Pulling the Splinter Out

“Where would U.S. incomes, earnings and corporate cash-flows be today if it weren’t for the $4.5 TN increase in federal debt over the past 10 quarters? Ponder for a moment the liquidity backdrop in the Treasury market had the Fed not intervened in the marketplace with quantitative easing (#1) and “QE2” - in the process convincing the marketplace that the Fed had committed to operating as a reliable market “backstop bid?” What would be the state of the household balance sheet today if not for the unprecedented fiscal and monetary policy response? Is it sound analysis to trumpet the pristine state of the corporate balance sheet and celebrate the improving household balance sheet - when the Fed is doing unconscionable things to its balance sheet and the federal government is in the process of destroying theirs?”

“How would global markets and economies be functioning these days had it not been for the almost $1.6 TN increase in international central bank reserve holdings over the past 12 months – or the $2.75 TN, 40%, growth in two years, to $9.45 TN?”

“Today, ECB President Trichet stated that “it is important that the dollar is a strong currency.” He also said that “fixing imbalances must focus on deficit countries.” To this day, Greenspan argues that foreign central bank Treasury purchases were instrumental for the rate environment that inflated our nation’s housing Bubble. And the argument that our trading partners – and their undervalued currencies and steady accumulation of American I.O.Us – are most responsible for global imbalances will not be resolved anytime soon.”

“Let the world adjust; just ensure that the Fed keeps doing what it's doing. And I just scratch my head in disbelief at how little we’ve allowed ourselves to learn over a turbulent 20 year period of interplay between “activist” policymaking and serial market Bubbles. After doubling mortgage Credit in seven years, our system is now on track to double federal debt in 4 years. And the markets couldn’t be more pleased with it all. It leaves one pondering what type of circumstance will be necessary to finally force us to start getting our house in order – to return to some semblance of disciplined central banking and fiscal responsibility.” David Nolan - Weekly Commentary


As I was reading the above quote I really started to think about everything our government has inserted itself into and had to start thinking: Where would our economy be if our government had not made money and services so easily accessible to all?

I think that really you can take two views on that. You can either say that we would be in a complete pit of depression for years (probably what the fellow I quoted believes) after each economic correction or you can believe that deep down that Americans are workers. When our backs are against the wall, and sometimes even when they aren’t, we step up to the plate and work harder putting us into a new boom cycle.

So where do I think we would be without government “help”? I think we would be regularly going through the boom and bust cycles we have been, but with a lot less of the extremes like we saw in 2008, and in general we would be prospering. Of course the government and central bank did step in too much and now they will have to get out or we will again have a huge burst. When they do step out of the way it is going to hurt. This interference has become very much like a splinter that has been allowed to fester for too long. Sure we could leave it there and keep covering it up or we can remove it (with all of the complaining and whining that comes with it) and finally start the healing process. While I don’t believe that many of our current representatives have the stomach for it, some do. Also, while there is a lot of anger out there and most can’t agree on how to start getting the splinter out, most agree (according to some polls I have read) that it has to come out now.

If Only...

"Winds of Change in Unionland" by Holman Jenkins

How's the view from Solidarity House? Just asking.

Solidarity House is the headquarters of the United Auto Workers in Detroit, whose windows gaze figuratively across the labor hinterland of the upper Midwest. At least it used to be a labor hinterland, though its politicians this week are taking an axe to public-sector unions. In Indiana and Michigan, proposals even target private-sector unions with bills to turn those states into "right to work" states, like Tennessee or South Carolina.

It all serves to underline the improbability of the agenda rolled out in January by the UAW's new boss, Bob King. Mr. King's grand plan is to organize Toyota and other transplant factories in Southern states where unions already aren't popular, where the laws already are unfriendly, and where previous campaigns have yielded nothing but defeat.

That Mr. King is not dumb is illustrated by his success in a previous job. He led the UAW's successful drive a decade ago to organize the auto parts suppliers. He won by playing the only card the UAW has to play, its politically-protected labor monopoly over the Big Three. He leaned on the Big Three to lean on their suppliers to accept the union on a card-check basis—without a secret ballot vote. In return, the UAW agreed to stand aside while the Big Three shut down some of their own plants and laid off workers.

That was the deal, and the episode offers three important insights. The union had little else to offer supplier companies or their workers, who folded simply under threat of losing their Detroit contracts.

Secondly, the supplier campaign was a distraction from the fact that the Big Three's own workers were giving ground on jobs and job security.

The third lesson, bluntly, is that Mr. King is blowing smoke about Toyota. The UAW has no card to play. The union's labor monopoly gives it no leverage over the transplant factories, and the union's appeal to their nonunion workers, realistically, is less than zilch right now.

The UAW finale has begun. It's the beginning of the end for the union, except as administrator of its membership's retiree health-care benefits (which increasingly looks like a bone thrown the union by the Big Three to give labor honchos a reason for living).

Let us put away our Woody Guthrie records. Detroit's "turnaround" has come not because everyone got a warm feeling and pulled together as a team. Accurately stating matters, the New York Times recently noted that the homegrown industry's "cost structure has been reduced substantially, first through worker buyouts and plant closings and then by eliminating debt during its bankruptcy."

This has the virtue of getting the chronology right. The big labor concessions all came before a government-sponsored bankruptcy that reorganized GM and Chrysler in 2009. In each case, the union gave ground because it knew the one way to outrun its all-important political support in Washington would be to drive the Big Three into Chapter 11.

Bankruptcy came to GM and Chrysler anyway in the financial crisis, followed by a taxpayer bailout. Mr. King knows, in the current political atmosphere, he can't go back to playing his monopoly card to extract anticompetitive terms from the Big Three.

He says the union has changed and wants a new nonadversarial relationship with management. But what exactly has the UAW got to offer? Evidence is lacking that organized labor actually adds value, creating gains workers and stockholders can share. If it did, Toyota et al. would be clamoring to have the UAW in their factories. They're not.

Mr. King's dilemma is evident in his lukewarm response to the Big Three's opening gambit in this year's quadrennial contract talks, an offer of enlarged profit-sharing. Here's the problem: Incentive pay is earned pay; workers see profits as something businesses create, not something union bosses create. And the foreign transplants will only be too happy to compete on the basis of performance-related pay. If the industry is headed toward compensation based on success, what are workers getting for their UAW dues? Good question.

Mr. King must have figured out the handwaving about Toyota no longer is going to fly. Expect him soon to change the subject to management compensation, especially the stock option and bonus payouts white-collar workers are enjoying as a result of the turnaround. Look for the Obama administration to pitch in with rhetoric about workers being denied their "fair share."
All the while Mr. King will be praying, praying—beseeching the heavens for some change in the political atmospherics to allow the union to go back to playing its monopoly card. Don't bet on it anytime soon.