Why Some U.S. Companies are Fleeing to Mexico and Trump Cannot Negotiate Us Out of this Mess

In my recent 1 March post Making America Great and Donald Trump, I said

the primary reason the opening of new trade markets around the world has not led to the growth of the American economy is because the American government does not allow American businesses to be competitive.  He notes the importance of corporate tax reductions, but only after implying that bad trade negotiations caused job loses in America.  The job losses in America are due to excessive taxes, paperwork, and regulations that American businesses are hobbled with, thanks to Washington.  Business expenses are very high in America compared to many other countries in the world.  To compete, we need to be free to take full advantage of our design and innovation capabilities, while shedding governmental burdens that provide no or insufficient benefits.  We should be taking advantage of our abundance of inexpensive and reliable energy, not trying to make it more expensive as Obama has done.  We should be taking advantage of our great banking and financial companies, not smothering most of them in disabling requirements under Dodd-Frank so-called reform.  We should not be raising the cost of business with governmental dictates of minimum wages, paid leave benefits, the highest corporate and personal taxes in most of the developed nations, ObamaCare, NLRB rulings favoring forced unionization, and EPA regulations based on exaggerated claims of mercury or catastrophic man-made global warming.

The lead Opinion article in the 4 March Wall St. Journal was titled Trump on Ford and Nabisco.  Trump has been claiming that Mexico hijacked both Ford and Nabisco plants resulting in plant closings in the U.S.  Trump says this is why he "Does not mind trade wars."

The Wall St. Journal response to that is:

That's one way of looking at it.  Another way is that both companies made rational decisions to move some of their operations to Mexico because the tax and regulatory climate in the U.S. under President Obama has become increasingly hostile to business.  Before picking destructive trade fights with the world, maybe the next President could work to make America great for doing business again.

Nine production lines at the largest bakery in the world, in Chicago, are to be closed by Nabisco to build a higher technology plant in Salinas, Mexico.  Nabisco will save $46 million a year with the new plant.  Nabisco gave the labor union at the Chicago plant the opportunity to match that annual savings.  The labor union brought in a Bernie Sanders campaign official to help them.  Operating a business in Chicago is especially tough.  Illinois has unusually high corporate taxes and property taxes, not to mention very high worker's compensation expenses.  Underfunded city employee pensions are forcing taxes upward rapidly.

Nabisco is hardly alone in abandoning Chicago or Illinois.  In 2015, Illinois bucked the increase in manufacturing jobs in other nearby states by losing 56 jobs a working day.  Meanwhile, Michigan gained 74 manufacturing jobs a working day, Ohio gained 58, Indiana gained 20, and Wisconsin gained 18 manufacturing jobs a day.  The unfriendly business climate in Illinois has dire consequences.

Both Ford and General Motors are doubling their production in Mexico by 2018.  Ford is building two engine and transmission plants in Mexico and will manufacture small cars and hybrids required to meet the federally imposed fuel standard fleet requirements on all Ford vehicles manufactured.  These required small cars are money losers, so it is particularly hard to manufacture them in the U.S.

The United Auto Workers Union has won an agreement that will raise the hourly cost of wages and benefits for its members to $60, from the already very high cost of $57/hour cost for Ford and a $55/hour cost for GM.  In comparison, foreign-owned automakers in the U.S. have labor costs of about $50/hour.

In addition to lower labor costs, Mexico has free-trade agreements with 45 countries, while the U.S. has free-trade agreements with only 20 countries.  Trump clearly wants to reduce our free-trade agreements, hurting the U.S. still further in this competitive advantage.  He will drive still more plants to Mexico following his trade-war policies.

The Wall St. Journal says the way to make the U.S. economy great is to

• lower corporate and marginal tax rates
• reform pensions and entitlements
• institute right-to-work laws
• repeal ObamaCare

This sounds rather similar to what I was saying in my 1 March post.  It is not the case that we are losing jobs because China and Mexico are better negotiators and Trump can just make better deals with them.  Our problems are mostly self-made and owe to our penchant for big government that acts as a parasite sucking the life out of businesses.

Government Motors Urges Us to Drive 193 MPH

How odd it is that after decades of the federal government twisting the arms, legs, and other appendages of state governments to lower their speed limits on the Interstate Highway System and on US Highways, Government Motors is now aggressively marketing a Cadillac that achieves speeds of 193 mph on the highway.  Yes, it has wiper blades designed not to lift off of the windshield at that speed says the oft-repeated TV ad.

In this day of the Nanny State, when warning labels proclaim that only professional riders should ride small bicycles built for young children, this would seem a surprising turn of events at first glance.  But upon reflection, we remember that the cigarette tax is a good part of the reason that cigarettes have not been banned.  The state and federal governments make big money from the sale cigarettes.  If marijuana had been similarly taxed, it would not be banned today.  Now that the federal government has a direct and very substantial financial interest in Government Motors, it is hardly surprising that GM is now free to advocate a car designed to achieve speeds of 193 mph.  If that helps sales by creating a new, less stodgy, image for Cadillac, then the Nanny State training wheels need not be attached.

