My views on GM

So, I’ve been putting a lot of thought into what my old employer, General Motors, should do. I think that they should go through a Chapter 11 bankruptcy, and the Federal Government should guarantee the Debtor-in-Possession financing (DIP financing). I think that this is the best way for GM to go.

Why Chapter 11 bankruptcy? Chapter 11 is a bankruptcy where the debt holders, the DIP lenders and the previous debt holders, assume ownership of the company, restructure it into a going concern, and emerge from bankruptcy where their debt has been converted into equity. Chapter 11 would be better than a Chapter 7 (Liquidation of assets) bankruptcy because the wholesale sell off of GM assets would signal the end of GM. While GM isn’t the mainstay of the GDP that it once was, the 2 to 3 million jobs that depend on the Big 3 (Ford, GM, and Chrysler) area very important.

Chapter 11 would allow the new owners to do things that should have been done 5 years ago: 1) fire top management (who finds it re-the-f@#k-diculous that GM’s CEO says it is the management that got them into the problem that is best to get them out of the problem), 2) have a judge change the UAW contract so that their health benefits are inline with what the average US employee has, 3) fire half of the management employees.

Top management has to go. Rick Wagoner has been the captain that has presided over this shipwreck. He might have inherited an untenable situation; but he has no credibly anymore. Bob Lutz might be a design guru, but there hasn’t been enough cultural change to the way GM designs cars to merit him staying around. I have heard many great things, from varied sources, about the CFO, Fritz Henderson, will probably not survive the new owners.

The UAW needs to understand that they are in the same boat as the rest of us for healthcare. The Big 3 are no longer the cash cows that they once were. The Big 3 can no longer price or produce their way to more cash or profits. The gold-plated benefits the UAW receive can no longer afforded. And, AND, AND! I do not believe the arguement that they have made enough concessions as of recent. $300 a year in premiums for a no co-pay, no out-of-pocket healthcare benefits? They should have to pay the same premiums a month the rest of the workforce has to, have the same co-pays, and the same out of pocket costs. It is time the UAW got its head out of the 1970’s and joined the 2000’s.

GM has WAY too many white collar employees. The plant I worked at went from 1,600 hourly employees and 100 salaried employees at the plant’s peak; to 300 hourly employees and 120 salaried employees. Not only is the increase in salaried employees disgraceful, but the number of senior managers (8th level and above, for those GM savvy among you) went from 6 to 9. From my contacts still at GM, this bloated salaried structure still exists. There is an executive rank employee at GM whose job title is “Executive In-Charge of People Not at Work.” The new owners of GM should wield the sword quickly, and often.

Why should the taxpayer be on the hook for the DIP financing? Here’s why: banks, PE firms, hedge funds, and other lenders of DIP financing are unwilling to give GM the estimated $30 billion it would take to get GM through the bankruptcy. The credit market is too tight for most lenders to take that big of a risk, even with the benefits of DIP financing. (DIP financiers get first dibs on all monies collect if the restructuring fails and the company goes into liquidation) If the taxpayer guarantees the shortfall between the DIP obligation and the liquidation revenue; then a couple of bigger firms would probably be onboard for the DIP financing, due to the upside on exiting bankruptcy successfully.

Giving the Big 3 a bailout would allow the current management and the unions to continue a business model that simply doesn’t work anymore. Both the management and the unions seem determined to do everything in their power to accept reality and update their practices to the current business climate. If GM, Ford, and Chrysler were to continue their failed business model for 5 or 10 more years, that would make the restructuring cost that much more, and kiss the $25 billion in low cost loans, in the current bailout scheme, good by. I enjoyed my time at GM, and by God, I still only drive GM; but the time for emotional, heroic actions is past, and now it's time for GM to painfully reconcile its practices.

Later,

B

A Sad November Day

I am sad. As a big John McCain fan, his loss hurt. I doesn’t just hurt because my side lost, and their side won; but, rather, I am sad because not enough of my countrymen hold in high esteem the values and character that John McCain embodies.

But, that, my friends, is the extent of my sadness. I am lining up behind OUR president. I want him to succeed and I will do my part, as an American, to help this country, and all of my fellow countrymen, be as successful as possible.

In four years, it will be time to duke it out, again, (well, two years and three months, as long as this damn election cycle lasted) but, till then, we are all Americans; and our fortunes are tied together.

A Liberal's Effect on the Market

So, I got to thinking about the polls around the presidential election. The first thought that came to my mind is the polls are bunk. If you look at Real Clear Politics you can see different polls that each have 1,000 plus sample sizes, that are taken right around the same time frame, where the averages, plus or minus the error margin, do not overlap. This is ridiculous, a sample of 1,000 plus people of should give the average of a population of 122 million (the voting public) 95% of the time, inside the margin of error.

