As Goes GM, So Goes the Country

On Monday, after a painfully long death spiral, General Motors (GM) finally filed for Chapter 11 bankruptcy protection. Oftentimes, bankruptcy portends rebirth. Unfortunately, the politically-inspired GM plan holds no such possibilities.

Under the current deal, the restructuring of GM will cost taxpayers some $100 billion (after the hidden costs of interest and refinancing are included). Even then, it is highly unlikely that GM will ever be competitive or that its debts will ever be repaid.

Far worse, the massive government bailout will delay rather than encourage broader economic recovery. And yet, U.S. stock markets rose on the GM announcement as if it were good news.

General Motors is but a microcosm of what most ails the U.S. economy. For decades, GM rested on its laurels. Its management yielded to innumerable, exorbitant trade union demands, passing the costs on to consumers in the form of lower quality products.

The result was that higher quality foreign cars, eventually also produced domestically by American workers, severely eroded GM's once dominant market position. The company's autonomy was effectively extinguished by the growing debt needed to finance this downward spiral. Investors, believing that GM was "too big to fail," continued to accept the company's high-risk paper.

In short, GM was brought to its knees by the abuse of trade union power and management's unwillingness to fight back.

Contrary to general belief, GM is not a huge employer. It directly employs only some 60,000 workers. This is less than one tenth of one percent of the number of Americans presently unemployed.

However, its trade union pension fund is being given billions of dollars of citizens' money and a major stake in the restructured company. Favoring GM workers over the millions of America's unemployed is grossly inequitable. The reason, however, is found in the murky world of politics.

The United Auto Workers (UAW), GM's primary union, was a major supporter of President Obama's election campaign. Predictably, this Administration has moved aggressively to subsidize them. Obama has taken the position that GM workers are an 'elite' and entitled to privileges not afforded to other workers. If GM were any other company entering bankruptcy, many workers would have lost their jobs, pensions and health coverage. Not so under the protective blanket of Daddy Government.

In its fight for grotesque entitlements for this small, but heavily Democratic, subset of the workforce, the Administration has run roughshod over those who financed the American auto industry, even labeling some as "unpatriotic" for failing to surrender their contract rights as bondholders. The notion that these stakeholders should "cooperate" to reach an "equitable" solution ignores the free-market cooperation that led to the original, contractual agreements. If I agree to give you half of my steak in return for half of your mashed potatoes when I finish my entrée, and when I go to collect you have eaten 9/10 of your mashed potatoes, can you plead poverty? You ate the potatoes!

Aside from these considerations, the sheer logic of the deal is faulty. Has Obama ever heard of opportunity costs?

Having pursued a path to commercial failure for many decades, it is clear that GM's management and workforce are moribund. However, the government has decided to pump massive amounts of citizens' money into this flaccid firm, without the practical ability to change its operations. Remember, the unions put Mr. Obama in office, and this project is meant to reward them. Will he have the courage to do what a profit-seeking management couldn't, by cutting the fat from this company? Obama now claims that a new "private sector" management team will be installed to make decisions independent of political control. This is farcical.

Economists believe that for each $1 billion spent on infrastructure projects, 35,000 wealth-generating jobs are created in the broader economy. The Administration is set on spending a minimum of $60 billion, and more likely $100 billion, to protect 60,000 workers at GM. Spent on much needed infrastructure, these same monies would create between 2.1 and 3.5 million real private sector jobs.

Furthermore, the money spent on GM represents a direct penalty against those foreign auto companies that manufacture domestically, who are fighting desperately for a piece of a decreasing market. American workers at these plants must surely feel unfairly discriminated against. Perhaps these competitors' ownership is overseas; but, while GM was shipping its manufacturing to Canada and Mexico, these firms were expanding their operations right here in America.

The federal bailout of GM exemplifies the grossly negative impact that government intervention has on the economy. As this type of behavior becomes ever more accepted and popular (barring a major change in voter sentiment), the prospects for the U.S. dollar and American stock markets is grim.

