The absurdity of the General Motors bailout


WASHINGTON, October 24, 2012 – It’s not just absurd; it’s criminal in several dimensions. But let’s look at the President’s claim that he “saved xx millions of jobs” by ramming through a government buyout of General Motors.

Did he — and was it “worth” it? 

Call it what you will, but the President’s process was established to allow GM to shoot through “bankruptcy” in record time and preserve the union/company relationship, and especially the union’s pension fund. That’s pretty obvious, as the natural trajectory of GM was taking it to bankruptcy court, where the laws would have allowed things to play out in a structured and legal way.

GM had been going broke for years, due to the usual restrictions on manufacturing in the US that most companies face, plus its special relationship with the United Auto Workers, plus its historically lousy management, which brought out many vehicles that the market didn’t appreciate, for reasons that ranged from a lack of differentiation among product lines, to perceived poor quality, to… just bad ideas, like the Pontiac Aztek or Chevy Volt.

GM was headed for bankruptcy, all right; this would have been devastating to, among others, the Democratic fundraising machine. But would it have been necessarily devastating to “Detroit,” as the politicians like to frame it?

I say, “no.” Here’s why: “bankruptcy” covers a lot of territory, from reorganization under Chapter 11 (which can take many forms) to the popular notion of liquidation, which conjures visions of bulldozers’ turning auto factories into fields of wildflowers and factory workers into beggars, haunting the streets of shriveling, dying towns. The President likes us to think about the latter case. This is ridiculous.

First, let’s address the worst-case scenario: GM goes into liquidation. Everybody goes home forever, the factories are closed, and GM’s assets go to the scrappers, to be melted into ingots and sent to China.

Can’t happen: GM’s assets are too valuable to end up on the scrap heap. We’re not talking about a furniture store that goes out of business; there are a jillion furniture stores. There are not a dozen huge car companies altogether, in the world.

Someone would buy the rights to manufacture, say, parts for Pontiacs, plus parts for anything else that the market wants. People will continue to crash their Buicks – they’ll need new bumpers; parts production would continue. Even the names alone — “Cadillac,” “Corvette,” or um, “Saturn” — have value in the marketplace.

The plants and equipment aren’t junk, either. Land, buildings, robots, welders, forming and stamping equipment, design equipment, computing systems: these all have value. Patents? Immensely valuable. Someone would be more than happy to buy these assets, and probably host a hiring fair to man the revamped engineering cubicles and production lines.

Under this scenario, there would surely be an interruption of production at GM. OK, the world wouldn’t end; this would mean more jobs at Ford, Chrysler, Toyota, Honda, Subaru, all hiring American workers; the overflow would be handled by other car companies, and possibly new ones that might come from re-assembly of certain GM assets into new forms.

A transfer of demand from GM products to other auto companies would not result in a huge “loss” of jobs – just a reallocation of the demand for labor. That’s tough on the displaced workers, but great news for those who would be hired; and many of these folks would be one in the same. And the new jobs wouldn’t be hindered by the old thinking that dragged GM over the cliff.

In the meantime, the workers who would have been laid off would have had 99 weeks of unemployment insurance to live on, just like many of the rest of Americans who lost their jobs since this mess started. (Maybe the union members live higher-expense, higher-debt lifestyles than most. That’s not the taxpayers’ problem; it’s a risk everyone takes when he signs on to work for anyone.)

There is no obligation on anyone to guarantee someone else a certain standard of living, especially when that standard of living is (as in this case) a large part of the parasite that bleeds the host to death. And the fact that GM’s management agreed to bleed the company to death is only an indictment of GM’s management – again, that’s not the taxpayers’ problem. Nor is it the government’s.

If GM’s assets had gone through courts and new owners in a legitimate bankruptcy, auto companies that had better management and better products would have had an opportunity to work without GM’s competition for a while, resulting in short-term advances for the surviving companies, and long-term health improvement for the whole industry.

Consumers – let’s not forget the bottom line here: why do manufacturers manufacture? The responsibility of a company is not “to create jobs.” It’s to satisfy consumer preferences and thus reward the corporation’s owners with profits; and consumers prefer to get the best compromise between price and value possible. Keeping high-cost (inefficient) manufacturers in business by insulating them from their managements’ bad decisions is assuredly not in the consumers’ best interest. But this whole political debacle isn’t about “the people.” It’s about the union vote.

