So What if GM Made a Big Quarterly Profit?

by: Ryan Avent

Commenter JRoth says (among other things) that I blew it on the issue of saving the automakers:

To my non-surprise, he’s written nothing. Back in the winter of ‘08-’09, he couldn’t say enough about the need to destroy GM: they would never be profitable again, it was a waste of money to save them, and they were an inherently wicked company. Three pages of GM-related posts come up on the site search, virtually all from that timeframe, and not a single one in the last year.

That would be the year that has proven Avent completely wrong. His analysis, and his understanding of the facts, were completely mistaken, driven (I guess) by emotion and ideology rather than any kind of grounding in the history of industry, industrial policy, and deindustrialization.

For the record, I didn’t advocate that anyone “destroy” GM. My recommendation was that the government provide a delicate way to allow the company to fail (GM had no trouble bleeding cash all by itself). But how about it? Was I wrong?

GM did just announce a quarterly profit of $1.3 billion, which seems nice. I may have overestimated how much money they’d need from the government before turning a profit. But let’s be clear about this: as of March of this year, the government had $76 billion committed to the automakers. So it’s perhaps a bit soon to be declaring the rescue a success.

I also argued that economic transition in the Midwest was an inevitability — that American auto sales and auto industry employment were unlikely to ever recover their pre-recession levels. That continues to look like a pretty safe bet. American auto sales remain well below the typical levels before 2007: around 11 million annually compared to 16 million in 2006. The same is true for employment in automobile manufacturing. Around 700,000 people are currently at work building cars in America (for all manufacturers, not just the Big Three). That’s fewer than at the point the rescue was initiated, and well below pre-recession levels. In 2006, nearly 1.1 million people were building automobiles. In 2000, the figure was over 1.3 million. The long-term health of the Midwest will depend on the strength of industries other than the automakers. That was true in 2008. It’s true now.

The other obvious point to make is that we need to know what the counterfactual is here. I never proposed that we tell workers in the Midwest to go take a hike. My view was that rather than throwing money at companies that would employ steadily fewer Midwesterners, no matter what, it would be a good idea to invest in the people and infrastructure of the Midwest. Sure, GM had a quarterly profit of $1.3 billion. So what? Is that a better or worse outcome for the Midwest than we would have seen had the $85 billion committed to the automakers been used to retrain workers, support credit to businesses generally, and invest in the physical infrastructure of the region? That’s clearly unknowable, but if we could run a controlled experiment, I know which strategy I’d put my money on.

There’s nothing miraculous or special about the fact that companies propped up by billions in government money continue to exist. And if that’s the measuring stick you’re using, you’re using the wrong measuring stick. I don’t care about individual companies. I care about the broader economy and the people it employs. And my sense continues to be that the money provided to GM has done little to improve the long-run growth prospects for the Midwest and would have been better used on other investments.