Wednesday, June 3, 2009

GM and the government

This is a little dated, but it's a topic I brought up on my twitter as it came out.

I'm extremely interested in the recent GM situation. Check out this article:

In order to save GM, Obama took a 60% stake in the company. Although he assures critics that the government will take a silent backseat when it comes to corporate decision-making, the fact remains, that GM has been virtually "nationalized".
Is this a slippery slope, as conservatives are calling it? I wouldn't take it that far. But it certainly questions the face of capitalism and government-involved as undertaken specifically by Obama (yes, the bailouts began under Bush, but direct stakes in companies only began this year). Michael Useem, a professor of management at Wharton says in the article that this decision would "mean a new chapter in the history books on American capitalism." Indeed, silent backseat or not, we're facing heavy government involvement....maybe in a place that we don't want or need it.

As Robert Reich, a noted liberal economist, Professor at Berkeley, and the Secretary of Labor under Clinton, has said, this bailout is a waste of taxpayer money and pointless. (Ref: This is somewhat true. Although GM, in its new strings of advertisements, are assuring potential consumers that it's being reborn, simple research is proving otherwise. One research group estimated that GM's market share is going to go down to 17% from a slipping 19% (GM predicted a healthy 18.5% in its own research). GM automobiles have more breakdowns and have a higher MPG usage than any Japanese car. Young consumers go straight to Japanese dealerships now instead of even considering American cars.

So, what kind of precedent does the government's involvement in GM set for corporate responsibility and financial strength? And, more importantly, are we trespassing a fine line that American capitalism was not set up to transgress?

Hmm. Political economy at its finest. Thoughts?


Sidharth said...

At the end of the day, fine tuning an economic principle of a market economy is worthless to a politician. It's the politics that matters.

Mike said...

The example of the US sinking $60 billion into a corporate giant like GM is not so much about saving the industry or protecting existing jobs, rather than it is to cushion the inevitable blow of these industries and these old business models. In echoing Robert Reich (which I am not usually apt to do), the government's heavy hand in GM can only be about one thing: slowing the inevitable collapse of GM.

People are always concerned about all these blue-collar workers toiling over an assembly line. The truth is that most of these blue-collar workers are going to lose their jobs in the coming years anyway, recession or no recession! They are being replaced by technology: robots. Even in China, those manufacturing jobs are increasingly being assigned to robots instead of people. The country that will win in the next phase of this globalized, industrial, capitalist world is the country that is able to best to retrain, reeducate, and reshape its workforce to become one that provides services.

In throwing a boatload of taxpayer dollars at GM, the government isn't hoping GM will come-back. Odds are, they're hoping it buys enough time for its workers to retrain and do something else. But that's exactly what it should be thinking. It's not about blue-collar manufacturing workers losing jobs. Those jobs are already lost. It's about turning that demographic which we care about and relabeling it as "lower-class working people who need to find a job as a taxi-cab driver or a hotel attendant, etc..." In reframing our concerns, we may best save those peoples' skins and keep our economy running, and even lessen the wide disparity in socioeconomic conditions this country has witnessed recently.

Furthermore, the old model of GM and the entire auto industry is a dead-and-gone one anyway. Instead of assembling cars all under one roof, these companies need to learn to standardize parts and let other new start-ups and fledgling companies on the periphery innovate and compete and sell their auto components to the big manufacturers at a better (more efficiently achieved) price. A start-up who makes better spark-plugs should get the contract instead of GM making a spark-plug in a heavy top-down fashion in Detroit somewhere. That start-up is lean, efficient, and knows how to compete. Their product is what we want in our cars, and is what GM should want, too, since it'll make their cars more affordable while being of a higher quality.

I am not for the government propping up GM, because I know GM is dead anyway. If it means that the workers there will be retrained to do something else, or the entire auto industry will shift to a new model of production, then I can see how that $60 billion is not a waste. In centering around little start-ups that can make better car parts for cheaper prices, which can only be accomodated by a large-scale effort to standardize the industry (like computer components were in the 80s), the American auto industry will rise again and slap its foreign counterparts down.

Let's hope those at the switches can take this advice.

Meghana said...

Mike, thanks for your thoughts. I COMPLETELY agree. Although I supported Obama in November, I'm uncomfortable with the precedent this sets and the corporate irresponsibility it functionally encourages. I fail to see the logic behind dumping taxpayer money on a sinking fiscal ship. The attempt at temporary job-protection only heightens the illusory buoyancy of the market and ultimately fails the American blue-collar worker, IMO.

Also, I'd like to echo what you said about business strategy reinvention. A case that comes to mind is New Balance - as one of the only shoe companies that still produces its product on American soil, it sought new and inventive ways of battling the higher wages locally. (For some background info on this, check a slightly old but useful article from BW:

Basically, it abandoned classic Fordism and turned to technology and innovation to solve the spending deficit on wages. GM needs to completely reinvent itself in order to be solvent, and I don't foresee this ever happening. And also, I don't like the government THAT much into my business....."our" business now, I guess....

Ryan A. said...

Just a thought regarding: "I fail to see the logic behind dumping taxpayer money on a sinking fiscal ship."

What do you believe is causing the sinking fiscal ship? Perhaps it is the poor quality of American cars. Yes, that seems plausible. The poor MPG as stated earlier. OK, that's another good reason. Unless it's a truck or a Corvette, it's ugly and front wheel drive. Another valid point. So, I wonder then, why would a company, who's watching its stock plummet and watching its subsidiaries close up shop, not change policy drastically and salvage. The answer is that they really couldn't.

GM was locked into ridiculous Union contracts that GM was unable to shed. However, a bankruptcy would legally break those contracts and allow GM to emerge from the iron fist of the Union.

Mike said that the government's heavy hand in GM is to slow the inevitable collapse of GM. I can't agree. I don't feel GM is anywhere near collapse as an institution of automotive engineering. I think GM needed room to breathe. If, with this bankruptcy, GM doesn't become saddled again with overbearing Union contracts, then I think GM has a bright future. If, however, GM burdens itself with unionization once more, then I would have to agree that spending $60 billion on GM is an utter waste.

I'm most likely not seeing the big picture here, however, the small slice of pie I have been paying attention to suggests that GM has a future; however slim that may be.