The Failure of General Motors Is a Failure of Government Policy

While the management of General Motors (GMGMQ.PK) over the past quarter century or more doesn't deserve any awards for stellar performance, I do view the GM bankruptcy filing as just as much, if not more, a failure of patchwork, inconsistent and irreconcilable Government policies during that time span. From the second highest corporate tax rate in the world to the lack of a unified health care system, the Government has time and time again interfered with the ability of GM to remain competitive. While the Government has continually imposed standards on the auto industry to improve mileage and reduce pollution, however well-intended, these policies have never been well thought out. As a consequence, GM, in order to cover its ever-expanding financial and regulatory obligations, was left with little choice but to manufacture a greater proportion of larger vehicles with higher profit-margins to help pay the cost thereof than otherwise would have been necessary with a more enlightened Governmental approach. Stated differently, Government policy caused GM to concentrate its manufacturing operations on a narrow focus of the automobile market as opposed to developing a more complete and well-rounded portfolio of products.

Over the years, the Government has also thwarted efforts to drill for oil offshore or in Alaska due to exaggerated environmental concerns. The result: America became more and more reliant on foreign oil. Meanwhile, the rest of the world continued to exploit their oil resources wherever located, onshore or offshore. So, in effect, this country unilaterally withdrew from the oil exploration business in the most promising areas for development.

What would have happened if the United States had promoted its own oil industry until the transition to alternative energy was possible? One benefit would have been a significant reduction of billions of dollars paid to Saudi Arabia and other OPEC members and a corresponding salutary effect on the U.S. dollar as balance-of-trade deficits would have been significantly lower. Perhaps the original Gulf War, principally fought to preserve the flow of reasonably-priced oil from the Middle East, would not have occurred, or at least in a more more limited form. Instead of striving to become energy independent from OPEC and to build up our own oil output through proven reserves, we chose to defend oil fields far away with American lives because environmentalists preferred pristine coastlines to economic independence. The environmentalists bear culpability for relegating our nation's overall national security to their provincial interests.

Of course, we would all prefer as little environmental impact as possible while achieving energy independence, but difficult choices sometimes have to be made. We have now seen what happens when this country is beholden to foreign interests for our energy consumption. We have turned the Middle East into a bastion of radical Islam by the very fact that we and other Western democracies have funded the oil producers instead of controlling our destiny without them. The billions of dollars dispatched to the Middle East, instead of being used by the OPEC countries to advance their societies economically, educationally and politically, have been used as hush money to covertly fund terrorist groups intent on destroying America to preserve the concentration of power and wealth in despotic regimes. More recently, the wars in Afghanistan and Iraq over the past eight years likely would have been quite different as well. Had we developed our energy resources properly, our involvement in the Middle East would have been significantly lessened and Islamic terrorism and hatred against the U.S. would have had fewer seeds upon which to grow.

In addition to failing to develop our own natural resources, the Government has failed to develop a coherent policy to deal with social security and medicare. Every year, employers face increasing costs as these programs are headed for certain bankruptcy. The demographics simply do not support a system where in the not too distant future, only two workers will be effectively supporting one retiree. In the initial stages of social security, the ratio was 16:1. That ratio, by definition, had to decline unless U.S. population growth surged beyond any reasonable prognostication of birth rates. Moreover, increases in life expectancy continue to put a further economic strain on funding. But, the failure to adequately address this time bomb even now has certainly imposed great economic strains on businesses, particularly those which manufacture goods and are more subject to international competitive pressures.

I am not advocating a reduction of current retiree benefits, but I am advocating that the system has to be redesigned to maintain its solvency. Already, the retirement age is slowly increasing, but that should have been done years ago. The social security tax is like a quasi-flat tax with one glaring deficiency -- it is only assessed against a portion of an employee's personal service income. There is no reason for this. If social security taxes had been assessed against the entire portion of an earner's income from inception or gradually increased to that level over time, the system would be significantly more financially secure today. It is frankly outrageous that people earning hundreds of thousands, if not millions, of dollars are paying the exact maximum social security taxes of people earning a fraction of their incomes. Moreover, proportionally shifting the social security and Medicare tax burden to the people who earn the most is not only logical but fair (to the extent one believes a flat tax is fair). Such a policy could also be structured to cap an employer's contribution per employee regardless of income level.

Disclosure: No position

Comments

[colion:]

Your title is not quite correct. As you note in the article, the problem is not just a government failure (which in turn reflects us the voters) but also of GM management. One aspect of this incompetence was accepting union contracts with ridiculous benefits. GM, like so many other companies and industries, looked to inflation to keep them above water and hide their actions.

