Special Report

The Five-Cent Lemonade Stand

Another name for Obamanomics' trillion dollar business model.

By 4.14.09

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Harry Stonecipher, the tough-talking CEO of McDonnell Douglas from 1994 to 1997, executed one of the great turnarounds in corporate history. He made no apologies for failing to provide greater job protection for employees. As he liked to say, the aerospace giant could "not afford one more worker than the minimum needed to satisfy the customer." Or, more succinctly still, he would say, "Only the customer can guarantee your job."

If having a job depends, ultimately, upon satisfying a paying customer -- a lesson many of us first learned as school children in mowing lawns, shoveling snow and doing other chores for neighbors -- what is one to think of the sustainability of the 3.5 million jobs that will supposedly be created or saved by the $787 billion federal stimulus package?

Still more, what is one to think of the future of the U.S. domestic auto industry -- or some of our leading financial institutions, which are now on federal life-support?

The key to understanding "Obamanomics" -- which is not so much hard-core socialism as it is wishful thinking masquerading as pragmatism -- is that it is based on a different business model arising out of childhood experience: not the self-initiated and arduous tasks undertaken by 10 and 11 year-olds seeking to earn extra spending money, but the more pleasant if boring job undertaken by much younger children in setting up a lemonade stand.

To a child of five or six (or to anyone these days who happens to be making economic policy in the Obama Administration), there's no such thing as real money; it's all play money, designed to imbue those who are throwing it around with a spurious sense of power and authority. 

The lemonade stand is subsidized front end and back -- with free inputs of lemons and sugar from parents and the indulgence of other adults who make a show of acting as discriminating customers.

Little kids see through the phoniness of thinking of the lemonade stand as a real business and soon tire of it. But the current economic crisis -- in undermining belief in the efficiency and fairness of the marketplace -- has revived faith in long-discredited economic nostrums, beginning with the idea that government is up to the task of restructuring big companies and, in doing so, turning lemons into lemonade. Thus, we saw the curious spectacle of four members of the President's auto-industry task force parachuting into Detroit last month and ("Here we go again," as Ronald Reagan might have said) getting a cram course on the economics of the automotive industry.

To review what would seem to be a simple story: In holding a monopoly over the supply of labor, the UAW, over a period of many decades, has used the threat of strikes to extract unreasonable pay increases and other benefits from management; in doing so, the union has been the willing and not exactly unwitting instrument of its own destruction.

So what did members of the task force learn on their fact-finding mission that might help them devise a cure for the fatal disease of excessive union power? 

Well, the first thing they learned was that they shouldn’t have worn suits in visiting auto plants, because that is a sight that offends the delicate feelings of the working men and women, or at least it does those of their UAW bosses. And second, they learned from their UAW hosts that, rather than being concentrated in the state of Michigan, retired autoworkers are spread out across the United States -- which is somehow supposed to make their fate a matter of national concern (note to the reader:  though the UAW surely did not go out of its way to emphasize the point, it is safe to assume that a disproportionate number of retired autoworkers are living in states such as Arizona and Florida, where golf is played year around). This second piece of information caused a soulful Steven Mousener, the task-force chairman, to confide in the Wall Street Journal, "At the end of all the numbers we are generating, there are real people."

Rattner (excuse me, it's Rattner, not Mousener) would have learned even more if he had simply picked up a copy of Roger Lowenstein's book While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego and Loom as the Next Financial Crisis, published in early 2008. Back in 1973, as Lowenstein recounts, the UAW won full pensions for early retirees under a "thirty-and-out" plan. This meant that an autoworker starting at a factory out of high school could retire with full benefits before the age of fifty -- becoming a permanent ward of the company while still in the prime of life. What a deal!

As described in Lowenstein's book, the gushing stream of cash flow that once went to GM's shareholders as dividends was thereby diverted to GM's current and future retirees:

Over a fifteen-year stretch ending in 2006, GM poured $55 billion into its workers' pension plan, compared to only $13 billion that it paid out in dividends. In other words, the company paid its pensioners four times as much -- not including the money that it spent on their generous health care benefits -- as it did to its ostensible owners!

And that explains why the company's stock has been in continuous decline -- not just over the past few years, but over the past four decades. GM's leaders over the years may be described as quislings for knuckling under to the union's demands. But there can be no denying the central part that union has played in the unraveling of the business. Rattner went to the right place when he started his visit to Detroit at the UAW's headquarters. It's just too bad that he went hat in hand.

Like the community organizer he once was, President Obama's approach to saving Detroit has been keyed to bringing different people and factions together…and selling them on his idea of a green and desirable future. He has called for "a set of sacrifices from all parties involved -- management, labor, shareholders, creditors, suppliers, dealers." In return for such "sacrifices," he promises various subsidies and speaks of a revitalized Detroit that will "lead the world in building the next generation of clean cars" and create new jobs that "cannot be outsourced."

This is beguiling rhetoric, but it is not the way anyone thinks (or can afford to think) in running a business. Businesses exist for the purpose of finding profitable ways to satisfy paying customers. The essence of private enterprise is that businesses go out of business if they aren't up to the task of earning a decent return on capital deployed while, at the same time, satisfying their customers (the automakers, unfortunately, have failed miserably on both counts). The creation of employment and the enrichment of workers are byproducts of running a successful business, not ends in their own right.

The lemonade stand that the administration is erecting for Detroit's benefit is like that of the kiddies in being rife with subsidies -- with little regard for whether the resulting product is anything that any real (i.e. independent and value-conscious) customer would want to pay for. The subsidies range from government-backed warranties and tax breaks to lower the price of cars, to elimination of a great deal of outstanding debt for the auto makers and the provision of federal loans to cover their working capital needs.

In subsidizing General Motors, the government is effectively trying to make up for an unfavorable cost differential between GM and the most efficient producers, and between GM and the manufacturers of the most highly desired automobiles. Either way, the subsidies impose both direct and indirect costs upon the American people (use of taxpayers' money, firstly, and then protectionism, disruption of trade, larger, more intrusive government, reduced return on investment and loss of productivity), and these are costs that are potentially open-ended and all too likely to mount over time.

To its credit, the administration seems to have recognized these dangers. It has acknowledged that it may still be necessary to hang out a bankruptcy sign -- with a possible Chapter 11 reorganization for GM and the further possibility of Chrysler going into liquidation. 

Even this government, it seems, may grow tired of the funny business of running a lemonade stand.

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About the Author
Andrew B. Wilson, a frequent contributor to The American Spectator and a former foreign correspondent, writes from St. Louis.