Autopia, Highly Compressed Garbage, and Bailouts

-

gomery twn.jpgFormer IBM top technologist and Sloan Foundation President emeritus Ralph Gomory has a provocative think-piece up at Huffington Post today titled “Autopia: A Tale of Two Bailouts.”
The piece is intriguing because Gomory casts winners, losers, and the narrative of the financial and auto bailouts at a distance — as if it were all unfolding on a distant planet.
Here is a chunk of the essay, but it’s worth reading the entire thing — and asking ourselves what part of the social contract with workers and firms and capital we want to proactively change in this era of bailouts so as to get out of the bleakness of Autopia:

Once upon a time on a distant planet there was a nation that looked a lot like ours — we’ll call it Autopia. They were indeed much like us, only with some things backwards. Autopia’s car companies looked and acted like our Wall Street, while Autopia’s financial companies acted a lot like our car companies.
In Autopia, the car industry did just fine for many years. It was a good industry and many people worked hard and got reasonably wealthy. But then a fundamental change of viewpoint took over the entire nation. This new and pervasive viewpoint dictated that all companies and this included the auto companies, had only one goal: To earn as much profit as possible. To a very large extent the companies came to care less about product quality, the fate of the middle class, and the overall state of the country. Instead it became accepted and even mandatory to measure everything solely based on profit. Elaborate rationales were invented that justified this new profit-centric doctrine and argued that maximizing the profit margins of the various companies benefitted all people throughout the nation.
This was the setting when HCG arrived. For a very long time cars in Autopia had been constructed out of metals and high-grade plastics. But with the introduction of this new material that the Autopians called HCG, everything changed. HCG was short for Highly Compressed Garbage. Highly Compressed Garbage was created by taking ordinary household garbage, condensing it in a high pressure compressor, and spray painting it. It looked and felt like metal and it was cheap, cheap, cheap. It really paid to introduce HCG into cars.
No one knew if HCG would hold up over time, but that was beside the point. HCG was cheap, and the cheaper the product, the higher the profit. Once the trend started, everyone had to join in or be left behind in the race for the only thing that mattered – profits.
There were a few truly golden years. Profits at the car companies soared to unprecedented heights. There were individuals who made a billion Autopian dollars in a year. The stock prices of the car companies soared, and very few people even noticed that all this wealth and happiness was based on an investment in garbage.
But after a while, bad news started to trickle in. A few HCG cars had started to fall apart, then a few more. This was ignored at first, but the trickle of failures soon became a stream, and the stream became a torrent. Soon all around Autopia, and in countries to which they exported, HCG cars were falling apart, and no one knew which cars would be next. Cars were collapsing and people were being stranded everywhere. Even the tow trucks sent to rescue them often broke down and joined the list of stranded vehicles.
Now you might think this would lead to a disaster for the car companies in Autopia, but fortunately for them, while they had been unwise with HCG, they had acted wisely in a political direction. Car companies always had considerable political influence in Autopia, but during the golden years their influence became immense. All major political parties vied for their contributions and were extremely responsive to lobbying from the car companies. As a result of this quid-pro-quo, many of the corporate beneficiaries of the use of HCG paid little tax. A car company executive even served as Secretary of the Autopian Treasury. So when the HCG crisis hit, the political investments of the good years turned to solid gold.
True, there were some hesitations before the government poured an unprecedented flood of money into the car companies. After all, profit was believed to be the only thing that mattered and the car companies were losing money and collapsing at an unprecedented rate, faster than any other industry ever. But the need for new solid cars to replace the old ones was too urgent. It was pointed out that the world might well come to a stop if there was not a flood of new money that would enable a fresh start, and this fear overcame even the doctrine of profits. The flood of money came, without strings. There was no change required in the way the industry worked; they didn’t have to give up their high compensation or buy back the broken garbage cars. After all, they had shown they could be profitable.
This treatment contrasts strikingly with the way the Autopian government handled another down-on-its-luck industry. Autopia’s financial companies had all kinds of problems, which started years back. Before profits became the only thing that mattered, and in a less competitive world, the financial companies had made share-the-wealth arrangements with their unionized workers. They had relaxed and become complacent. Foreign companies caught up with and surpassed their services. When they struggled back and provided competitive services, they were handicapped by the binding promises they had made to their workforce–promises that were no longer being made in the new profit-oriented world, and which their new competitors never had to make — and by the bad reputation they had with the many who used their services in the days before their services improved.

