What to do With GM?

The conversation is now quickening. The topic is GM. I suppose in a broader sense the topic is actually what to do about American owned car companies since they are all suffering in one way or another. Here’s a New York Times story today to set the stage:News Analysis – G.M.?¢?‚¬?„¢s Troubles Stir Question of Bankruptcy vs. a Bailout

Here’s my take on GM:

I tend toward bankruptcy. This is because I see no plausible route whereby taxpayer money will be sufficient to stave off bankruptcy in the longer term.

GM is not just financially bankrupt, it is intellectually and managerially bankrupt. It is a company whose management completely and willfully sought to develop a product set that appealed to ever smaller segments of the world market [think behemoth SUV’s]; who sought to thwart improvements in emissions standards; who negotiated self-destructive union contracts; and who are still to this day advocates of the denial of man-made global warming. These are appalling managers who cannot and should not be trusted with a dime of public money.

In view of this terrible record an injection of taxpayer cash would need to be accompanied by a turnover of management and direct ownership rather than ‘loans’ or any other such fictions.

I doubt whether the current administration, the Bush team, will allow any such thing. So I say let GM go bankrupt.

As a matter of politics it looks as if the Democrats are piling in to give away cash to the car companies in order to shore up and reward their constituencies. That’s fine. It mimics the way Republicans have just handed over half a billion dollars to banks whose managers are just as devoid of current and sensible ideas as their automobile counterparts.

But we should think that good politics is necessarily good economics. In this case the two conflict. In the long term [economists love to hide in the future!] there can be no doubt that whoever makes cars needs to be more sensitive to the environmental impact of their product and to the cost of running those cars. Getting away from oil is therefore a priority. Some car companies have made significant steps in that direction. They just aren’t American owned. Many of them employ large numbers of Americans to make those efficient cars here in America. So the technology is here also. It is the management of that technology, or more technically: the governance structure within which the technology is deployed that we need to address. I have no doubt that America will have a strong car industry in the future. It will be smaller until its costs and products are in line with the rest of the world. And it may not be American owned. Getting form dinosaurs like GM to that future is the relevant question.

In a market driven society like ours the correct option to the kind of abysmal failure that GM represents is bankruptcy. Unless we want to restructure the economy along European style social democratic lines, which I am not opposed to, then we have to use the best tool available. That would be Chapter 11.

Of course the disruption and chaos caused by losing our largest manufacturing company would be huge. The social cost in the communities concerned would be massive. But that’s where the government has a legitimate role: huge targeted re-education, welfare, wage loss, housing, health and retirement programs could be put in place with the same money now being talked of as a cash infusion. By making direct use of the money the taxpayers can be assured that the objectives of their intervention, the mitigation of social damage, are being achieved without an ancillary loss caused by the inevitable waste that would result from handing over piles of cash to inept managers.

Once GM enters bankruptcy the people who are most to blame for its failure: its management, unions, and shareholders will be forced to make decisions that they would only delay were they the beneficiaries of taxpayer largesse. Other once mighty industries have gone through this process. I am not advocating it as painless. But it is the correct solution.

Some might argue that we have given unfair preference to the financial industry were we to allow a GM failure. This is not the case. However large an employer GM is, even including all its feeder suppliers etc, it plays a much smaller role in the total economy than the financial industry. The focus of the bailout of the banks was to bolster the credit system rather than to save specific companies. The fact that a number of rotten and inept management teams were saved was collateral damage within that larger goal. Also the fact that the Treasury and the Federal Reserve Board have wandered off topic and have been less than transparent in their activities should not detract from the main objective. The financial bailout was aimed at a systemic problem. GM represents a significant but localized problem.

Consequently it can be allowed to fail.