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The Economics Of Another GM Bailout

Posted in auto industry, Cars, Detroit, Ford, GM, Newsworthy, Politics, Scandal by Vito Rispo | November 10th, 2008 | 13 Responses |

“Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress but as a danger. I call this the make-work bias, a tendency to underestimate the economic benefits of conserving labor. Where non-economists see the destruction of jobs, economists see the essence of economic growth: the production of more with less.”
–Bryan Caplan

GM and Ford are once again begging at the doorstep of every honest, tax-paying American. Just two months ago, Congress gave the Detroit Three $25 billion dollars worth of bailout money, and now they want more. They say this time it’s different; this time, with only $50 billion, they can become profitable. The worst part is GM’s argument for the bailout: they say if the taxpayers don’t bail them out, it’ll spell horrible doom for the economy.

Now, I could go off on an economics lesson about how moving workers and resources from a less productive activity to various other more productive activities is a very good thing, and has great benefits for society. I could quote economists talking about how preserving jobs in unproductive business is actually a bad thing and hurts the economy. But people generally aren’t interested in stuff like that. So I’ll take it in another direction.

First off, GM’s trouble isn’t an industry-wide problem. Other auto makers are having difficulties, but they’re not asking for a handout of taxpayer’s money. For years, GM and Ford have been lagging behind their competitors. To put it in economist’s terms: they’ve been making cars that consumers don’t value as much as the cars made by their competitors. But instead of changing their cars or their way of doing business, they just spent their money on lobbyists. They tried to work the system to stay afloat. Companies like Honda and Toyota kept improving, making cars that consumers wanted, anticipating demand, while GM and Ford just… didn’t.

Secondly, 266,000 people is a lot of people. That’s a massive work force, but there are 9 other US companies that are have a bigger workforce than GM, and one of them is Wal-Mart. What if Wal-Mart asked for a handout from the US taxpayers? I doubt they would get the same amount of sympathy.

So what do we do? If I’m not part of the solution I’m part of the problem, right? Well, if we bailout Detroit again, $50 billion will only be the start. We’ll be locked-in to a partnership with a failing company, forced to “protect our investment” by giving more and more money to the sinking ship, but there will eventually come a point where it just won’t matter, and it’ll go under anyway.

So get it over with now. GM needs to file for bankruptcy, that’s all there is to it. Bankruptcy protection will get them out from under the thumb of the UAW, giving them a chance to really become competitive. GM could strip down and become a lean, mean, automaking machine, freed from all the red tape and bureaucratic nonsense that bogs it down now. But even if they don’t, even if GM fades into nothingness, that’s still a good thing. Those 266,000 GM workers and all the resources currently being used by GM in unproductive ways would be freed up. Those workers would be a valuable pool of employees for productive businesses, and the resources and buildings could be bought up and used by productive businesses. It would give a nice boost to our economy. But will it happen? Not bloody likely.

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13 Responses

  1. Suzanne Denbow says:

    Uh, don’t be so hasty to lump Ford into that category. They haven’t been actively panhandling like GM, and Mulally’s plan to bail Ford out consists solely of building better product and tightening the budget – he is not actively begging Congress for aid.

  2. adam hartung says:

    Remember when Circuit City was a favorite in “Good to Great” by Jim Collins? Remember when we thought being big gave you clout with customers and vendors to produce long-term returns (Michael Porter’s 5 Forces Model)? It’s time we recognize that the old approach to management doesn’t work in a rapidly shifting competitive world. There are winners in today’s market, but they follow a different approach. Read more at http://www.ThePhoenixPrinciple.com

  3. It is important to remember that when talking about economic theory, the key word is “theory.” It leads to the idea that instead of 266,000 people losing their jobs, they are “freed up,” along with the assets of the General, to do other more productive things.

    That argument is, interestingly enough, not only being used by libertarians, but now also by those interested in a so-called “green” economy, such as the president-elect. The theory is people who transition from making Chevrolet Tahoes or Cadillac Escalades to solar panels or plug-in hybrid vehicles.

    Would that it was that simple, that easy. Taking someone who has made $23 an hour for plugging bolts into a panel for years and feeding their family and paying their mortgage, while they retrain, is a major endeavor; however, that has not stopped Toyota from doing something similar with a plant in the Midwest – Ohio as I recall – designed to build Tundra pickups, being reconverted to make Prius automobiles (the first domestic factory for the Prius).

    How does Toyota do that and GM doesn’t. It’s about cash reserves, right? That is what GM is burning through, at this writing, with the alacrity of a sailor spending money on leave in Hong Kong.