More later.
— Steve Clemons

Comments

10 comments on “Autopia, Highly Compressed Garbage, and Bailouts

  1. JohnH says:

    More evidence that the rot starts at the top, in this case with Chris Cox, who was intent on dismantling the SEC’s regulatory oversight:
    http://tpmmuckraker.talkingpointsmemo.com/2008/12/cox_worked_to_dismantle_the_se.php
    Like their defense for 9/11, the Bush administration will argue that their was no way they could have imagined such a calamity. Yeah, right! After massive deregulation, what did they expect?

    Reply

  2. rich says:

    Gomory reversed the treatment of auto vs. financial companies.
    It’s an allegory in which the ‘auto industry’ is a thinly-disguised metaphor for the ‘financial industry’. Autopia = Autarchy.
    Cars made out of Highly Compressed Garbage (HCG) sound suspiciously like the Structured Investment Vehicles (SIVs). Wall Street has the influence in D.C. — not Detroit.
    Which is interesting, because as the the SIVs fell apart, these financial wizards got the hell outta Dodge. They’re not just getting bailouts running to the hundreds of billions—they’re evading any and all taxes on the their profitable activities:
    Get this — Goldman Sachs has moved into the 1% tax bracket — by ‘moving’ it’s activities to other countries or jurisdictions.
    http://www.bloomberg.com/apps/news?pid=20601087&sid=aznONFlyupOI&refer=home
    The rate decline looks “a little extreme,” said Robert Willens, president and chief executive officer of tax and accounting advisory firm Robert Willens LLC.
    “I was definitely taken aback,” Willens said. “Clearly they have taken steps to ensure that a lot of their income is earned in lower-tax jurisdictions.”
    U.S. Representative Lloyd Doggett, a Texas Democrat who serves on the tax-writing House Ways and Means Committee, said steps by Goldman Sachs and other banks shifting income to countries with lower taxes is cause for concern.
    “This problem is larger than Goldman Sachs,” Doggett said. “With the right hand out begging for bailout money, the left is hiding it offshore.”

    Reply

  3. JohnH says:

    Like basketball, winning is good. Winning at any cost (bribing the refs) is bad. Corporate America corrupted the game, the most extreme form of corruption.
    Job 1 is to make sure that deregulation is seen as bad, very bad. Its advocates should be seen as lunatics. It should become generally accepted that calls for deregulation are outside the realm of acceptable public debate. Failure to enforce regulations should subject public officials to public humiliation. Bring back the pillory and the stocks!
    http://www.geocities.com/WestHollywood/Heights/9417/punish.html
    BTW, why is Chris Cox still at the SEC?

    Reply

  4. TonyForesta says:

    Word JohnH. Profit per se is not the problem. Profit as god, and profit by any means possible, including illegal, collusionary, malfeasant, prefidious, systemic deception, and insider bribing of politicians is the problem. Apple is a good example, because the products and services are exceptional. Contrast with the swindlers thieves, and pathological liars on Wall Street who colluded in concert with the swindlers, thieves, and pathological liars in the mortgage lending industry to FALSELY pumped up real estate values to unprecedented hieghts, disinformed consumers, and allowed individuals with inadequate resourses to purchase homes way beyond their means with no money down and a woefully lacking credit check. The goal was selling mortgages for profit all the way down the line, while failing to recongizing or appreciate, or account for the FACT that most of the mortgages illicitly sold were junk, non-performing, and certain to eventially default.
    Profit is one thing. Profit gleaned through illicit or criminals means is something entirely different.
    The basic issue is the rule of law, which of course has been ignored, and ruthlessly perverted, betrayed, and undermined for the last eight years. Profit gleaned legally is the heart of sound economics. Profit by any means including illegal, deceptive, illicit, and collusionary means is a crime, and undermines economics, economies, justice, and societies as we are tragically and painfully learning today.

