Thursday, April 8, 2010
I am in the middle of reading a terrific book about the auto industry.
Written by Paul Ingrassia, a long-term industry reporter for the Wall Street Journal, the book does a good job at detailing the many mistakes that both management and labor unions made over the last few decades that lead to the bankruptcy of Chrysler and General Motors.
The problems of the auto industry were known for decades. Indeed, my first job after graduating from the University of Michigan in the late 1970's was at Comerica Bank in Detroit, where some of my colleagues were heavily involved in the first Chrysler bailout.
After Chrysler repaid the government in 1983, it was back to "business as usual" for the Big Three auto companies, and they enjoyed a number of years of prosperity. However, the problems in the industry were never properly addressed, which lead to their eventual ruin.
I am reminded of this when I read stories about the huge fiscal debt problems at both the federal as well as the municipal levels. We all read the stories and say "Gee, this is a real problem" but then, when there is no immediate impact, we assume that somehow the problems will all work themselves out.
This was the case in the auto industry. Most analysts knew that the labor contracts the Big Three were signing were saddling future generations with unsustainable burdens, but no one really seemed to care. The Japanese auto manufacturers were producing better cars at attractive prices, but this too was viewed as more of a curiosity than a concern.
So today we think that the fiscal problems are more of an intellectual discussion than a real issue. But the day of reckoning is coming, and may be here sooner than we think.
In the end, there are really only two choices to make: either raise taxes significantly (on everyone, not just higher income taxpayers) or cut government expenses (which largely rests on the highly unpopular decision of reducing payments to seniors and pensioners).
Sovereign debt crisis at 'boiling point', warns Bank for International Settlements - Telegraph