    Toyota can also do what they are doing for its workers, due to the fact that they look to the future five or 10 years out, not just three or four business quarters. Toyota also seems to understand that its best assets are indeed its workers. To GM, workers are merely labor costs walking around on two legs.

    I share your concerns Vito, but it seems we are fated to bail out Rick Wagoner’s incompetence and Bob Lutz’s inability to see how product was changing; two men who didn’t understand the value of the EV-1, in terms of its enhancing the company’s reputation with environmentally inclined consumers, nor a way of providing alternatives for the longer haul.

    You might want to give a call to David Cole, at the University of Michigan (Center for Automotive Research) to see what he has to say.

  4. Lawrence says:

    Why bail out GM when could save the Candlemaking industry?

    http://www.investopedia.com/ask/answers/08/candle-makers-petition.asp

  5. Shibakoen says:

    Terry, I agree with you that workers will have a rough go of it when they are forced out of their jobs and this point is minimized by saying the workforce is “freed up”. We do have unemployment insurance to help ease the transition, but it will be very difficult. But while we’re taking a realistic look at the lives of the workers, let’s take the thought experiment a bit further.

    First of all, what kind of an idiot thinks their life will be set when their only skill is ‘plugging bolts into a panel’? Workers that make their living this easily should know that one day they will be redundant and/or replaceable by a cheap robot or a cheap Mexican worker. Why should we even spend millions to send that person through public school if their professional lives will culminate in being able to ‘plug bolts into a panel’? Is this ‘contribution’ to our industrial prowess even worth $23/hour? We’re finding out now that it is not. Oh, wait, Chrysler supposedly found this out 30 years ago when we bailed them out the first time!

    The fact is that forcing workers to join unions and pay dues, takes money away from workers, encourages corruption and bleeds industry dry by forcing manufacturers to basically guarantee a comfortable livelihood for every ‘bolt plugger’. If Michigan were a ‘right to work’ state, I don’t think Detroit would have the problems it has. The fact is, the bolt plugger should have realized long ago that his job would be easy to replace — if it weren’t for the powerful union — and should have been spending his free time (40 hour work weeks must be nice) re-educating himself. Although it would have been preferable for him to have paid attention during all that free schooling, gotten a scholarship to go to a college and gone on to invent the robot that could plug bolts into panels even faster, cheaper, and more efficiently. Unfortunately, GM wouldn’t have been able to buy the robot without raising Cain with the Union, so instead the bolt plugger could have created a new car manufacturer that made more reliable, fuel-efficient, and desirable cars and laughed as GM went bankrupt. But no, the bolt cutter instead spent high school drunk and is now crying to his Congressman that his job should be preserved because he’s “too dumb to learn.”

    I think libertarians are a bit crazy because we definitely need government spending on roads and infrastructure, defense and education among other things, but like hell our tax money should go to an inefficient loser companies like GM, Ford and Chrysler. I mean come on, they have a built-in market in government agencies. There are more than 80,000 government units around the country and I guarantee no cop is going to be driving around in a foreign made squad car. Even if these companies only catered to governments, they should make BOATLOADS of cash. Instead, they waste money turning Fox’s Sunday Football pregame show into a running infomercial for the new F150. IDIOTS!!! IDIOTS ALL OF THEM!!!

  6. [...] speaking of insolvent companies, poor GM wants the government to bail it out too.  Not because it will ever be profitable again, but because a lot of people might otherwise lose [...]

  7. James says:

    “I think libertarians are a bit crazy because we definitely need government spending on roads and infrastructure, defense and education…” – Shibakoen

    Libertarians =/= anarchists.

  8. Before unions, we had not only had weeks with more than 40 hours, at wages that were pathetic, even for their time, but also child labor. Not all unions are corrupt, but then in some cases, unions might not be necessary.

    I don’t know that only people who put bolts into panels don’t want to spend their time learning new things. As HL Mencken once said, “No one ever lost money underestimating the intelligence of the American public.”

    As a people, Americans do not value life-long learning. How else to explain why football is the national religion and the high esteem most Americans hold professional athletes in, while still using what started out, and remains, an insulting term for those who love to learn: geeks.

    For an understanding of how bad things were before unions, consider reading “The Jungle” by Upton Sinclair; or go visit almost any slaughterhouse in America, most especially the ones where most of the workers are Latino.

    For an understanding of how bad it is – and how bad the attitude can be – read “Rivethead” by an author whose name escapes me.

    This is a turning point for not only the American auto industry, but America in general. Let’s hope we make it.

