Tuesday, November 27, 2018

Complex System Underlies Simple Story about GM Layoffs

I found this article in the Times yesterday about layoffs at GM.  It seemed pretty straightforward.
General Motors announced Monday that it planned to idle five factories in North America and cut roughly 14,000 jobs in a bid to trim costs. It was a jarring reflection of the auto industry’s adjustment to changing consumer tastes and sluggish sales.
It’s pretty remarkable because, as short as it is, it is directly or indirectly related to many dimensions of public policy I've devoted time and attention to in this blog, including inequality, taxes, interest rates, growth, trade, energy policy, climate change, globalization, immigration, and even automation and the future of work.

But then I thought about it and concluded I would have appreciated the article even more if Boudette, the author, had bothered to connect the elements in his article into a system.  As is, the story leaves the reader with a pretty clear victim (organized labor) and villain (GM management).  In this frame, the article appears to be a list of factors that help the reader understand why GM has decided to permanently close these plants.  It is, in effect, an apologia for GM management.  And relationships between public policy and poor socio-economic outcomes remain implicit if they are mentioned at all.

However, if the story were framed instead as a dynamic model, a network of causes and effects, the reader would be more likely to see how many of us -- including many of the laid off workers -- support policies that, at least in part, produce outcomes nobody likes.  When we paint this picture of a dynamic system we can see how all of us are affected by those outcomes as well, and also why it is so hard to change.

Here's my analysis.  Without changing any of the basic facts reported in the original story, see how linking the causes and effects might affect your own relationship with the news.

The biggest item in the story that deeply affects everything else is this:
Closing auto plants outright — rather than idling them, as G.M. says it plans — has been rare since the industry emerged from the recession. The last permanent shutdown of a plant in the United States came in 2016 when Mitsubishi Motors shuttered one in Normal, Ill. Before that, Ford closed a truck plant in St. Paul in 2011. 
This is a new pattern in globalization:  companies are moving to seek growth markets, not just low-cost production.  To me this indicates a belief at the highest level in the company, the board, and public capital markets as well that these conditions, every one that follows in this essay, are structural and permanent.

First lets take a look at demand, the first cause.  Ultimately, soft demand is a consequence of inequality:  not enough middle and working class workers earn enough to own newer cars.  Period.  It make sense that car companies are seeking markets where workers are earning higher wages and consuming more by moving operations abroad.
Until last month, G.M. had been offering severance packages to entice salaried employees in North America to leave the company. In January, the company plans to cut additional white-collar jobs on an involuntary basis. Between the two actions, it aims to eliminate about 15 percent of its salaried jobs in North America.
Neither immigrants to the US nor foreign workers are taking our jobs; it's the lack of demand and surplus capacity.

But according to Boudette, it’s not just demand in general here but demand for these kinds of smaller and more energy efficient cars specifically.
Part of the retrenchment is a response to a slowdown in new-car sales that has prompted automakers to slim their operations and shed jobs. And earlier bets on smaller cars have had to be unwound as consumers have gravitated toward pickup trucks and sport-utility vehicles as a result of low gasoline prices.
And this is not limited to GM.  This news is part of a larger pattern:
Earlier this year, Ford said it would stop making sedans for the North American market and announced cuts in its work force. Fiat Chrysler stopped making small and midsize cars in 2016.
Low gas prices are a result of our energy policies.  They closed the small car plants permanently.  Yet they invest in their truck and SUV businesses which continue to grow in North America.  As they commit to this strategy they become even more opposed to policies that might reduce the impact of transportation on climate change but would also increase the cost of energy:  such policies would threaten their SUV business.  Re-entering the smaller and more fuel efficient car market would then require building new plants, an expensive proposition.  This reinforces the alignment of car manufacturers with the fossil fuel industry and against virtually anything we might consider to reduce the harmful effects of of carbon released into our atmosphere:  climate change

See the feedback loop?  This is a system.