So, the old argument that high speeds are not an efficient use of fuel and therefore endanger national security by forcing us to buy oil from the OPEC nations who do not like us, is now set aside in the interest of making Cadillac seem sexier.  The argument that high speeds are dangerous and should be prohibited, is now inverted into one that implies that driving at dangerous high speeds is sexy.  And everyone knows that sex sells cars.

The fact that the government gave GM up to a $45 billion tax break by allowing it to continue to write off any current and future profits against losses prior to its reorganization is an ongoing embarrassment the government is trying hard to hide.  It has given GM a further domestic tax break of about $14 billion.  On top of that, the government still owns 26.5% of GM stock and wants to unload that well prior to the upcoming 2012 election.  It is estimated the loss upon the sale of the stock will be between $10 and $25 billion, where the upper estimate is based on the sale of so much stock no one much wants dragging the price way down.  These are the real costs of the GM bailout.

Of course all these losses do not stop Obama from bragging about how the government will get all of its money back on its GM investment.  Perhaps his whopper will be a lot less apparent to most of the People most of the time if a sexy Cadillac can be driven at 193 mph!  That should make GM stock much more valuable in a hurry.  This administration needs to leave GM behind long before the 2012 election so its losses will be old news by then.

Mark Mix On the GM Loan Repayment

National Right to Work President Mark Mix has dug up a bit more information on the GM loan repayment I discussed in this previous post and this previous update.  The $5.8 billion paid back on 21 April was the balance of a $6.7 billion loan at 7% interest.  Obama praised GM for this repayment and its CEO Ed Whitaker touted it in an ad shown extensively on TV.  This was in fact repaid with part of $43 billion of taxpayer money it received in 2009.  Now, Mark Mix says this repayment was made in good part to secure a new loan for $10 billion at a lower interest rate of only 5%.

The government-chosen management and the UAW sure are demonstrating a knack for getting their hands on our money.  I do not remember choosing GM as an investment.  Did you?

Government Motors or Despot Motors

The federal government has put about $20 billion into General Motors and plans to put in another $30 billion in the bankruptcy settlement. It will consequently own 60% of GM according to plan. Canada will own 12%, the United Auto Workers Union will have 17.5%, and the cheated bondholders will have to settle for 10% ownership. If the federal government is to come out of this restructuring of GM without losing taxpayer money, its 60% ownership will require that GM be worth $83.33 billion at some future date. And this neglects the fact that the taxpayer is not made whole unless the government investment earns interest over that time. More realistically, the taxpayer ought to get at least 6% real interest on his investment. So, in three years, GM needs to have a market value of $99.25 billion, or $83.33 billion compounded annually 3 times. Of course, it is more likely to be compounded monthly, with a result of at least $100 billion then likely.

What is the likelihood that GM will be worth $100 billion in 3 years? Well, surely we are all laughing at that question. GM is going to be managed directly from the White House, by the Despot-in-Chief Obama. He has no commercial enterprise management experience worth noting. His motivation in action is most certainly only political and does not include any concern for the taxpayer recovering his money, let alone with appropriate interest. The UAW can and will make demands for concessions before the next presidential election and the Despot will grant many of those demands. He will also mandate further small vehicles be built, which Americans will not want to buy. He will require GM to spend further huge sums on impractical power systems for cars and trucks. Americans will not buy these very expensive and impractical vehicles. Management will be afraid to make decisions for fear of stepping on the Despot's toes or what is the same thing, for fear of stepping on the UAW's toes. A shareholder with 17.5% of company shares is usually someone of power and they certainly are when the Despot holds 60% of shares and is allied with the 17.5% shareholder.

So, both management and labor union members will pretend to work in the best socialist tradition. This is a road much traveled and well-known. It is why nationalized companies in the U. S., in Great Britain, and in France, not to mention in the USSR and the post-WWII eastern Europe, have never worked. In the U.S., we have the well-known examples of the U.S. Post Office and Amtrak.

Despot Motors will lose the taxpayer's investment. The taxpayer will be very lucky to get out of this investment with $10 billion of the $50 billion committed or to be committed. That will only happen if the Despot does not win re-election and the in-coming President immediately sells GM for whatever it is worth on the market at that time. It is more likely that Obama the Despot will milk still more money out of the taxpayer for GM. At the least, we can expect an edict that all future federal government vehicle purchases or leases will be from GM at inflated prices. Most likely, there will simply be further grants of money as GM will be losing money hand over fist. No, Despot Motors will be squirting blood at least 10 feet.

It has been speculated that no one will want to buy from Ford Motor Company because the government will be doing favors for Despot Motors. Frankly, if Ford Motor does manage to stay out of bankruptcy, it will be the only game in town. The Despot will try to tilt the playing field toward GM, but he will not be able to compensate for GM's mismanagement. Meanwhile, Ford has experienced a much lower loss of sales than have the Japanese and Korean car makers, as well as lower losses than Chrysler and GM. Both Chrysler and GM will find it very difficult to get private investors to put money into them as shareholders and as lenders. Ford will have a very big advantage here. If Ford fights hard for UAW concessions, it will do even better. The UAW and federal government mandates on car mileage, size, and power systems will still be nightmare problems for Ford. Frankly, the traditional American auto industry has been milked to death and is not where any young professional would want to build a career. Go elsewhere, young man or woman. But cars will still be needed, so Ford is the only viable source for that commodity.