without it carrying over through years if not decades.

We're still talking about the closing of over a dozen plants and factories, which will ripple through the supplier market. 21,000 union workers will lose their jobs. 40% of the dealers will close. The retiree health care fund will now be partially composed of stock that right now is trading for pennies.

The government will drop another $30 billion into the car company on top of the $20 billion already dropped, winding up owning 60-70% of the company, and while officials predict a recoup of that investment within five years, I don't think anyone would stake their life on that. With a collapse in wages and wealth, and no more home equity ATM, new car sales just won't rebound without serious prodding from government (like a cash for clunkers deal).

This has been coming for a long time, of course. Michael Moore, who owes a lot of his prominence to GM, in a weird way, with his first major film Roger & Me about the shuttering of a plant in Flint, warned about this 20 years ago.

It is with sad irony that the company which invented "planned obsolescence" -- the decision to build cars that would fall apart after a few years so that the customer would then have to buy a new one -- has now made itself obsolete. It refused to build automobiles that the public wanted, cars that got great gas mileage, were as safe as they could be, and were exceedingly comfortable to drive. Oh -- and that wouldn't start falling apart after two years. GM stubbornly fought environmental and safety regulations. Its executives arrogantly ignored the "inferior" Japanese and German cars, cars which would become the gold standard for automobile buyers. And it was hell-bent on punishing its unionized workforce, lopping off thousands of workers for no good reason other than to "improve" the short-term bottom line of the corporation. Beginning in the 1980s, when GM was posting record profits, it moved countless jobs to Mexico and elsewhere, thus destroying the lives of tens of thousands of hard-working Americans. The glaring stupidity of this policy was that, when they eliminated the income of so many middle class families, who did they think was going to be able to afford to buy their cars? History will record this blunder in the same way it now writes about the French building the Maginot Line or how the Romans cluelessly poisoned their own water system with lethal lead in its pipes [...]

Let's be clear about this: The only way to save GM is to kill GM. Saving our precious industrial infrastructure, though, is another matter and must be a top priority. If we allow the shutting down and tearing down of our auto plants, we will sorely wish we still had them when we realize that those factories could have built the alternative energy systems we now desperately need. And when we realize that the best way to transport ourselves is on light rail and bullet trains and cleaner buses, how will we do this if we've allowed our industrial capacity and its skilled workforce to disappear?

Moore has some very smart suggestions, including one I've made for a while - converting the auto production lines to create clean mass transit vehicles and high speed rail cars, fighting climate change while funding a real economic recovery that is tangible and creates infrastructure. Other factories could be retooled to produce wind turbines and solar panels. He wants a massive increase in the gas tax to pay for it, but we could do just as well using the $30 billion we're about to dump into GM and profiting from the economic growth of added production and jobs.

To the extent that there's any hope from this bankruptcy, it's that we can at least start to move away from the obsessive car culture that has poisoned our planet and cannot sustain itself. Any increase in economic activity will be accompanied by a spike in oil prices - heck, we're already seeing a spike because of less bad economic news. We need to start adjusting away from the oil-based economy, and the collapse of two major car companies can provide at least an impetus.

The Bondholders Crack

Looks like GM's bondholders jumped aboard at the last minute:

The revised offer to the holders of $27 billion in unsecured GM bonds amounted to a take-it-or-leave-it ultimatum: Go along with what the government auto task force's proposal or be left holding the assets a new GM doesn't want — ones with presumably little value at all.

In addition to the 10 percent of the stock in a newly formed GM that was originally rejected by bondholders, the new offer would give them warrants to acquire an additional 15 percent stake at a deep discount. That would come only if they agree to support selling the company's assets to a new company under bankruptcy court protection.

Basically, the government made them an offer they could not refuse. I think they got a worse deal than Chrysler's bondholders.

As long as I view this as basically an extension of the stimulus package, I think I can live with it. But I still worry about the autoworker pensions coming out of these bankruptcies. That hasn't been well-defined just yet. And this isn't pleasing:

"We will come out of this rid of some of the historic legacy costs that have been dragging us down for the last 20 years or so," GM Vice Chairman Bob Lutz said Thursday at an Automotive Press Association luncheon in Detroit. "We will come out of it with an all new focus on product development."