  9. larry says:

    Unions are entirely unnecessary, the only thing they’re really good at is creating a problems between labor and management. Unions value seniority over work performance, that means if you’re a mediocre worker and you show up on time- you make more money than than someone who is twice as productive and also shows up on time simply because you have worked there 12 years and he has worked there 10 years. Only in a labor union is that possible. How is that good for the economy? How is that good for anyone? Well maybe the Union.
    I think religion is the reason that “Americans do not value life long learning.” According to a 2002 study by the Pew Global Attitudes Project, the US was the only developed nation in the survey where a majority of citizens reported that religion played a “very important” role in their lives. Religion does not promote learning, it gives you illogical answers without proof and condemns you for asking questions. If that plays a major role in your life, of course you’re not going to value learning.
    As for child labor, during the Industrial Revolution most children worked on farms but when the demand for workers increased they moved to factory work. Over time when wages rose, their parents earned enough money to send their children to schools and child labor declined. How many of us have heard stories of our ancestors who worked their entire lives and made sure their children went to school? It’s just a stage of economic development. It’s only natural to want to give your kids a better life than the one you have.

  10. Becky says:

    Could I please get a bailout? They thinkg 50 billion is cheap, I’d just need like….2 million. That’s like peanuts! Pls let me know who to contact about this.

  11. Shibakoen says:

    I actually agree with larry and Terry – if that’s possible. I absolutely think unions are necessary. Having worked overseas for crappy (criminal) management without the power of a union, I know how helpful it could be to improve the state of workers’ rights.

    However, workers should have the right to join them if they please. Secondly, one shouldn’t have to pay dues. After all of the union corruption that we’ve had in the past, it should be criminal to force workers to join these organizations and take their money to fund. I don’t have a problem with workers uniting. I have a problem with forced unionizing and powerful, corrupt union management. If the Big 3 were in a Right to Work state, I don’t think they’d have all of the problems they have now. They’d still have some, of course, but I think they’d be in a much better state to compete with Toyota and Honda (which produce cars HERE for comparable wages for workers — yet aren’t continually in trouble and asking for handouts).

  12. Karen says:

    “If you’re occupying an ivory tower or a talk-show microphone, you have the luxury of debating economic theory. If you are among the one out of ten workers who depend on the auto industry for your daily bread, the question is a little more immediate.”

    10 Reasons why we should help the American Automotive Industry

    1. It would be one in many decisive step toward putting America on the forefront of the Green revolution — “Do we really want to depend on Japan, Korea, and Germany (and soon China) for the future of our cars and related technology or do we want it grown here in the USA?” for our generation the new Green Energy revolution will be equivalent to the space race of the 60s. Whoever gets there first will be a power player in the world economy. And guess what the American Auto Industry got there first and will be able to regain that spot if we help them through this difficult time. By 2010 the GM Volt will roll off the assembly line. This will be the first fully electric production vehicle produced. Talk about Toyota all you want, the truth of the matter is that Toyota’s answer to the Volt is a plug in Prius. That vehicle will be able to travel 7 miles on a charge vs. the Chevy Volt’s 40 miles on a charge. That vehicle will be gas base vs. the Volt being a true electric car. Beside that US auto manufactures are working on Plug in hybrid, Clean diesels and hydrogen vehicles.

    2. They do produce cars that American want to drive –.Just a short time ago that was the SUVs. The American appetite for the SUVs did not change until gas prices became unbearable for most consumer. That did not happen until price where well over 2.50 per gallon. And that happened in 2007. And even with the change in gas prices GM still sold, more than 9.3 million vehicles, keeping the brand in a dead heat with Toyota as the world’s largest automaker. It was the second-best sales year in GM’s 100-year history. US auto companies change gear to pick-up the production of their smaller car lines in 2008. And in 2009, dealer showrooms will boast about 140 models with highway fuel economy ratings of more than 30 miles per gallon. That’s an increase of 25 percent over the number of 30 mpg products offered in 2008. Model year 2009 vehicles will include 25 hybrid and eight clean diesel models, as well as autos employing fuel-efficient technologies like continuously variable transmissions and cylinder deactivation. By 2010 the GM Volt will roll off the assembly line. This will be the first fully electric production vehicle produced. Soon to be followed by plug in hybrids and on the horizon hydrogen vehicles (which are already being driven by selected consumers around the country).

    3. We are Americans and if we are going to succeed in this global economy we need to stick together – Ask yourself in these hard economic times would Japan allow Toyota to fail, would Germany allow Volkswagen? More importantly given the lessons of the financial meltdown, we need to return our economy to one that’s based on producing real products not financial paper pushing. Sure, we should have bailed out textiles before it all went overseas. We should have slowed the loss of electronics. But because we didn’t save those industries doesn’t mean we shouldn’t now save the American auto industry–particularly given the lesson of the financial collapse. We need to save the auto industry because cars are one of the few things we make anymore–and we need to focus our economic recovery on the things we make rather than on the bubbles we finance.

