Ford, GM, Chrysler Announce Losses; Can the American Middle Class Survive a Big Three Meltdown?

By Evelyn Black, on November 10th, 2008

Can the U.S. economy possibly get any scarier or more complicated?

The short answer is yes, it can. The longer, more complicated answer is that the looming (potential) failures of Ford, GM, and Chrysler present long term sustainability problems for a middle class that is already clamoring for short term, emergency solutions.

Ford recently announced third quarter losses of $129 million but admitted to having burned through $7.7 billion in operating costs during the same period. GM announced a staggering loss of $2.5 billion. Chrysler, by all accounts, will be belly up by the start of 2009 if the government is unable to broker a merger with GM, and all three are begging Washington for a second $25 billion in low-interest loans to keep them all afloat until the current economic crisis passes.

The announcement of these stunning losses and the request of additional federal money came alongside industry announcements of even more lay-offs and possible suspension of the plans for research and development of new, more fuel-efficient American cars. Without a more competitive product than the big trucks and SUVs of the past 15 years, it’s hard to see how and when things will get much better for the U.S. auto industry, but unfortunately the problems go much deeper than that.

Retail sales fell of a cliff in October across the board, with the exception of Wal-Mart, which saw a 2% increase in sales. Even sales of luxury items fell; items which in the past have been fairly recession-proof. Stores like Saks and Bloomingdales posted some of the worst figures of all. Job losses for October came to just under a quarter of a million, bringing the unemployment rate to a 14-year high of 6.5%, and this, by general agreement, is only the beginning of the labor effects of the recent credit crunch.

All of this bad news is hitting right before Christmas, a time when retail stores generally expect to be ramping up for the November and December sales that will carry them through the rest of the year. This year, those sales may not materialize at all. Circuit City is shutting down 120 stores for good, right before Christmas, just to stay solvent, and other big box stores that usually hire extra help for the holidays are actually terminating permanent workers to reduce costs.

The fact is that people are not buying anything right now. Even if the Big Three could produce a car that runs on air and then start shipping it to car lots tomorrow, most Americans would be unable to qualify for loans to buy these magical air cars, even if they had jobs or money to put down on them, which fewer and fewer people do with each passing day. The recession is looking like it will be long and hard, with many analysts seeing a turn-around no sooner than 2010.

When Henry Ford first started to build automobiles in the U.S., he made the radical decision to pay his assembly line workers incredibly well. He did this not out of a sense of altruism or social justice, but rather to expand his business plan so he could market his cars to everybody, thereby making more money for himself. In making this decision, he not only enabled his workers to buy the cars they were building, he also ended up creating a thriving American middle class.

Over the course of the past 30 years several developments have increased profits for U.S. corporations and their stockholders, while at the same time putting downward pressure on the mostly industrial middle class. Changes in U.S. trade agreements allowed industry to flee the U.S. rapidly and dramatically, forcing formerly middle class workers into low-wage jobs in the service sector.

As the good industrial jobs disappeared, corporations also began to eliminate middle-management white color jobs with middle class salaries. Most of the corporate jobs left in the U.S. today are entry level service sector jobs, often in call centers or tech support, with little opportunity for advancement or career development. Not much remains between the bottom of the corporate pyramid and the CEO, and what does remain is under constant pressure to produce more profit for less reward.

In fact, in most of these workplaces (the classic cubicle farms of the ‘Dilbert’ comic strip) a management style designed to turn over employees in one to two years remains firmly in place. While this rapid turnover keeps labor costs low, it also creates a very unstable, low-paid workforce with no special loyalty to any one job and not enough annual income to commit to a four-year auto loan.

In other words, the middle class jobs that created the ‘consumer economy’ are largely gone with the decline of the Big Three and the loss of myriad other U.S. industrial jobs, both related and unrelated. Steel, textiles, electronics, computer chips—all of these items are made overseas now. When people don’t have good jobs and can’t get credit, they can’t spend money. When people can’t spend money, more people lose jobs.

Short term, the U.S. will have to find a way to keep people in their homes, keep them warm and fed, and stabilize housing and financial markets. Those challenges would be daunting in and of themselves for even an economic Mozart. Deficit spending seems unavoidable at a time when the national debt is already completely out of control.

But long term, the U.S. will have to find a stable job base that can support a middle class and do whatever is necessary to keep those jobs here. If that doesn’t happen, if we don’t see something on the horizon to replace the dead industrial base, then all the stimulus packages Congress can dream up won’t prevent a long and painful period of poverty and contraction in America.

Gas prices are finally coming down.

Unfortunately we’re running on fumes and our credit cards are being declined.

What happens next will have long and lasting effects, not just on the economy, but on the health and security of the nation.

