Is the Education We Want, the Education We Need?

German apprentice steelmaker

My Dad never went to college. He was about four months into a six month hitch in the Army on December 7, 1941 -- that day of infamy. When he returned from the war four years later, one thing led to another and… well, he never went to college.


Perhaps for that reason, I was programmed to go to college from an age earlier than I can remember. It was a matter of faith. I never questioned it -- never felt the need to. So, it seems odd to me that some people are questioning the value of a college degree.

Last week, the Wall Street Journal published an article (Education Slowdown Threatens U.S. ) summarizing the studies of two Harvard economists. Professors Claudia Goldin and Lawrence Katz have calculated the average years of schooling for native born Americans since 1876. Today, the average 30 year old has only 8 months more education than their parents. This contrasts to 1980 when the gap was about 2 years. The Journal posits that this factoid does not bode well for our nation. After all, college grads have fared pretty well during this extended down turn with an unemployment rate of 4.2%, about half of the rate for those with only a High School diploma.

From the Wall Street Journal

The article included a graphic comparing the percentage of the US population that has attained a college degree to other countries. The US was 14th on a list that was led by S. Korea, Canada and Japan. What struck me, however, was that Germany – that’s right, Germany – was 25th on the list.

We all know about Germany, right? It is the economic engine of Europe. It is highly industrialized, produces great manufactured products and runs a trade surplus of about 15 Billion Euros per year. So, if a college degree is so important, how does Germany do it?

Perhaps part of the answer lies in Germany’s apprenticeship program. The tradition of apprenticeship in Europe goes back to the Middle Ages. It is embedded in German society, driven by industry demand and put to good use by high tech manufacturers. The “dual education” system combines on the job training with classroom vocational instruction. Young Germans can choose among 356 occupations including medical assistant, industrial management or optician. It is also a government program.

In this country, ‘A’ students go to Harvard, MIT or Stanford if they can afford it. If not, they may have the opportunity to attend great public universities like the University of Michigan, Indiana University or the University of California at Berkeley.

But, what about the ‘B’ students and ‘C’ students? Many are getting business degrees at lesser schools. Is there value to that approach?

Early in my career, I worked at Citicorp and Goldman Sachs. We hired the best and brightest from the top business schools including those mentioned above. They were management trainees and were paid very well. Smaller businesses couldn’t compete with those compensation packages.

In a small company, you need people with experience, not trainees. So, who will hire the ‘B’ and ‘C’ students? What value is there in a business school degree from No Name University?

Here in Florida, the Dean of the business school at Nova Southeastern University, Dr. Michael Fields, created an innovative program – a Sales Institute -- requiring every business school student to attend at least four courses in sales and sales management. Dr. Fields met resistance from his most important constituents – the faculty and the students.

However, there was one group that loved the program – business owners. The idea that they might be able to hire people who were ready to produce revenue was very appealing. Faculty and students don’t see the value in the less intellectual skill base of the sales profession. Employers see dollar signs.

But you don’t go for an MBA to end up as an apprentice. And, that was the perception of Nova’s program.

But, what’s wrong with apprenticeships? What if we had an education system that provided the real world skills that industry demands?

In Albany, NY, the College of Nanoscale Science and Engineering was started with $1B provided by the state of NY and an additional $13B from industry. The college is educating Americans in nanotechnology used in the manufacture of computer chips and other miniaturized electronic devices. The college has created over 13,000 jobs in that rust belt city and promises to produce graduates with world class skills.

The US Department of Labor has created a program to support structured apprenticeships through the office of Education and Training. Reflecting the political reality of this country, the DOL uses funds that have been reallocated from other projects to support industry led efforts to create apprenticeships.

One example is the National Information Technology Apprenticeship System created by the Computer Technology Industry Association (CompTIA). NITAS took two years to develop and has a goal of training at least 7 million workers in the IT trades. The structure is noteworthy. The government sponsors the program but does not fully fund it, regulate it or make it mandatory. The industry set standards and participates voluntarily because it sees benefit in hiring workers who are more productive on Day One of employment.

The net is this. A better trained, more productive workforce will make it more attractive for free enterprise corporations to invest and create jobs in this country. These jobs will have higher wages than low skill service jobs. Higher wages increase demand for goods and services and grow the economy.