I guess the retiree health fund gets a piece of the company in this deal, so maybe they can save something for the workers. But really this is just a bad scenario, especially if it fails to save GM or Chrysler. It's hard to feel good about these deals.

The GM Bankruptcy

The offer to GM's bondholders was even punier than the offer to Chrysler's. And the bondholders predictably rejected the offer. So off we go into another bankruptcy. Under the terms of the deal, the government would take a much higher stake than they did with Chrysler.

The latest plan for the troubled automaker, which is expected to file for bankruptcy by Monday, calls for the Treasury Department to receive about 70 percent of a restructured G.M.

Including the more than $20 billion that has already been spent to prop up G.M., the government will provide G.M. at least $50 billion to get the company through Chapter 11, people with direct knowledge of the situation said Tuesday. By some estimates in Detroit, tens of billions beyond that amount may be required.

The United Automobile Workers, meanwhile, will hold up to 20 percent through its retiree health care fund, and bondholders and other parties will get the remaining share. Shareholders would be virtually wiped out.

Because of the publicly traded nature of the company, this will be a long and complex bankruptcy filing, unlike Chrysler, which appears to be moving right along. The government would be a silent partner, hoping to sell their shares as soon as the carmaker gets back on its feet.

Taxpayers will have invested around $50 billion into GM before this is over. I'm trying to understand how this makes sense. That's a lot of money to put into the hopes of the Chevy Volt. Maybe you can see this as an extension of the stimulus, saving another million or so jobs by keeping the architecture of the auto industry, and its suppliers, in place. That's about the only way I can stomach it.

The Next Auto Bankruptcy

As soon as I heard that GM and the United Auto Workers reached a deal similar on the merits to the Chrysler/union restructuring deal, I knew that the bankruptcy filing wouldn't be far behind. WaPo says next week, but more interesting than that, they claim that Chrysler will come out of bankruptcy as GM goes in:

The Obama administration is preparing to send General Motors into bankruptcy as early as the end of next week under a plan that would give the automaker tens of billions of dollars more in public financing as the company seeks to shrink and reemerge as a global competitor, sources familiar with the discussions said.

The move comes as the administration prepares to lift the nation's other faltering car company, Chrysler, from bankruptcy protection as soon as next week, industry sources said.

The shifts into and out of bankruptcy are landmarks in the Obama administration's attempt to broker a historic restructuring of the American auto industry in the space of months.

We're looking at $45 billion in loans, making it the largest investment in any company outside of AIG, I think. And the government would take 50% ownership in the deal. And the government is probably buoyed by the success and speed of the Chrysler bankruptcy, where virtually all the bondholders were eventually crammed down and the bankruptcy judge has expedited the process. Presumably they believe the same will happen with GM.

The loss of 2000 dealerships will really put a cramp on local economies. At least in Southern California, some cities have dozens of dealerships along a particular boulevard, and they account for a substantial portion of local sales tax revenue. These communities have already felt the pinch, but closure would devastate them.

Clearly the Administration has made up its mind that this is the best solution. But this is also why a robust public health care option must be invoked. The government has spent something like $55 billion on GM and Chrysler (with another $10 billion or so on GMAC, the financing arm). It could apply that to health care and suddenly make companies like them, and thousands of others, globally competitive.

The Big Shift On Cleaner Cars

I'm looking at the President's speech on raising gas mileage standards and finally putting to an end the slow-walk approach to reining in greenhouse gas emissions. My state Senator, Fran Pavley, is there, and there may be nobody more responsible then her for this day. She authored the landmark tailpipe emissions law in the California legislature that provoked this eventual solution. And as Kate Sheppard explains, this is really a big step.

The move will push the entire country to meet the aggressive standards proposed by the state of California. California and 13 other states had requested a waiver from the U.S. EPA that would allow them to set tougher auto-emissions standards than the federal government by requiring cars to reduce their emissions of carbon dioxide—and the only viable way to cut CO2 emissions is to require cars to get better gas mileage. The Bush administration denied California’s request last year, but Obama directed the EPA to reconsider the petition almost immediately after he took office.

The Obama administration will now officially grant California’s request for a waiver, and at the same time will adopt California’s standard for the whole country. This means fuel-economy and emissions standards will be combined into one straightforward set of rules [...]