Then I had another thought. I wonder if the market is correlated to the expectations of the election? It should. The two candidates have very different ideas on regulation, free markets, corporate taxes, and various other factors that influence the market. So, the market should care about the outcome of the election, and the prices should reflect expectations of the election.

So, here’s what I did, I took the daily average of the Real Clear Politics average and the closing price of the Dow since August 1st. I then took the change in the poll average and the change in the Dow. I then checked, on a one day lag, if the market reacted to the movements of the poll average. I used a one day lag because I assume that the traders, analysts, and other market participants generally digest their political information after the NYSE and the NASDAQ close. One other consideration that I made was this: the change in poll numbers over the weekend is a Monday minus Friday delta, just as the change in the Dow close is a Monday minus Friday delta. I’ve also looked at a two day lag, a three day lag, a average of the next three days’ delta, and a four day delta average.

What I found was this: on the days John McCain closed the gap in the polls, the following day the stock market would climb. On the days when Barack Obama gained in the poll average, the market would go down. The numbers are this: average gain for McCain in the polls 0.74% for an average gain of 1.86 points in the Dow. For Obama, his gains in the polls were an average of 0.67% for an average drop in the Dow of 66 points. A two day lag reverses the effect, and a three day lag re-reverses the effect. The average delta for three and four days shows gains by both candidates have a negative effect on the Dow; however, an Obama gain has at least twice the negative effect that a McCain gain has.

This study is not scientific, and there was little if any effort to try to control for outside factors. I did this little exercise because I was curious and I am a huge dork. Still, the data is what the data is. (The data are what the data are, I suppose) And, if one only takes the lead Obama has in the RCP Average and runs a correlation of it on the Dow Price (not the movement in price, just the price) for that time frame, one will find it is negative correlated. I also ran a covariance and found the Obama’s lead has a negative covariance to the Dow Price.

I made a pretty graph of the One Day Lag scenario. Yay for me.

Later,

B

5 year old car batteries suck

So, this last Monday, I was getting ready to leave work. I go out to my car (a 1999 Pontiac Sunfire) and I try to start it. Nothing. Gee, that's weird, it ran this morning. So, I look to see if I left anything on in the car. Nope. No reason it should have die while sitting in the parking lot.

So, it is 5:14PM, and basically, everyone but two guys are gone. One guy pulls his Buick Century around and we try to jump it. Nothing, still. Shit! So, I have to get a ride halfway home, and get my roommate to come pick me up. Embarrassing.

The next day I wear jeans (I was the envy of everyone at work wearing jeans on a non-Friday), packed up my socket set, packed an old sweatshirt, and headed off to work in my truck. I was more than a little upset because the truck gets 14 mpg on premium gas and the Sunfire gets around 32mpg on the cheap stuff. At about 3:00 PM I go to the local AutoZone to buy a battery, the homely, yet helpful girl at the counter looks up the battery for in their system. She starts naming off different batteries; but I interrupt with:

Me: Cheap. I want the cheapest one you got.

Homely Sales Rep (HSR): That will be $65 for the battery.

Me: Not bad.

HSR: A $12 core charge. And Tax.

Me: Core charge?

HSR: You bring us your old battery, you get the $12 back.

Me: Oh, like a soda bottle return.

HSR: What?

Me: Never mind, I’ll take the battery.

After this mildly entertaining distraction I went back to work. At 4:57, after most people had left, I changed the battery in the parking lot. It wasn’t as easy as I had hoped, the Stanley socket set I had only hade 3” socket extenders, so that made getting the battery “holder” bracket hard to get on and off. And, the stupid engineers at GM had the air intake hose running right in front positive lead of the battery. I had to push the hose back (which that hose is sturdy stuff) to get the positive leave on and off. And, I think I kind of stripped the negative lead, but not so bad that it won’t hold, for now. All said and done, it took me 35 minutes to change the battery. And the car works now.

What sucks is that I now have two vehicles in the parking lot, and I can’t find anyone that likes me enough to give me a ride to work to get both vehicles home. It never ends.

Later,

B

More musings on a Monday, what the ....

So, I’ve watched a weekend news show this weekend, and one of the liberal commentators railed on how the middle class has been shrinking, and that it is the fault of Republicans/conservatives. The funny thing is, that while this lady might be partially right, her answer was WAY wrong. She advocated for the Employee Free Choice Act, which basically allows unions to do card checks. (A card check is where a union has to get 50% plus one person to sign a union card, and then the company is forced to recognize a union. It basically does away with a secret ballot vote to unionize. It also has a couple really one-sided collective bargaining rules.) I think this is a bad idea that ranks up there with hydrogen filled blimps and New Coke. If you look at every American industry that has heavy union influence, you will see a failed industry. Steel Companies: Dead. Airline Companies: Dead, a couple of times. Auto Companies: In their death throws.