There has been much written about our broken public education system. And, indeed I agree with most of the criticisms. But, if you could fix the problem tomorrow for, say, all the third graders in America, we would still be 20 years away from feeling the economic impact. Apprenticeships can have an almost immediate impact and don’t require tax dollars to develop.

The ultimate question is whether initiatives that take us in this direction will encounter the same resistance that Dr. Fields encountered. Are Americans ready to have their children become apprentices rather than college grads?

Or, to put it another way, would my Dad have approved? Or, your Dad?

Is This a Claude Rains Moment?

Claude Rains as Captain Renault

I love old movies. Perhaps it’s because I grew up watching them. In those pre-Sesame Street days, after school television was largely a choice between soap operas and the Million Dollar Movie. Independent NY channel 9 (WOR-TV) would run the same movie twice a day for five afternoons. So, I grew up watching old movies from the 30’s and 40’s. Perhaps that would explain my poor social skills.



One of my favorites (and, I am not alone on this) was Casablanca. The romantic WW II classic starring Humphrey Bogart and Ingrid Bergman had a great supporting cast including Claude Rains as a corrupt French policeman.

The ordering by the Nazi’s to find a reason to shut down Rick’s Café (Bogart’s establishment) elicits the following dialog between Rick and Rain’s Captain Renault

Rick: How can you close me up? On what grounds?
Captain Renault: I'm shocked, shocked to find that gambling is going on in here!
[a croupier hands Renault a pile of money]
Croupier: Your winnings, sir.
Captain Renault: [sotto voce] Oh, thank you very much.

I thought of him this week when the news broke of members of the Secret Service and (gasp!) our very own military were discovered to have engaged the services of prostitutes in Colombia. I am shocked, shocked to find that members of our military and Secret Service engaged the services of prostitutes.

But, this is not a joke. There are a couple of issues here:

Prostitution is legal in Colombia. What's the controversy? Are we to hold these public servants to a standard that is above the law? Who sets the standard? How does a member of the Secret Service know what the standard is?

Well, there is a higher standard. It’s called a security clearance. And, though I seriously doubt that everyone who engages the services of a prostitute has had theirs lifted, in this case, that’s exactly what happened.

But, I wonder. Are activities that are legal some places but not others permissible? Drugs are legal in Switzerland and prostitution is legal in the Netherlands. Should members of the Secret Service be precluded from engaging in legal activities in other countries if they are not legal in the US?

The larger issue, of course, is the potential security risk associated with inviting prostitutes into a hotel room that houses the President's itinerary and other details of his trip to South America. What's to stop a potential terrorist or assassin from paying a prostitute to spirit away some of the confidential documents that contain these details in the middle of the night?

Something nearer to me personally is the scandal that just broke about alleged rapes at West Point and Annapolis and the associated cover-up. Two women – one from each of the Academies – have alleged that they were raped as students (cadets, midshipmen) and that senior officers were unresponsive to their complaints. If true, it is unconscionable. Women were first admitted to the Academies in 1976. By now, their participation in our armed forces and their evaluation on the basis of merit should be a matter of routine.

I am reminded of the Tailhook scandal in 1992. Navy Lt. Paula Coughlin was forced to run a gauntlet of drunken pilots who groped her and tore at her clothes. The annual Tailhook convention was attended by some of the same senior officers who should have been preventing this type of behavior.

When the story broke, then Secretary of Defense Dick Cheney asked for and received the resignation of the Secretary of the Navy (the Navy’s CEO), Lawrence Garrett III. Several senior officers were relieved of their responsibility and punished for the cover-up. The Navy embarked upon an education program to prevent future occurrences of sexual harassment.

It’s time for a refresher course.

There will always be breaches of acceptable conduct and there will always be cover-ups. The larger question is how will the leadership of these important institutions respond?

The Catholic Church covered up sexual abuse of children for decades, a breach that I still find the most egregious of any in my lifetime. Richard Nixon and his close advisors engaged in a cover-up of the Watergate burglary. The cover-up was worse than the crime.

So, it will be interesting to watch the events of the next few weeks. How will the LEADERS of these important institutions respond as the facts unfold? What will the current Secretaries of the Army and Navy do? How about the head of the Secret Service? How will they respond?

Will they act like true LEADERS? Or, will they act like Claude Rains?

WHO WILL LEAD?