The announcement will also be an opening move for the EPA in its fight against global warming. Last month, the agency indicated that it intends to begin regulating greenhouse-gas emissions under the Clean Air Act, having determined that planet-warming gases threaten human health. EPA’s first target was expected to be mobile sources—i.e., cars and trucks—which account for 20 percent of all U.S. emissions.

The move will please the Auto Alliance, the major industry group representing car makers, which has been asking for one standard that unifies emission and fuel-economy standards across the whole country.

Environmentalists do not consider this a backtrack or a compromise at all, but the "single biggest step the American government has ever taken to cut greenhouse-gas emissions," according to Daniel Becker of the Safe Climate Campaign. The cost of cars will increase, but the reduction in fuel costs will offset that.

And this shift will aid the climate and energy legislation moving through the House. Obviously the White House is signaling that they're moving forward, and the Congress can either get involved in the solution or sit back and watch. I have no doubt that Obama's EPA will be vigorous in pulling the trigger on regulating more greenhouse gas emissions, for example from power plants, in the absence of legislation.

Cash For Clunkers - An Innovative Idea From Washington? The Devil You Say!

I support a 'cash for clunkers' program not because it would help the US auto industry and increase consumer spending. It would really reduce emissions at the low end and green the fleet. And I don't buy the criticism that nobody would participate in the program. Right now, because of the economic downturn, we are seeing cars that would have otherwise been junked remain on the road. Those are precisely the cars targeted. Allowing people to turn them in for cash they can use to buy more efficient vehicles would reverse that bad outcome and have an environmental impact besides. It's benefited Germany, France, Italy and other countries who have adopted the policy. And it looks like the House struck a deal moving this forward.

In a major advance for the so-called “cash for clunkers” program, House negotiators reached a tentative agreement on a plan that would award vouchers of up to $4,500 to vehicle owners who trade in their old cars for more fuel efficient models.

Under the House plan, a car trade-in that improves fuel efficiency by at least 10 miles per gallon would qualify for a $4,500 voucher, as would the trade-in of a small truck that improves efficiency by 5 miles per gallon. The new vehicle must have a minimum fuel efficiency rating of 22 miles per gallon for cars and 18 miles per gallon for small trucks.

A car trade-in that improves fuel efficiency by at least four miles per gallon would qualify for a $3,500 voucher, as would a small truck trade-in with a two mile per gallon improvement.

Those fuel efficiency ratings don't sound like a lot, but improving 10mpg to a low-mileage car saves a lot more gas than improving 10mpg to a high-mileage car, and essentially this program is designed to do just that.

Negotiators plan to stick this inside the larger energy bill, where its benefits can weigh on auto-state lawmakers who might otherwise be tempted to reject the whole thing. So while "cash for clunkers" doesn't solve the problem of reducing fuel consumption completely, it doesn't have to do the whole lift by itself. And as fuel economy standards are finally set to rise, this proposal would actually get those more fuel-efficient cars out the door and onto the road. Hopefully this will help the larger energy bill pass.

...As for increasing biofuels, some harm more than help, but hopefully this can spur innovation so that we can run cars on banana peels like in Back To The Future.

The Hedge Funds Destroy The Economy, Again

Over the last 30 days, Chrysler secured deals with their union. They got the bondholders to take 28 cents on the dollar. They made a deal with Fiat. They lined up pretty much every stakeholder and got them all to share in the pain. And then the hedge funds said no and forced them into bankruptcy.

Chrysler LLC is going to file for bankruptcy, an administration official confirmed to CNN Thursday.

The filing comes after some of the company's smaller lenders refused a Treasury Department demand to reduce the amount of money the troubled automaker owed them.

Chrysler officials had no comment on the bankruptcy report. The company faces a Thursday deadline from the Treasury Department to reach deals with creditors who had loaned the company about $7 billion.

But the filing will not mean the halt of operations or liquidation for the troubled 85-year old automaker. Instead, the administration expects to use the bankruptcy process to join Chrysler with Italian automaker Fiat.

In addition, the United Auto Workers union announced late Wednesday night that its membership at Chrysler had overwhelmingly ratified a concession contract reached between the company and union leadership on Sunday night.

This will be a quick bankruptcy, since most of the deals are in place. But in this case, the hedge funds (they are the "smaller lenders" referenced in the article) are more likely to get a better deal from a bankruptcy judge. And we're certainly going to see if anyone trusts buying a car from a company in bankruptcy. So Chrysler comes out of this, but diminished, because the hedge funds demanded payment.