But Boudette adds two other reasons for the closing, tariffs and interest rates, both of them policy driven and structural as well:
In addition, automakers have paid a price for the trade battle that Mr. Trump set in motion. In June G.M. slashed its profit outlook for the year because tariffs were driving up production costs, raising prices even on domestic steel. Rising interest rates are also generating headwinds.
Interest rates are going up because, again no surprise here, GM continues to report profits.  So based on financial performance, the Fed sees apparent growth too, becomes worried about inflation and raises interest rates.

Nobody should be surprised to learn that short-term investors agree:
Investors welcomed the news, sending G.M.’s shares up 4.8 percent to their highest closing price in about three months.
How much of this financial performance is real and enduring, though?  At least some of that performance is a result of tax policy and the layoffs themselves, not the production and sale of automobiles.
[The] corporate tax cuts enacted last year [...] saved G.M. $157 million in federal taxes in the first nine months of the year, according to the company’s most recent quarterly earnings report.
[... And] Ms. Barra said G.M. would set aside up to $2 billion in cash to pay for the job reductions announced Monday, and take noncash charges against its pretax earnings of about $1.8 billion. The charges will affect earnings in the fourth quarter of 2018 and the first quarter of 2019. 
So it seems that although part of GM's growth may be real based on reduced costs and increased profits abroad, another part of it is likely to be short-lived if not entirely phony.  Notice that the cost of the restructuring will be reported next year while the benefits of the layoffs and tax bonanza hit the books right now.  Based on conventional accounting techniques, the company is growing even as its workforce is shrinking overall and its business is shrinking in North America.  Investors know this and may unload the stock sooner rather than later, illustrating how wages and employment can be depressed and the business actually shrink while the stock price goes up over the short run.

Unfortunately, this nuance is missing in most business journalism.  GM executives are neither simple villains nor are they sage and devoted protectors of long-term customer, investor and employee equity:  they are simply weak but "reasonable" actors, shackled by short-term investors, fearful of the media and inflated stock prices of their competitors, motivated by reducing costs and equipped with conventional accounting techniques to take full advantage of both layoffs and tax policies.

So specific tax policies and tariffs constructed ostensibly to protect jobs are having the opposite effect, as predicted by more thoughtful analysts and reported widely in conventional media which fewer and fewer of us bother to read.  Did anyone notice how Trump reacted to the GM news?  He’s “very disappointed in GM management,” he says, although his policies reinforce the very behavior he disapproves of.  As usual, he seems to believe his own rhetoric and fails to see any connections with policy.  And so do all the middle age, white workers who love Trump's inflated rhetoric almost as much as he does, accept it at face value, and continue to support the President and his party, despite the fact that they are now out of a job.  

As long as this story is not reported as a system, the deep connections we're showing between the layoffs and GOP policies will not affect working class voters and our decline in real wages reaching back to the 1980's will continue.

At some level I can understand the bitterness of the workers affected and the appeal of the simple solutions proffered by the GOP.  But market-oriented Republican leaders know better and should be ashamed of themselves for their tacit if not active support of a business culture, accounting practices, tax policies, energy policies and tariffs that all contribute to negative growth, inequality and layoffs.  And investors seem equally short-sighted:  they are investing in GM despite structural cutbacks due to soft demand, especially for small and mid-size efficient cars and quarterly earnings.  The fact that the GM business is shrinking in North America because of tax policies, energy policies, tariffs and inequality may be offset by growth in China.  And even if it isn't, it's not going to affect financial performance metrics adversely, at least not yet.  

Now we can see how short-term investor interests align with current GM management, oil companies, and GOP policies on taxes, energy and trade, and, at the same time, their lack of concern for the long-term effect of layoffs, job growth, inequality, unemployment and low wages.  Together their lobbies produce plenty of media with simple messages and, in many cases, misleading information and outright lies.  This can only be packaged and sold as "America First" when we disregard feedback and relationships between distinct policies.  Republicans get elected promising to create jobs and restrict immigration while supporting policies that actually deliver negative growth, under-employment and short term profits instead.  It's no wonder that many of the same laborers who have just lost their jobs will continue to support the President and the new populist GOP:  the messaging unfortunately works.