Yet, American investors are bullish on the bad news. They are reading corrupt bankruptcy proceedings and profligate spending as a sign of effective governance. This highlights how desperately most investors, indeed most Americans, are clinging to the red herrings of "hope" and "change."

As goes GM, so goes the country.

Comments

[Roy Cohen:]

We are witnessing the murdering of the free market system. and the justification provided for the bailouts is based on incorrect economic thinking. What is happening is nothing more than nepotism and legalised theft from taxpaying citizens. I only hope Americans realise what is being done to their economy and country before so much damage is done it will take many decades to repair. The problem with governments is they grow, like a cancer, slowly killing its host. The more they overide and meddle with free markets the more damage they do, resulting in more to "fix" and more government expansion.

Let the markets do their job!!! the inevitable corrections will be quicker and less painfull. Especially for those who are not "connected".

Jun 03 05:29 AM

[JohnAl:]

Excellent article!

It remains to be seen how GM will fare after it's bailout bankruptcy. The crony capitalist manner in which this went down has also disturbed many potential buyers. I wonder how many will now swear off GM, and how that sentiment may damage their future.

Jun 03 05:36 AM

[User 353732:]

Financial bankruptcy is often preceeded by moral bankruptcy.
The culture of entitlements, of rewards without value creation and of taking without earning has now spread to large sections of society and the economy.
The immediate target of the sustained and expand assault on both property rights and the competitive enterprise system is the middle class. The chosen weapons are taxes without services, regulations without benfits and debt without hope of repayment. Big Government , Big Business(esp the biggest financial, utility and industrial corporations), Big Labor and Big Media have one uniting value in common: contempt for the middle class.
Squeeze the middle class into political impotence and then a tiny , self perpetuating oligarchy with the support of the dependents and employees of the Parasitic Economy can keep consuming the substance of an inexorably weakining Productive Economy. The smart parasite of course, will bleed the host enough but not excessively.
We know that our domestic parasites are voracious but are they insightful enough to keep the Productive Economy alive?

Jun 03 06:25 AM

[Roy Cohen:]

Whatever happened to politicians being "servants of the people?"
Somewhere along the way they have begun to behave more like rock star celebrities or royalty. Those who innovate and add value are being used and abused by those who have been granted the power by a society mistakenly putting their faith in the ability and integrity of government. Why do we put faith in politicians interested only in being elected, rather than trusting the entrepreneurial ability of individuals operating in a free and competitive environment? It bothers me that so many are quick to blame capitalism and free markets for the problems we face, when it is quite clear that government intervention is the root of the crisis. It is also clear we have never really had a truly free market system. As long as governments have the power to allocate our dollars, regulate industries, set wages, set interest rates, how can anyone argue this is a free market? What is more worrying is how many of us buy that B.S. and open the door for yet more government control and intervention. No wonder we have misallocation of resources, no wonder we have bloated and powerful trade unions holding us to ransom, no wonder we have lobbyists vying for handouts of your tax dollars stolen from a decreasing base of productive individuals. This is not a sustainable situation and definitely not the principles which built America into an economic powerhouse. It is truly amazing the damage and destruction the arrogance of governments can achieve in a short time. It is time to put the government on a diet. It is time to deregulate our industries. Decrease the size of government and its spending (waste). Get rid of labour legislation and see true job creation. Reclaim the power from government. How can this be done? Easily! Vote for those that would privatise and deregulate industry rather than those seeing themselves as our saviours. This may not popular with the incumbents and those benefiting from the status quo, but for the sake of the economy, the country and the future it is time for the people to reign in the government. Let’s have real change, not just more of the same.

“The business of government is not the government of business” – Nigel Lawson

Jun 03 07:39 AM

[TeresaE:]

A huge part of GMs (Chrysler & Ford too) problems is that the UAW pushed them to off shore suppliers starting under Clinton. (again see the Democrat = better deal for fewer union workers).

They fired their best customers and for a couple years housing employed those former suppliers and allowed them to continue buying cars.

Right now, Chrysler & GM are handing out obituaries to even more American suppliers (and their employees), thus firing even more of the car companies' best customers.

