Wednesday, April 1, 2009

Shrinking GM will make us poorer as a nation

Last September’s bankruptcy of Lehman sent markets around the world into a nosedive and economic activity followed. Lehman’s complex interrelationships with financial counterparties triggered a domino-like collapse, the repercussions of which are still being felt today.

While Lehman was a big firm it was nowhere near as big as General Motors. Moreover, as a financial intermediary that basically brokered or traded paper contracts for itself or other parties, its contribution to the real economy was small.

General Motors on the other hand is a different story. As an enormous producer of cars, trucks and other vehicles, and the owner or developer of the technology involved in that process, it is an important part of our nation’s stock of real wealth. Putting GM into bankruptcy (and Chrysler as well), by definition leads to the diminution of the real wealth of society, both now and in the future.

Many people argue that GM and the other U.S. automakers are “not viable” and should be left to fail. Even President Obama has been saying this.

However, the viability argument is tenuous at best. General Motors, until recently, sold more vehicles than any other automaker in the world and with all its problems is still only marginally behind its closet rival, Toyota. For those who espouse market fundamentalism—that the market should dictate the success or failure of firms—then GM has been quite viable.

Those who argue that GM’s legacy costs—its contracts and commitments to employees, many of whom are union members—reduce its long-term competitiveness; fail to understand that for decades the Japanese government engaged in policy designed to support their automakers and to bestow upon them competitive advantage. That included protectionism, direct subsidies, currency manipulation and other impediments to free trade.

Now that those policies have diminished we see Toyota and other Japanese automakers struggling with many of the same problems that GM has. For the first time ever they are experiencing operating losses and are having to shed jobs and close plants. Yet you don’t hear anyone asking whether or not Toyota is viable.

The real problem faced by GM and automakers everywhere is that we are in a global economic contraction that is the worst the world has seen since the 1930s. Even the best run firms, both inside and outside of the auto industry, are having a hard time coping with that.

It is a shame that President Obama has chosen bankruptcy as the path to fixing GM’s problems. For one thing, bankruptcy is not likely to be as quick as he envisions. On the contrary, for a firm GM’s size, it’s likely to be a long, drawn out affair with many, many, other firms and with millions of workers affected. At a time when the economy is struggling just to stabilize, this creates a high probability that it will be sent crashing down to an even weaker state.

President Obama and Congress have the means to fix GM without putting it into bankruptcy and harming an already weak economy. The Government should be doing all it can right now to sustain demand. This would ensure that GM and the other automakers, along with businesses of all types, continue to see sufficient sales and activity so that they remain ongoing concerns and keep workers employed. Without sufficient demand we will soon be questioning whether any firm is “viable.”

Putting GM into bankruptcy is not the answer. Adam Smith once said, “the real wealth of a nation is the abundance of its consumables.” Reducing our capacity to produce the vehicles that will eventually be needed by the current and future generations—and the technology that goes along with that—leaves us poorer as a nation. That is the real legacy we will be handing down to our kids.

1 comment:

Unknown said...

Amazing that the Obama admin didn't force a "wage" restructuring down the throats of Geithner's wall street buddies before they could receive govt assistance.

If any industry isn't "vital", it's the wall street investment banks. Let them go and help GM and Chrysler.