Precious Dollars

My last post (One Issue and One Issue Only) stimulated a variety of responses. Many fell into the “Right On!” category; others were more circumspect. Over lunch, one of my readers commented that “every dollar in the federal budget is precious to someone”. That’s a great insight. It explains why pollsters tell us that the vast majority of Americans agree we should balance the budget but few agree that we should cut something that affects them – Social Security or the home mortgage deduction, for example.


Many self-described liberals reacted negatively though none challenged the economics. One described the post as “more blah, blah, blah”. Others merely asserted that I “must be for” raising taxes, eliminating the Bush tax cuts or reducing defense spending. I was a bit taken by surprise as I didn’t intend the post as a political statement but rather a brief on economics. I believe the economics are important because we are sitting on a ticking time bomb.

Sometime late this year or early next, Congress will have to approve another increase in the debt ceiling. Almost simultaneously, the Bush tax cuts will expire – not just those on the rich but the middle class as well. The last debt ceiling deal requires that mandatory cuts be made across the board unless a new deal can be made. So, we will have a sharp increase in taxes accompanied be a dramatic reduction in government spending. In the context of today’s political environment, it’s hard to envision a solution.

If you’re into shock therapy, you may think this will be a good thing for us. However, the abrupt cessation of government deficits is likely to be a shock to the economy, leading to massive unemployment and stalled growth.

It’s easy to buy into the theory that one cannot get out of debt by taking on more debt. It sounds logical. But, an economic collapse will likely result from putting it into practice. We have seen evidence of this in Greece, Ireland and Spain.

It is better to come up with a plan for sustainability that adjusts the current course over time. The President recently submitted his idea to Congress in the form of a budget for fiscal 2013. It was rejected by, not only Republicans, but also every Democrat in the House of Representatives – a vote of 414 to 0.

There are other approaches. Congressman Paul Ryan (R-WI) has put forth his Roadmap for America (see, Every Dogma Has Its Day). It was the basis for his 2013 budget proposal. Now the Chairman of the House Budget Committee, Ryan’s budget proposal has lost some of the bi-partisan approach evident in the original Roadmap.

There is much to criticize in the Ryan budget plan. MIT's Simon Johnson points out that, while Ryan would make substantial cuts to government expenditures, he does little to “stabilize revenues”. He also points out that the Ryan plan is regressive. That is, it cuts substantially from programs that affect the poor. All of that said Ryan does get us on the path to fiscal sustainability according to the bi-partisan Congressional Budget Office.

A more bi-partisan approach was taken by the President’s own commission. The National Commission on Fiscal Responsibility and Reform (often called Simpson-Bowles) first met in April of 2010. Their charter was, according to the President, to identify “policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run”.

Alan Simpson

Recently, the commission’s co-chairs, Alan Simpson (former Republican Senator) and Erskine Bowles (former Clinton chief of staff), were interviewed by Charlie Rose. Simpson joked that his wife noted the “lilt” in his step of late. She said it was because he had finally pissed off everyone in America instead of just a few.

He cited cuts that his bi-partisan commission recommended to student loans, Medicare, defense spending, farm subsidies and veterans benefits. There were increases in gas taxes and the elimination of tax deductions that would affect the middle class.

The plan was criticized by those on the left (Paul Krugman, Nancy Pelosi) who don’t want cuts to government programs and the right (Defense contractors, the American Enterprise Institute) who don’t want to see taxes increased.

Those who occupy the middle of the political spectrum (including me, see "Why I Like Ike") were more friendly, viewing it as a starting point for compromise (Third Way, Concord Coalition).

Personally, I remember being hopeful when the commission’s report was released. I thought perhaps the President would take up the banner and fight the good fight as he had promised – the “grand bargain” he has called it. I wrote about it in a blog post the morning of last year’s State of the Union address (see "Adam Smith: Communitarian").

Everyone will hate getting to a balanced budget. Simpson was only half joking when he talked about pissing off everyone one in America. But, perhaps that is the only way this will work – if everyone makes a sacrifice.

So, how do we get out of this mess? There is only one answer in my view: presidential LEADERSHIP.

Apologists for our current President will point out that the Republican opposition won’t pass anything the President proposes. But, didn’t both Clinton and Reagan have their way with a Congresses of the opposing party? And, didn’t George W. Bush get anything he wanted from a Democratic Congress – the Iraq War, the Patriot Act, the tax cuts?