Join the forum discussion on this post - (2) Posts



3 comments   U.S. Economics   , , ,  

Is President-Elect Barack Obama a “Socialist”?

By J.D. Seagraves, on November 10th, 2008

A few weeks before the election, “Joe the Plumber” asked Barack Obama about his tax plan, and Obama said that he intended to reform the tax code to “spread the wealth.” The McCain campaign seized on this gaffe and ran with it: what Obama was advocating, they said, was tantamount to “socialism.”

The “socialist” charge was repeated many times throughout the remainder of the campaign, and it continues to be levied against President-Elect Obama even after his historic election. Recently, Investor’s Business Daily editorialized that the “change” Obama favors “can only be described as socialistic.” But what does this even mean?

Is “Socialist” Nothing but a Slur?

Kansas City Star editorialist Lewis Diuguid says that “socialist,” in the context used by McCain and his supporters, is nothing more than a thinly veiled racial epithet. After all, Diuguid points out, iconic African-Americans such as Martin Luther King, Jr., W.E.B. Dubois and Paul Robeson were all smeared as “socialists” by their racist opponents. But the inconvenient truth is that King, Dubois and Robeson were socialists.

Dubois and Robeson were long-time members of the Communist Party of America, and Martin Luther King, in just one of many examples, once gave a speech in which he called for a “better distribution of wealth” and opined that “maybe America must move toward a democratic socialism.” Socialism was “not the sum of these men,” says libertarian Lew Rockwell, “but they were all red-blooded socialists.”

Regardless, “socialist” can definitely be used as a mean-spirited slur, but the word also has a legitimate meaning. The question remains: Is Barack Obama a socialist?

What is Socialism?

Socialism is defined as an economic system wherein the means of production and distribution are collectively owned, typically by a monopoly government. Politically, a socialist state can be democratic, dictatorial or anything in between: contrary to popular belief, the method in which leaders are chosen is not an element of socialism.

There is no such thing as “private property” under socialism: production is centrally planned by committees on the basis of what they think people want or need. Theoretically, each individual is expected to produce according to his ability and consume according to his need. It sounds like heaven on earth—or does it?

It is often said that socialism is good in theory but bad in practice. Actually, this is untrue. The Austrian economist Ludwig von Mises proved that socialism is not good in theory and cannot work in practice. Mises’s 1922 work Socialism demonstrated that a pricing system and for-profit ownership of the means of production are necessary to signal to producers what to produce. Mises thus predicted the collapse of the Soviet Union, with great accuracy, almost 70 years before the fall of the Berlin Wall.

Democratic Socialist or Social Democrat?

Even the most paranoid “ditto head” could not seriously think that President Obama will collectivize all U.S. property in the hands of the federal government. Clearly, Obama will not usher in a truly socialist America. He might, however, move us in the direction of greater “social democracy.”

Our national confusion in regard to political taxonomy dates back to the New Deal, when the word “liberal” changed meanings in America. Previously, a “liberal” had been someone who emphasized individual liberty, private property and limited government. These were the ideas that dominated the Democratic Party from Jefferson through Cleveland, and although Woodrow Wilson’s “progressivism” represented a departure, Franklin Delano Roosevelt actually campaigned as a traditional, classically liberal Democrat. Once in office, however, FDR “flip flopped”—and took the term “liberal” with him.

What we now consider “liberalism” in the United States is referred to as “social democracy” throughout the rest of the world, and “social democrats” are often slurred by their opponents as “socialists.” But social democracy differs from socialism in that it leaves at least nominal ownership of industry in private hands, while heavily regulating, subsidizing and managing various sectors of the economy in pursuit of social goals. Key elements of social democracy include government-controlled education and healthcare, a broad economic safety net, environmentalism, protectionism, multiculturalism and a foreign policy that “promotes democracy.”

Dawning of a New Age?

In that same editorial cited earlier, Investor’s Business Daily said Obama “may be guided by principles different from what we’re used to and on which the nation was founded.” Based on his campaign rhetoric, President-Elect Obama certainly sounds like a social democrat, but does he really represent a radical change from our recent history as a nation? After all, George W. Bush signed Sarbanes-Oxley into law, expanded federal funding of education and healthcare and invaded a sovereign nation in order to install a “democracy”—his presidency may not have been textbook social-democratic, but it certainly leaned in that direction.

The truth is that our nation was founded on the classically liberal principles of political decentralism and laissez-faire. Regardless of what right-wing radio says, these founding principles are not at risk of going down the drain under President Obama because they were jettisoned decades ago. So while the Obama administration might represent a modest shift to the “left” (whatever that means), the essential nature of America’s political and economic systems will remain unchanged under his leadership. And that’s unfortunate.



Leave a comment   Politics and Government   , , ,