Now can we tax their income as income instead of capital gains?

...Obama on the hedge funds, just now:

While many stakeholders made sacrifices and worked constructively, I have to tell you, some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them. I stand with Chrysler's employees, its families and communities. I stand with Chrysler's management, its dealers and suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don't stand with those who held out when everybody else is making sacrifices.

Obama had an interesting bit last night where he talked about the enormous scope of the political landscape, and how "I can't get the banks to do what I want them to." It was a telling example.

...By the way, the biggest windfall for the hedge funds is that they bought lots of credit default swaps that they can now cash in on to hedge their investment with Chrysler. They stand to gain much more money with Chrysler in bankruptcy. And ultimately, that was the decision they made. We're talking billions.

Shrinkage Of The US Auto Industry

It looks now like GM and Chrysler will avoid bankruptcy, by consolidating operations, giving stakeholders a haircut and basically shrinking the size of the American auto industry. Chrysler's biggest lenders reached a deal with the Treasury Department to accept about 28 cents on the dollar for the company's debt. Add this to their deal with the UAW forcing them to accept losses, and an imminent deal with Fiat, and the automaker will presumably meet the requirements to borrow another $6 billion in federal assistance.

As for GM, they're essentially shrinking their output, cutting brands like Hummer, Pontiac, Saab and Saturn, and closing up to 1,000 dealerships (though that's on top of what could be another 1,600). That's likely to put 130,000 people out of work at least.

Emptywheel has this to say about the GM restructuring:

That said, today's plan finally gets around to cutting the number of dealers that GM will need to cut to turn itself around--they're talking of closing 2,600 of their 6,200 dealers across the country (did I say tons more job losses?).

On a conference call with GM CEO Ray Young, I asked how they were going to pull this off--was the government going to help them get out of their contracts? As a later questioner noted, the elimination of the Oldsmobile dealers was a very costly process. Young basically said that GM now could use the Oldsmobile process as a lesson in how not to do things.

That said, Young wasn't prepared to explain how GM plans to get out of 2,600 dealer contracts without billions in costs. The government is not going to help--so this is still an area where bankruptcy would offer an advantage to GM over this restructuring. Young said the impacted dealers would be approached over the month of May, and dealers would be wound down over 2009 and 2010. One of the reasons for the big factory idling, he explaned, was to help dealers sell down stock before they closed up shop (which means dealers may be able to pay off their debt before closing their business.

I'll again point out that it makes perfect sense to shrink the part of the American auto industry that makes AUTOMOBILES, but not to shrink the companies that could make other useful durable goods; namely, wind turbines, high speed rail cars, and other factory-produced items. Why can't GM and Chrysler get in on those contracts? Why would we build up new factories instead of retooling the ones we have?

Victory, Comrades!

So the American automakers are slowly moving toward their final positions. Chrysler put together a deal with the UAW to save them $200 million a year, and similar deals will probably be applied to Ford and GM. Obviously, Chrysler's deal with Fiat must still be consummated. As for GM, looks like we're all going to own it, and I trust this means we all get a discount.

The U.S. Treasury would own at least a 50 percent stake in General Motors under a plan the company released today to avoid bankruptcy.

The strategy would essentially formalize the government's control over one of the icons of corporate America.

"I'm a believer in dealing in reality," GM chief executive Fritz Henderson said in announcing the new plan. "We've gotten great support from the Treasury. It has viewed this matter from day one as a kind of private equity investment. It has pushed us in a lot of ways."

The announcement came as the company said it would further shrink the number of workers, dealers and types of cars in an attempt to prepare it for a United States shrunken by the recession.

Henderson said GM will eliminate 21,000 jobs by next year and phase out its Pontiac line as part of a last-ditch restructuring effort to keep the company afloat and win additional government aid.

Now this would be some ACTUAL socialism in the traditional sense. I understand the concept of trying to save all these manufacturing jobs, but I agree that a state-owned GM, at a time when the Administration is seeking policies that move away from large auto manufacturers with the product profile of a GM, could be a problem. What I've often little understood is why the government couldn't offer contracts to companies like GM to retool their factories to make high-speed rail cars and wind turbines and other physical parts of the green economy. Maybe this could be a step toward it.