Has our current President abandoned the hope of his “grand bargain”? Is he capable of leading the nation to a more sustainable course? Is it time for a change?

WHO WILL LEAD?

One Issue and Only One Issue

I’m a boring guy. While most folks like to argue politics from their heart – women’s contraception, gay marriage, the war(s) – I like to discuss data and charts. What can you expect? I studied economics in college despite its label as the dismal science. BORING… right?

Now, if I haven’t lost you already, I’ll tell you that – boring or not – I am zealous about the economy this year. Why am I so zealous? Because we are headed for disaster unless someone changes the paradigm in Washington.

Here’s where we are headed. Unless we get our deficits under control, all of the federal government’s revenue – that’s all the taxes we pay – will go toward interest payments on the debt within 10 years. Nothing left for Social Security or Defense or whatever your favorite program is. A simple way to think about it is to look at how much money the federal government spends per household compared to the income of the average household. Here’s a chart from a White House publication on the budget:

Think about the impact of a household making $50K per year having additional debt of $30K on top of their mortgage, credit card debt, student loans and whatever. And, that’s $30K more each and every year!

But, you’ve heard all this before. You listen to cable TV, right? You’ve heard all the pundits. What am I saying that isn’t just more of the same? Well, here goes…

There are four schools of thought in economics: Classical (Irving Fisher), Keynesian (John Maynard Keynes), Austrian (Ludwig von Mises, Freidrich Hayek) and Monetarist (Milton Friedman). If I were to expand on each, this would go on for pages and pages. My goal here is to make it simple. So, where is the central truth that cuts across all four schools of thought? Here’s my try at it:

The most common measure of our economy, Gross Domestic Product (GDP), is the sum of consumer spending, investment, government spending less the trade deficit (or plus the surplus in the case of Germany or China). Simple representation:

GDP = C + I + G – Net Imports

The “C”, consumer spending, is the lion’s share of the economy (about 70%) so, in a recession, Keynesians focus on stimulating demand. Recently, that has taken the form of programs like “Cash for Clunkers” which provided a short term boost to consumers who needed to buy a car. The key is that it is short term. The data suggest that a stimulative boost today results in an equal subtraction from GDP in about three years. That might work in a short term cyclical recession but it doesn’t in a long term credit crisis like the one we are recovering from right now. It is also important to note that Keynes’ assumes that any short term stimulus that would generate a deficit would be repaid once the economy was restored to growth. With the exception of Clinton, it seems that all Presidents for the last 40 years were absent on the day they taught that lesson in Econ 101.

I’ll come back to the “I” (Investment) in a moment. Let’s skip to the “G” (Government). When the government spends money, there is no “Multiplier Effect”. In other words, a dollar spent by the government results a dollar of GDP. Whereas, a dollar spent by a business results in $2 to $3 of GDP. Why? Because businesses only make investments that will generate a return on investment. Governments are not that picky. For validation, you might want to read what Obama’s former chief economist, Christina Romer, wrote about it by clicking HERE.

Okay, back to the “I” in our formula, Investment. Investment equals savings, plain and simple. Whatever people and companies don’t spend equals investment. Sounds simple enough. But, the bigger question is where does that money go? If it’s your money, you might put it into a mutual fund or buy stocks and bonds. If it’s a company’s money, they might invest in equipment to make their businesses more efficient. Either way, investment “multiplies” in GDP terms. Another way to think about is that the only element of the GDP formula that creates jobs is the “I” – investment.

However, if the government takes away the excess capital – our savings -- in the form of taxes, there is no multiplication. So, when you hear conservatives talk about government spending “crowding out” private investment, that’s what they mean.

Okay, so what? You might ask.

That brings me to the deficit. Before I start, I should tell you that I am not fanatic about a balanced budget. In fact, I don’t think we need to balance the budget – so long as the annual deficit is less than the annual growth in GDP in percentage terms. Bear with me while I provide an example.

Suppose you own a business that generates $1 Million per year in profit. Now, suppose you borrow $10 Million dollars at 5% annual interest. That’s $500K in annual interest payments, right? No problem unless your income drops below $500K per year. And, if you invest the $10 Million wisely, you might grow your business and increase your income and create a few jobs.