    Reply

  5. Franklin says:

    It’s interesting at this stage to contrast Ford and GM. Ford has made the pivot into the 21st century — they will suffer in a sustained down-turn, but are currently in much better shape than a number of their competitors (foreign and domestic). A lot of this can be attributed to the company CEO — a guy with a background in finance AND engineering.
    GM brought in a guy from the finance industry, which perhaps made some sense in the short-term — the financing division was a money maker. In terms of product development though too many of GM’s product lines have lacked imagination and innovation. It still has some good product lines, which look viable for the long-term — e.g. the Chevy Malibu, Pontiac Vibe, Chevy Cruze, and potentially the Volt — but it also has quite a bit of crap.
    In terms of manufacturing, I think about a guy like Steve Jobs — someone who realizes that product innovation and a consumer oriented focus — are what ensure a market for products, and a company’s viability.
    Based on the overall failure of Financial Wizards M.B.A. programs need to have a more creative component — one that entails good business practice, and a consumer focus — rather than just finding creative ways to hide risk from investors and clients.

    Reply

  6. JohnH says:

    “Business as usual” is the operative phrase. Except business as usual has come to an end. So the “capitalists” are falling back on political “business as usual” with Congress–storming the halls for bailouts. Financial experts are increasingly pessimistic that this will turn out well, since it looks like a matter of time before the Fed has to start printing money and injecting inflation, perhaps hyper-inflation into the system. The “capitalists” (oligopolists) simply can’t control themselves. And there is no adult supervision in Washington.
    Per Thom Hartmann, FDR introduced the New Deal to save capitalism from itself, much to the chagrin of most “capitalists,” who were vehemently opposed to anything that infringed on their perks.
    Time will tell if the political elite will finally grow up, use the powers vested in them, and provide the adult supervision that the “capitalists” sorely need and resent.

    Reply

  7. ... says:

    JohnH – >>They took advantage of their position and essentially bought the government and changed the rules in their favor or dispensed with them altogether.<< how is that going to change given what we now know and with control of the propaganda outlets in the hands of a few??? with bush and it might appear with obama as well it is biz as usual while maintaining the phony facade called america.

    Reply

  8. Dan O'Donnell says:

    Trickle down; torrent up.

    Reply

  9. JohnH says:

    While it’s a popular refrain to attribute all our ills to the profit motive, I’m not sure that that is the root of the problem. Profit driven companies are valuable contributors as long as they accept their place in society and obey the rules of the game.
    Like sports, where every team sets out to win everything, rules are paramount. With no rules, basketball would look a lot like rugby and cease to be the same enjoyable sport.
    So the problem really boils down a failure of the rules based system (government). Companies were allowed to concentrate into a series of enormous, highly profitable oligopolies. They took advantage of their position and essentially bought the government and changed the rules in their favor or dispensed with them altogether.
    This is particularly true in finance, where laws were changed and regulators appointed to permit the development of a whole shadow finance system. Auto companies considered themselves too important to fail, and they believed that the government would bail them out if they got into trouble (a la Chrysler). So they used their clout to fend off rules (CAFE standards) that would have improved their competitve position long term but reduced short term profit somewhat.
    Until our dear leaders recognize that concentrated corporate power is that problem, nothing will change. Problem is that it is these powerful interests who underwrite our dear leaders, along with the media and think tanks.
    At some point, corporate leaders will have to realize that a lack of rules destroys the game for everybody. Until then, the prospects of anything changing are pretty dim.

    Reply

  10. ... says:

    Steve, i think this paragraph captures the kernel of truth to where we are at present..>>This new and pervasive viewpoint dictated that all companies had only one goal: To earn as much profit as possible. To a very large extent the companies came to care less about product quality, the fate of the middle class, and the overall state of the country. Instead it became accepted and even mandatory to measure everything solely based on profit. Elaborate rationales were invented that justified this new profit-centric doctrine and argued that maximizing the profit margins of the various companies benefited all people throughout the nation.<<
    the other comment i would like to make is that the financial industry is not an ordinary industry in that it has been built up on the very same premise in the above paragraph.. being pivotal to all financial transactions (excluding direct barter) it has been able to screw the planet royally with this same ideology, that loves to masquerade as capitalism…
    for all of this to change requires letting go an dishonest ideology, which requires acknowledging the dishonesty in the first place… usa politics is light years away from ever acknowledging that the goose that laid the golden egg is in fact a huge monster(greed) that continues to wreck havoc on the world..

    Reply

Add your comment

Your email address will not be published. Required fields are marked *