    4. They Saved Us not to very long ago – We owe the Auto Industry some help. They helped save this country in World War II. If we loose our leading Manufacturing base do you really want to rely on Japan and Germany to make our tanks and planes. I’m sure this would be wonderful news for Toyota and Volkswagen but I’m not so sure I would want my country’s security dependent on their good will toward us.

    5. It is very likely that our country will make money by helping the US auto industry- In 1980 we guaranteed $1.5 billion of private loans to Chrysler. Chrysler paid back the loans with interest and the US government made $400 million on the deal.

    6. If they went under, the job losses would touch every State in the union — Nearly 3 million jobs would be lost in the first year alone – with another 2.5 million to follow over the next two years. 1 out of every 10 people employed in America today is tired to services that is related to the U.S. auto industry. These people would see job cuts as well.

    7. American Standard of living would be adversely affected — Personal income in the United States would drop by more than $150.7 billion in the first year. “To put GM failing into perspective, in 1998 during a GM strike that lasted for 3 months, the aggregate US GDP dropped by 1/3rd”. Think about that, one company being on strike for only 3 month cut our Gross Domestic Product by a third. The government standing back helped cause the Great Depression. Did we not learn the lessons so painfully taught to our grandparents.

    8. The US tax base would see substantial erosion — The cost to local, state, and federal governments could reach $156.4 billion over three years in lost taxes, and unemployment and health care assistance. This affects every American not just those tied to the auto industry. Meanwhile the most of the profits of foreign-brand cars assembled or imported in the United States go back to their home countries. Yes, foreign companies pay tax’s on their operation here in the USA, the bulk of there operations feed their country’s tax base not ours.

    9. Domestic automobile production would more than likely fall to zero – even by international producers, due to supplier bankruptcies — “If GM goes down, it will take down companies like Lear and Johnson Controls,” That will shut Ford down, and it would shut down production at Toyota and Honda,” John Wolkonowicz, an analyst for Global Insight, told Automotive News. “They would go down like dominoes.”

    10. “We’re lending $120 billion to an insurance company. There’s $700 billion set aside for banks and others whose leaders enriched themselves while ruining their companies and our economy. The leaders in the US auto industry have made their mistakes–plenty of them–but they didn’t enrich themselves beyond decency as those other executives did. Today’s economic problems, brought on by subprime mortgages, credit default swaps, a credit freeze and a stock market collapse, were caused by those other folks not the US auto industry”.

  13. Uncle B says:

    Mao’s revenge, – a self-regenerating and endless army of country girls in their prime, manning Chinese factories for 55 cents an hour, and working 12 hour shifts, 7 days a week, pooping in floor slot toilets, sleeping on 3′x6′ mats on the floor in the factory, eating at the in-factory cafeteria, wearing company uniforms 24 hours a day, color coded to indicate their departments, they return to the peasant farms whence they came when burned out, pensionless and – no economic burden to anyone, die an early and convenient death! and have ALREADY been taught by GENERAL MOTORS – U.S. how to build Buick LeSabres and a Cavalier like car called the Cherry! They will take a job from your neighborhood soon! They have no costs to commute either, they don’t even own cars. – the world is a changing place, and not all for the good – the neo-cons and Uber-rich stock holders of America are tired of your (very expensive) sort, and prefer her (very cheap) sort! as far as they are concerned, don’t you kiss your sad ass goodbye, just f##k off and die! P.S. The Chinese country girls will soon learn to build Electric cars if need be! So watch the Walmart ads for latest info on sales here! Same girls, but from India already dominate the computer world, and thanks to satellite communications, do our banking now, from India! Smaller components for Honda, Toyota, Hyundai, are currently supplied by the same army of Asians! The current “bullshit smokescreen” about bankruptcy of car companies IS A CON JOB to place blame, and contrived so that current (soon to be former) GM, Chrysler and Ford employees and retirees will be shuffled over to a government liability before re-amalgamation and the rise of the final victor CORPORATION! owned by the same crooked shareholders! The spoils are the sales rights for this new corporation to the new Chinese lines of cars in America, and destined to under price Toyota, Honda, Hyundai and Mercedes out of the market place with cheap Chinese clones! And as for capitalist corporations, once the corporation dies, nobody is liable to anyone – poof, you’re a bag of shit, Yankee Doodle!