Now, let’s compare that to the federal government. Our annual GDP growth is about 2% (optimistically). Yet, our annual deficit is about 8% of GDP. So, we need to fund that deficit of 8% or about $1.3 Trillion. The government does this by selling bonds (only if the Congress approves raising the debt limit). And, who are the buyers? Well, if we assume that everyone who exports to us uses the dollars received to buy US Treasury bonds, that would cover about a third of it. And, the rest? Well, the buyers of late have been investors afraid of the consequences of owning Euro bonds. Europe is a few years ahead of us and nearer to collapse.

But, the fall back, if we can’t find enough investors, is the Federal Reserve Bank. What has been referred to as Quantitative Easing or QE, is the creation of money by the Fed to buy US Treasuries. This matters a lot. When the Fed increases the supply of dollars, the value of the dollar goes down. And, the price of every commodity and product produced overseas – food, oil, manufactured goods – goes up.

A lot of people like to criticize the Fed for taking these actions; however, it’s worth remembering that the Fed couldn’t buy US Treasuries if they weren’t for sale. In other words, if Congress and the President would balance the budget, the Fed’s actions would be unnecessary.

So, what is the impact of the national debt rising as depicted on this chart? Bear in mind that it’s going up at a rate of more than $1 Trillion per year.

Lower growth, higher inflation, less employment!

The four schools of economics differ on many factors or behavioral models. But, all of them would agree on these basic principles.

So, there you have it. My simplified version of the economics of our government. Government spending does not generate growth. And, deficits prevent job creation and are at the root of inflation. I could make it more complex; but, why bother?

Now, back to my zeal. If you buy into my dissertation as expressed here, you must be focused on the presidential candidate who offers the best chance of wrestling the deficit and national debt to the ground. There are no happy solutions to this problem. Any solution will cause us all to object to something.

So, the question isn’t whether we should do something about it. The question is WHO WILL LEAD?

Let Israeli do it: Not So Fast…

Iranian Hovercraft

There’s been lots of talk about going to war with Iran lately. The recent state visit of Israel’s Prime Minister made headlines and the Republican presidential candidates had to make tough guy statements to avoid being labeled wimps.


But, aren’t we all a little war weary? It was outgoing Defense Secretary Robert Gates who last year said, “Any future defense secretary who advises the president to send a big American land army into Asia, or into the Middle East or Africa should ‘have his head examined,’ as Gen. [Douglas] MacArthur so delicately put it”. (MacArthur’s advice was provided to JFK at the onset of the American military build-up in Vietnam.)

Maybe that’s why many American’s think the easy way to eliminate the Iranian nuclear threat is let Israel take them out through an air or missile attack. If that’s the way to go, it won’t be easy. US involvement will be an essential part of the Israeli plan.

There’s been news coverage describing the number of countries whose airspace Israel would have to violate to successfully attack Iran. Less covered is the degree of US participation that would be necessary.

Aside from the permission the US would have to provide to allow the Israelis to fly over Iraq (a problem in and of itself), there is the challenge of the dealing with the Iranian Navy in the Persian Gulf. Not much of a challenge, you say? Well, you would be correct. However, that doesn’t mean that we don’t have to deal with it.

Any plan to mount an attack on Iran would have to include pre-emptive strikes on Iran’s Navy or risk disruption of oil tanker traffic.

It was with great fanfare that the US Fifth Fleet sent a carrier group through the Strait of Hormuz into the gulf the last week of December. It was done on the heels of Iran's sabre rattling over how they would use their naval base in the strait to close shipping lanes in the event of an attack by Israel or the US.

But, what would an attack by Iran’s navy look like. It wouldn’t be a traditional naval battle with large ships lobbing shells at one another or using fighter jets to take out the enemy. It’s Iran’s asymmetrical attack capability we should worry about. In military parlance, asymmetrical means they will use small boats and submarines to covertly attack our Navy ships or oil tankers. Much as a small rubber raft loaded with a bomb blew a hole in the side of the USS Cole in 2000, they would seek to use small victories for propaganda effect with a view toward shutting down the shipping lanes that carry about 30% of the world’s oil cargo to market.

So, before Israel could mount an air or missile strike on Iran’s nuclear facilities, the US Navy would have to take out as many of the small bases that house small craft as possible.