Jun 08 08:51 AM

[john s. gordon:]

your focus on universal health coverage for all americans is laudable however it couldn't happen because the mammoth insurance corporations and the mammoth pill manufacturer corporations like to keep their cash cow just like it is.
> jack

Jun 08 09:09 AM

[Deweyp:]

Since the UAW has a monopoly on representation for auto workers for all of the big 3, they have the ability to shut one down during strike and allow the other 2 to continue to produce and sell cars. Faced with this possibility, GM was forced to accept the outrageous demands the union made or go out of business. We do not like to pay $4 a gal for gas but if you have no other choice you dig deep and pay it or park your car and stay home. GM was in the exact same position as share holders would not allow the company to go out of business, leading to an untenable contract. Michael is one of the very few who truly understands the situation that lead to the demise of GM and Chrysler.


On Jun 08 08:51 AM colion wrote:

> Your title is not quite correct. As you note in the article, the
> problem is not just a government failure (which in turn reflects
> us the voters) but also of GM management. One aspect of this incompetence
> was accepting union contracts with ridiculous benefits. GM, like
> so many other companies and industries, looked to inflation to keep
> them above water and hide their actions.

Jun 08 09:50 AM

[Trane250:]

GM and Chrysler failed because, given their cost structure and hidebound culture, they couldn't compete against Japan, Inc. Academics and their political acolytes in both establishment parties have endorsed and promoted unfettered free trade. If we had a fair trade policy, both car companies would still be prosperous.

Jun 08 10:41 AM

[WayneS:]

The only government policy visible is pandering for votes as evidenced in the congressional "inquest" this past week. None of the congressmen had any intelligent input. If GM had followed what the congressmen said they had been telling GM for years, GM would have gone bankrupt years ago. GM makes and sells the vehicles that we want. That is their business. They have a small margin of profit and is affected by the economy. Government intervention is the problem, not the cure.

Jun 08 11:41 AM

[Pstoneki:]

Unfortunately GM doesn't build the cars that most car shoppers want. If they did, they would have much a larger market share and I wouldn't have 2 Volvos, an Audi, and a Land Rover. GM never took the step of realizing that their market share did not support the size of their manufacturing capabilities. And now they are paying the price.


On Jun 08 11:41 AM WayneS wrote:

> The only government policy visible is pandering for votes as evidenced
> in the congressional "inquest" this past week. None of the congressmen
> had any intelligent input. If GM had followed what the congressmen
> said they had been telling GM for years, GM would have gone bankrupt
> years ago. GM makes and sells the vehicles that we want. That is
> their business. They have a small margin of profit and is affected
> by the economy. Government intervention is the problem, not the cure.

Jun 08 12:24 PM

[colion:]

True but, for example, they had the option of going overseas to a greater extent than they did. One way or the other management could have taken actions to neutralize the UAW but did not. The belief that inflation would bail them out was a fatally flawed position that did not encourage (or perhaps even discouraged) innovative actions that could have increased their efficiency, market position, and strengthened their negotiating power with the UAW. There is always more than one way to skin a cat.

On Jun 08 09:50 AM Deweyp wrote:

> Since the UAW has a monopoly on representation for auto workers for
> all of the big 3, they have the ability to shut one down during strike
> and allow the other 2 to continue to produce and sell cars. Faced
> with this possibility, GM was forced to accept the outrageous demands
> the union made or go out of business. We do not like to pay $4 a
> gal for gas but if you have no other choice you dig deep and pay
> it or park your car and stay home. GM was in the exact same position
> as share holders would not allow the company to go out of business,
> leading to an untenable contract. Michael is one of the very few
> who truly understands the situation that lead to the demise of GM
> and Chrysler.

Jun 08 12:41 PM

[robinjoe:]

If all this is true, why isn't Ford bankrupt? Maybe the arguement can be made that that domino will fall soon, but it hasn't yet. Real problems:
A) Little innovation (Where is the iPhone car equivalent?)
B) Dealers treat customers horribly (Japanese don't)
C) Poor quality
D) Not even really trying to run a profitable business, entitlement mindset

Jun 08 02:07 PM

[WayneS:]

Pestoneski - On AOL, I saw that the majority of people over 50 buy American and those under 50 foreign. Also that 9 of 10 cars that get ticketed are foreign. 9 of 10 of the cars that are least ticketed are American. I don't know if these are related or not. I do know that the fuel mileage for American vehicles has steadily gone up over the last 20 years, while the fuel mileage for foreign vehicles has gone down as they try to copy American car makers. I am over 50 and I have only had trouble with foreign cars. Also, I got better fuel mileage in my 1-ton dually with 3 carpoolers than I did with a Toyota Corolla. Also, we didn't have to put our briefcases in the trunk. To each his own, I guess. We all have our preferences and prejudgice (however it is spelled). PS. My next vehicle will be American if the government allows it. It will be a long time from now as I only have 186,000 on my Buick and 247,000 on my Dodge truck.

Jun 08 08:51 PM