Suppliers USED to buy their POS every 2-3 years. Once those jobs went to Asia and Mexico, the customer base shrunk.

Our government has been complicit in selling your children into low paid slavery.

And the market cheers.

Wonder who is going to be cheering at this time next year?

Jun 03 09:16 AM

[normthefedup:]

Author, you're a genius. E pluribus unum. Kudos. The fact that I don't like what's happening doesn't change the fact that it IS happening. We are witnessing the rapid downfall of America and that is tragic. In 50 years, we'll be the next United Kingdom. Just another second rate power. I am fortunate that I will not see it finally happen. Well said.

Jun 03 10:01 AM

[Danny Newton:]

If GM survives, jobs will be lost. That is because they must stop using 24 hours to make a car while their competition is using 16 hours to make a car. If GM fails, jobs will be lost, just a lot more jobs.

The unions targeted the industry by picking a target and then getting all the rest to go along with it. No matter how many people complained and warned that this day was coming, it looked like a good deal for everyone. The company got a solid commitment on future labor costs and the workers got more money/benefits. All of the smart people at the table seemed to agree and they had lots of pencils in their pockets.

The high compensation packages made those compensation packages vulnerable to eliminating the job through technology. Productivity increases were consistently more than twice the background population increases. Demand for most products is at least related to the population times the disposable income.

Thee is too much auto capacity with respect to demand and as one might expect, the least efficient producers are going to be pushed out of the market.

Jun 03 10:18 AM

[goldhammer:]

Mr. Browne, though I do not _want_ to agree with you, I do agree with you. I am not eager to demonize the government, unions or American manufacturing, but I have two words: British Leyland.

You know the story: failing domestic automaker, government backing, pumping demand, more 'investment' - and ultimate failure.

GM & the UAW aside, I chalk this up as part of the Main Street Bailout that follows the populist outrage (justifiable, in my eyes) over the Wall Street Bailout. Part and parcel of the political reality.

I wonder: is it better to let (fill-in your favorite bank/inv house/automaker) fail quickly, or better to prop them up for a more orderly wind down? I hold my nose and say: prop them up.

Jun 03 11:02 AM

[Mad Hedge F...:]

Not good. The fat lady finally sang. General Motors (GM) is gone at last. Don’t look at the share price, which now trades in pennies, down from $90. Look at the labor force, which has shrunk from 360,000 to 39,000 on its way to 18,000. I sat at Ralph Nader’s knee (because there were no chairs) 40 years ago, who wore his unfashionable trademark white shirt and pencil thin tie. He was fresh from the runaway success of his book Unsafe at Any Speed, which castigated GM for its Corvair, which had the unfortunate tendency to explode when hit from behind. Even then he was predicting the demise of GM. Companies that recklessly kill off their customers and produce inferior products at high prices can’t last, he said. Fuel efficiency and the environment came later. Many people considered him a communist then, for bashing GM was considered unpatriotic by most and treasonable by some. No doubt J. Edgar Hoover’s FBI was following his every move. I think that Obama should now make Nader a director of GM, along with that other GM hater, Michael Moore.

Jun 03 11:45 AM

[LJR:]

I was under the impression that the cost of producing a car in the U.S. by companies like GM and those like Toyota isn't that much different, just a few dollars, and that labor is only part of it.

There is, however, this great disparity in wages in the U.S. and other developed countries and in countries like China and India, and this is bound to cause problems. Eventually there will have to be a leveling out.

Jun 03 02:43 PM

[Davewmart:]

So it is all the Union's fault, and nothing at all to do with the fact that the top executives at GM and the other American car companies conned - sorry, of course I mean 'earnt' bonuses and salaries in the tens of millions of dollars, whilst the top man at those hopeless incompetents Toyota got around $900,000 a year?
American companies really buy quality for their vast salaries!

Jun 03 03:40 PM

[billp37:]

Morgan Stanley [Batie] and Goldman Sachs [Riesz] advisors speculated that Ford may have trouble competing against GM and Chrysler which have both shed debt.

home.comcast.net/~bpayne37/goldmansach...

?

Jun 03 09:25 PM