The US sanction regime on financial transactions with Iran is starting to take hold. Once Iran cannot get its oil to market, they have little to lose financially by shutting down the strait. However, an attack on the US Navy would give us an excuse to attack their Navy. So, I don’t think it is likely unless they are provoked. No, the most likely cause of military conflict would be the desire on the part of the Israeli’s to take out Iran’s nukes.

Vice Admiral Mark Fox

Here’s what Vice Admiral Mark Fox (USNA ’78), the man in charge of the US Navy within the Central Command (COMUSNAVCENT in military parlance), had to say about the prospect of this war. “The Iranians’ ability to impose high costs on their enemies by exploiting Iran’s imposing geography bear careful consideration today by potential opponents.” He was talking about Iran’s 1300 mile coast line on the Persian Gulf which is littered with small coves that hide small boats and cruise missiles.

Are we ready for a war with Iran? Setting aside the incredible financial and human cost of the wars winding down in Iraq and Afghanistan, it is noteworthy that Iran is three times the size of Iraq and has five times the population.

Are we ready to take them on? Maybe we should ask Robert Gates.

WHO WILL LEAD?

Bailouts and Bankruptcies: What’s the Right Thing to Do?

I’ve started to wonder if this blog is still about LEADERSHIP – its original mission – or if it’s about cars. My last entry (Clint vs. Karl: Yeah, But What About the Cars?) focused on the validity of Chrysler’s claim in their "Halftime in America" ad on the Super Bowl. My assertion – that cars manufactured by the Big 3 are every bit as good as the foreign competition -- has since been borne out J.D. Power & Associates. Their most recent survey of the reliability of three year old cars ranked four American brands in the top 10 (Ford, Lincoln, Buick and Cadillac) and clearly observed that there are no more poor quality cars sold in America. Even those at the bottom of the survey’s list report very few problems and their reliability was not significantly different (statistically speaking) from those at the top of the list.


Most respondents to the posting told stories of cars they have owned for a long time, ranging from an ancient Land Rover Defender to a classic 68 Olds to a late model Chrysler 300C. Others lamented the fate of GM, a once great American manufacturing company.

One response, from my old friend Bob Cannan, stood out because it addressed the GM and Chrysler bankruptcies. While Bob conceded that the Chrysler ad was just that (an ad to sell cars), he continues to be disturbed by the government’s bailout of 2 of the Big 3.

“I think what I and others worry about is the idea that the American people, who understandably would mourn the loss of the American auto industry, will now come to believe that the ends have justified the means. The government, in other words, saved Chrysler and GM.” Said Bob. Going further, he protests:

“But this could have been done, and should have been done, by conventional bankruptcy.

“In conventional bankruptcy, a judge could have called all contracts into view, including the union’s. I’m sure that a restructured GM, emerging from the court of a skilled bankruptcy judge would have been much stronger than the one we see today. And the process would have been legal.

“Instead, the rights of bondholders and existing stockholders were violated. It’s grand larceny in my opinion. Repugnant. Reprehensible. The stock was distributed to the unions. Directly.”

For the most part, I agree with Bob. Indeed, I would take it a step further. The seeds for the current public expectation, that government will step in, were sown by the original Chrysler bailout in 1980. If Chrysler had been allowed to fail then, how much stronger might the rest of the industry have been in 2008? That bailout was the first step on the proverbial slippery slope.

That said, I think that the period of time between the Lehman bankruptcy and the GM bankruptcy -- a period of about 9 months -- was one of the most extraordinary of our lifetime. I believe it was George W. Bush who said, "I’ve abandoned free market principles to save the free market system." It's now easy to analyze the mistakes of the 9 month period in question. However, when we were in the middle of the storm, the fear of collapse dominated everyone's mentality.

What about the assertion that it was not legal?

We often hear that our nation is governed by the “rule of law”. The founders ensured that the elected legislature made the rules and not a sovereign. In the minds of many, “rule of law” conjures images of criminals going to jail. However, its most common application is the execution of contracts. In the case of GM and Chrysler, those contracts were loans, corporate bonds, supplier purchase orders and union agreements.

A Bankruptcy Court is not a court of law; it is a court of equity. In simple terms, the judge gets to decide what’s fair and equitable. It doesn’t matter what the contracts say. In a sense, they break the law by setting aside existing contracts.