So, I would be remiss, and hypocritical, if I all I did was throw stones at this idea, and not offer a better one. So here is my plan: Cut corporate tax rates to 30% with a plus/minus 5% based off of a ratio of the Firm’s Top 20% earners total income to the bottom 80% earners total income.

I think this wouldn’t be that hard to manage, already most of the income needed for this calculation is reported to the IRS; things like Options, restricted stock, etc for the top earners would have to be calculated. The hard thing to come up with would be: what is the desired ratio? 50/50? 20/80? 80/20? There is a proper ratio that helps growth the wealth of the middle class while still giving enough incentive to the exceptional managers to work hard, and deliver good results, to keep the economy growing.

Why is this superior? Because it allows for choice. If a firm is driven by the performance of its top level managers, and the firm would seriously falter if they left, then it might be reasonable for the Top 20% to earn a lion’s share of the wages provided by the firm. The shareholders wouldn’t mind, because they would earn more with the ‘good’ Top 20% earners with the 5% increased income tax than they would with bad leaders and a 25% income tax. On the other hand, if the leaders of a firm can be changed out without much loss to the firm, then the share holders would demand the ratio that would get the -5% corporate income tax adjustment.

The beauty of this program is that it isn’t some cockamamie plan to try to grow the wages and compensation pie, but rather an incentive system to influence how it is cut. If a firm is successful when the Top 20% are responsible for much of the performance, and they are compensated the best, then it makes sense to tax the firm at a higher corporate income tax rate. (Rich people only spend so much; they don’t spend in proportion to how much more they make then the middle class) If the firm pays its Bottom 80% well, then it should have a lower corporate income tax rate for two reasons: 1) at a lower rate, it would return more to its investors, making it more successful and much more likely to be a continuing concern; and, 2) the Upper Middle, Middle, Lower Middle, and Lower Class people who earn more would most likely spend most of their increased earnings – thus growing the economy.

The draw backs would be the measurement and enforcement of this policy. As I originally stipulated, measuring the total income/compensation shouldn’t be too hard; but some instruments used to compensate execs are hard to value, and they are not always realized in the same year they were issued. Enforcement would be a problem, too. There would have to be a group of people at the IRS to determine if each company submitting its compensation ratio was doing it honestly, correctly, and fairly. However, the IRS is full of people that deal with this type of ambiguity regularly, so it shouldn’t be too much of a leap for the IRS to develop this capability.

In conclusion, I do think that it is time the middle class receive some lovin’ from governmental policy. However; the policy shouldn’t be so dogmatic and ideological that it ends up causing economy-a-cide. I think that my plan, fully fleshed out, would allow for middle income growth, economic growth, and is more libertarian in approach and would represent the least amount of government growth of the two plans presented.

Later,

B

Marginal Income Tax Rates and Refined Musings

So, I’ve been thinking further about some of what I wrote yesterday.

The first is the idea of raising the top Marginal Tax Rate back to 39.5%. Will this really increase tax revenues? My hunch is yes; and the data might seem to indicate that. Using http://www.irs.gov/, and http://www.econstats.com/ I was able to pull a few numbers. I pulled the nominal GDP from 1986 to 2005 (they had it to 2008 Q2, but my data range was limited to 2005) and I used the IRS website to pull the total income tax revenue for the top 1% of earners from 1986 to 2005. (It should be noted that more than the top 1% pay at the top rate, but the data was broken in top 1%, 5%, 10%, 25%, 50%; so getting the income tax revenue by the top Marginal Rate payers was not possible with these sources) Using either the IRS site, or the OMB figures from http://www.whitehouse.gov/ I was able to get the top Marginal Rates for each of those years. For each year I divided the income tax revenue that the Top 1% of earners paid by the GDP of that year – I call this ratio “Top 1% income tax paid as a percent of GDP” (T1%GDP). I then took an average of these ratios for each of the distinct Marginal Rate periods. One thing that was interesting is that income from the Top 1% changed at a different rate, sometimes in the other direction, than the Marginal Rate did. Case in point, when the top Marginal Rate went from 48% in 1987 to 33% in 1988 (a reduction of 31.2%) income from the T1%GDP, grew 1.4%; when the Marginal Rate went from 33% to 31%, a 6.1% reduction, again, T1%GDP grew 4.3%; when the marginal rate went to 39.6% from 33%, a growth of 27.7%, T1%GDP grew 47.1%; and, finally, when the Marginal Rate went from 39.6% to 35%, a reduction of 11.6%, the T1%GDP fell 16.7%. If, in 2006 and 2007, the Marginal Rate was 39.6%, and the same average %GDP was pulled in as during the actual 39.6% years, that would have represented an additional $70 billion in revenues. Of course, I have to add the caveat that there are plenty of other things happening in these year besides changes in the Marginal Tax Rate that could affect revenue, and the sample sizes are small, but revenue would most like go up.