So we’ve covered inequality, taxes, interest rates, growth, trade, energy policy, climate change and globalization.  But what about automation?
Over all, the American auto industry has added nearly 350,000 jobs since the industry bottomed out in the wake of the recession. But the industry still employs tens of thousands fewer people than before the crisis, and hundreds of thousands fewer than in 2000.
How growth without jobs be possible?  Automation.  Automation is relentless.  It is absolutely a factor in the loss of jobs and the increase in inequality.  And because of AI it's beginning to affect white collar workers as well.  Only owners benefit from automation because income is not pumped through the company to a workforce earning wages.  But who will buy the output from these new factories when so many workers have been replaced by machines?  What will become of the investments in this capacity when what appears to be limiting growth is demand?

One piece of bizarre, somewhat contradictory news:
Even though they are facing a potential slump, carmakers continue to spend heavily to develop electric vehicles and self-driving technology, both to meet regulatory mandates and to anticipate the future of driving. That shift is expected to remake the global industry and enable companies to enter new and potentially lucrative businesses, such as driverless taxi and delivery services.
Good.  The loss of jobs in one sector will be replaced by jobs in another, at least theoretically.  But the article does not say where these new vehicles will be manufactured.  Well, given the rest of the arguments in this article, it appears GM will be well positioned to enter these businesses at scale to meet future demand, at least in China, anyway.

So I found a lot to think about in this article.  But it bothers me that NONE of the points it makes are explicitly linked to each other and to policies as a dynamic system so readers can see how the effects it describes are interrelated.  Nevertheless, I'm sympathetic to the journalist:  I've diluted the simple narrative of the victim and the villain, making it a lot longer, harder to read, and a lot less memorable.  What editor could possibly go along with that?


Stephen Quatrano said...

Several readers have pointed out that soft demand for small and fuel efficient cars is not JUST a function of low energy prices. There is plenty of evidence that decades of marketing have actively pushed consumers towards small trucks and SUV's. And others have pointed out that GM management itself is to blame for a weak product like with resect to brutal competition in the small car market. These are pretty clearly underlying factors in the layoffs. It's important they weren't mentioned in the original article and they are both worth mentioning here.

However, to connecting these points to the larger system changes nothing. These same market dynamics are at work in Ford and Chrysler. They've made similar production decisions to move operations abroad for the reasons mentioned in the article, even though they have strong offers in the small car segment. And, tor what it's worth, this suggests that short-term, financially motivated decisions to push more profitable product lines is affecting Ford, Chrysler AND GM, making them ALL more vulnerable to increased fuel prices and therefore more resistant to policies we might favor that increase the cost of fuel to reduce the harm of climate change

Meanwhile, poor product marketing and engineering is more of a factor in the case of GM.

Complicated. And humbling. To be continued.

Stephen Quatrano said...

Others have pointed out that GM cashed the bailout check from the Federal Government, unlike Ford and Chrysler and therefore has some additional ethical obligation to protect US jobs. This seems worth mentioning too, although I can't see how this affects the larger feedback loops I was exploring in my analysis.

OptimistiCynic said...

Just saw this, Q.

FYI - the shift to SUVs is global (https://www.nytimes.com/2018/03/03/climate/suv-sales-global-climate.html). Also, with fuel efficiency, SUVs get better mileage (and hence have lower operating costs) than did sedans in years past.

Stephen Quatrano said...

Thanks for this, Rob. Pretty interesting. I had no idea the SUV phenomenon was global, thanks for the link. And it's also interesting that the fuel-efficient-SUV is no longer an oxymoron. I need to get past the stereotyping. Thanks for the corrections!