In the GM bankruptcy, there was no commercial lender – bank, private equity fund, non-bank lender – who could or would step in to finance the company’s continuing operations. So, rather than let GM fail, presumably taking down much of the supply chain with it and putting hundreds of thousands of people out of work, the government stepped in as the Debtor in Possession (DIP). Were it not for their loan during the GM bankruptcy proceeding, GM would have ceased to operate. For most companies, that would have meant liquidation.

Would a willing buyer have stepped up to acquire the Buick Division or Cadillac? Not likely. Not then anyway.

More often than not, the DIP is also the ultimate buyer. And, the buyer’s desired outcome is usually the key factor in determining the final deal that is approved by the bankruptcy judge. So, the government structured the outcome.

When the government gets involved in business, the results get distorted. In this case, the distortion took the form of an allocation of a significant share of GM to the UAW. Believers in free market capitalism find this reprehensible as do I.

So, what do you think? If the government hadn’t stepped in to save GM and Chrysler, would the economy have collapsed? Moreover, was the GM bailout an example of extraordinary LEADERSHIP in a time of crisis or a nail in the coffin of the American free enterprise system?

Clint vs. Karl: Yeah, But What About the Cars?

Clint Eastwood

I watched the Super Bowl on a Huge Screen TV. It was about 9 feet high and 16 feet wide, planted in the ground across the swimming pool from the projector and its audience. There were 40 or 50 people at the party so I saw few of the plays and heard even less of the audio. When Clint Eastwood’s "It's Halftime in America" Chrysler ad came on, I heard very little of Clint’s speech. What I did hear was the woman behind me, whose husband grew up in Detroit, express her empathy for the plight of Michiganders. That said, she isn’t about to give up her S-Class Mercedes.


By the next morning, of course, Karl Rove was on Fox News politicizing the ad. Has Clint Eastwood --America’s tough guy and the former Republican Mayor of Carmel, CA – gone soft in the head? Or worse, become a Democrat? Never mind that Clint is an actor who probably got paid bazillion dollars for reading a speech for 2 minutes. For the same money, I would have dressed up as Bo-Peep and sang Deutschland, Deutschland Uber Alles. This debate (over nothing) has gone viral since.

Lost in all this discussion is any analysis of the validity of Clint’s (and Chrysler’s) claim. Are the Detroit Big 3 producing cars that can compete on a global stage? More importantly, are they competitive in the world’s most important market, the U.S. of A?

2012 Buick Regal

I wouldn’t qualify as an expert; however, I am a car nut. I read about, drive and buy a lot of cars. And, I am here to tell you that products from GM, Chrysler and Ford are every bit as good as those from Japan, Korea and Europe. Maybe better.

Last year, I blogged about Bob Lutz’ book, Car Guys vs. Bean Counters (They Don't Write Songs About Volvos). It’s a great book even if you’re not a car nut. Lutz spent his life working in the industry and was largely responsible for Chrysler’s comeback in the 90’s. The book is well written and Lutz is a great American character, a former Marine Corps fighter pilot whose treatise offers terrific lessons in leadership.

While Lutz’ book may be self-promotional, he also goes out of his way to say the he doesn’t believe anyone, including him, could have saved GM from its 2009 bankruptcy. However, the changes in cost structure brought on by that event coupled with his decade long focus on design and engineering have resulted in a great product lineup from Chevy, Buick, Cadillac and GMC. Ditto, Ford and Chrysler.

2012 Chrysler 300C

But, public perception lags reality and GM did great damage to itself by producing mediocre automobiles for a generation while Toyota became the world’s largest auto maker by focusing on quality and products that people wanted to buy.

However, if you are in the market for a new car, you owe it to yourself to check out the American competition before you make your final choice. Before you buy that Lexus, stop off at a Buick dealer. That’s right. Buick!

2013 Ford Fusion

Interested in a BMW 3-series or 5-series? Check out the Cadillac ATS or CTS. A high performance coupe like a BMW M3 or Infiniti G37S? You owe it to yourself to test drive a Camaro ZL-1 or a Mustang Boss 302. Porsche? Try the new Corvette. Mercedes E-Class? Drive a Chrysler 300 first. Honda Accord? Ford Fusion.

In each case, you will find the American car offers similar (or even better) performance, utility, ride and handling – at a lower price!

As for the S-Class Mercedes? Well, not yet. But, then it’s only half time.