The second thing I was thinking about is that if LLC’s and S-Corp’s were allowed to be at a lower Marginal Tax Rate then the highest individual Marginal Tax Rate (my suggestion was 30% small corps, 39.6% for individuals) that every individual that earned more than $250k would find a way to convert their income into a small business income. While some of this happening isn’t too bad, allowing everyone to do it would be counterproductive. Unfortunately, I couldn’t find any data on the size of small business produced the most amount of employment. If, say, firms that had $8 million in revenue, and $1 million in net income produce 90% of small biz jobs, I would create a second, Marginal Tax Rate tier for small businesses that bumped up to 39.6% for any net income above and beyond $1 million. However, since it is an accepted fact that most small business do not do more the $1 million in revenue (much less $1 million in net income) a very rigorous study would have to be done to determine the right level of net income to boost a business from the discounted small business income tax rate to the full on 39.6% small business income tax rate.

Hmmm, I will have to think about these things further.

Later,

B

Musing on an Economics Tuesday

So, here are some of the things I’ve been thinking about:

1) I wish Barack Obama would stop saying he is giving a tax cut to 95% of Americans. He is not, he can’t. To get a tax cut, one must pay taxes, and only 62% of Americans actually pay taxes. What Obama is proposing is giving everyone in this county several ‘refundable’ tax credits, with the average being somewhere around $1,000 a tax filer. A ‘refundable’ tax credit is different from a deduction in that a deduction offsets any tax you incur, so, you have to make enough to pay taxes to take advantage of the deduction - a ‘refundable’ credit is where you get the $1,000 whether or not you have a tax liability to offset with the $1,000. There is another name for a ‘refundable’ tax credit: welfare.

2) I was feeling pretty good about the bailout until I read this. Prof. Zingales brings up many good points on how the original bailout was a bad idea, and how the modified bailout leaves a lot to be desired. The problem that I have with Prof. Zingales plan is that it would require a lot of administration; and if there is one thing the Federal Government has proven, it is this: it is very inefficient at administering anything.

3) I have my own plan for turning around the economy. Here it is: lower the corporate income tax rate to 20%, keep the capital gains tax rate at 15% for individuals, raise the top individual tax rate back to 39.5%; and create a separate tax bracket for LLC and S-Corp small businesses so that income derived from them is only taxed at 30%. There are few reasons I think this would help.
A) Businesses create jobs, and businesses are started when the return offered to the shareholders exceeds what they can get in other investments. Taxes lower the Net Income, and thus lower the return. So, by lowering the business taxes more firms would be created, more people employed, more good purchased, new technologies brought to market, etc.
B) Raise the top individual tax rate to 39.5%. Companies do not keep income/cash; S-Corps and LLC’s do not be definition, and C-Corps do not by function. A company earns a negative return (because of inflation) on any cash it keeps on hand, so a company either pays its excess cash to it employees (more people employed) or as dividends to its owners. So, to the extent that these increased rewards are passed onto the people who already make a lot, the government should get a larger chunk of the pie.
C) Small businesses that are S-Corps and LLC’s pass through their income to their owners. So the return that is calculated is based off of the tax rate the owner pay as an individual. So, if the business throws off more than $250k a year, the owner is taxed at the top bracket. While this seems reasonable at first blush, it isn’t; here’s why: If, say, the business had $10,000,000 in revenue, but $650,000 in income before taxes, that’s a 6.5% margin. Under the current system (and assuming my top bracket tax increase) the after tax net income would be $393,250, or a 3.93% return, less that a government bond. If, however, the income was classified as small business income, and taxed at 30%, the after tax net income would be $455,000, or 4.55%; greater than a government bond. This example is a bit contrived; but it illustrates how effective tax structure can affect business investment decisions: the return possible by the business has to be greater than the possible alternative investments.

4) I guess Prof. Wildman was wrong, Paul Krugman's being a first class ass was not enough to keep him from getting a Nobel for economics.

Anyways, those are a few of the things I’ve been think about recently. Oh, and the Browns won last night. Woo-Hoo!

Later,

B