If a natural bankruptcy were to have taken place, those new (unionized or otherwise) hires would not have the seniority, pensions, and work rules that they held under the UAW contracts at GM. In fact, a not-uncommon use of bankruptcy as a strategic tool is to rewrite onerous contracts, so this tactic could have been employed without the federal government’s intervention. In fact, it would have been better for GM’s competitiveness (and hence for its long-term survival, as well as for consumers and ultimately its workers) if it didn’t have to labor under such expensive contract obligations, including an enormous pension funding.

And here’s where the whole government shuffle also got very illegal: the government simply decided to take the assets of the preferred shareholders and use them to partially fund the UAW pension obligations. There is no legal right anywhere to do that. It is a direct interference in private contracts, not to mention a terrible precedent! The Administration’s way to color this theft with acceptability was to make a take-it-or-leave-it deal with the shareholders, who had no alternative – and who still didn’t approve.

Anyway, here’s what happened (in greatly-simplified terms):  The preferred shareholders were presented with a government diktat: surrender your shares. This shareholder property was to be taken under any circumstances, but the shareholders were offered something that looked like a “vote,” and it was reported that about 55% said OK to the deal, which was no deal at all, but was confiscation of whatever value was in their property.  (Preferred shareholders receive payment before some other groups, in legitimate bankruptcy proceedings.) I have never seen what “55%” meant – whether it was counted by number of shareholders, or by number of shares – but that’s irrelevant: no matter who’s voting, the voters have the right only to speak for their own property, not for the property of others.

It’s as if 55% of iPad owners voted to sell everybody’s iPad to the government – voting has no relevance: they can’t sell what isn’t theirs! But the government “accepted” this particular “vote,” and the stockholders (all of them, not just the 55%) were simply… robbed.

If GM had gone through a legitimate bankruptcy, would there have been a temporary shortage of new cars? Possibly, but it would have been temporary – and if it were an anticipated problem, the President could have done something with the “clunkers” he bought (and destroyed) in his concurrent “Cash for Clunkers” scheme.

So, going back to whether all this illegal activity was a good idea: did the stockholders (the owners) of GM do well, or better than they would have under a legal restructuring? Unlikely, but we’ll never know, since a legal machination didn’t happen. Did the UAW do better? Absolutely – no plausible restructuring would have funded the pensions and maintained the contracts to the extend Obama did.

Did the taxpayers do better? Of course not – they paid.  Though President Obama says taxpayers were repaid “every dime,” Obama really means the US Treasury was repaid (and even that is in dispute).

So, to recap: allowing GM to go bankrupt in the traditional, legal way would not have cost the taxpayers a dime; it would not have involved the government in unconstitutional (illegal) investment in private capital; it would have resulted in only a small long-term reduction in force (but a large reduction in union wages, union dues, union power, and union political contributions); it would have been a reward to better-managed auto makers.

“Parts for Pontiacs” would still be produced; profitable (good) investments would continue; bad parts of existing contracts would have been rewritten in a legal way; properly-managed auto companies would have been rewarded for their good decisions; Americans would have had better cars, from healthier companies; American auto workers would be working for better-managed, healthier companies; bad managers would not remain in high demand; and you wouldn’t have been put at risk.

Plus, the sanctity of contracts would not have been violated, the rule of law would have been preserved, the markets would not have been manipulated by government; massive mis-allocation of funds would not have distorted the recovery; uncertainty over whether our rulers would simply do away with any laws they found inconvenient would not intimidate potential future investors; and stockholders would not have been robbed.

All in all, it’s better to follow the law and respect the whole population and our Constitution, than to buy the votes of some campaign contributors. You can tell that to the President. He’ll listen; he said he would.

The President’s oratory about my getting repaid in his gamble notwithstanding, I didn’t see any repayments come through any channels to me. Did you? So, even if the debt were “repaid,” follow the money: from us, to the government, to GM, and to the Treasury. That’s one-way, friend. Your government gambled with your money, and despite what they’re telling you, you’ll never be repaid the first dime, not to mention the last.


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Tim Kern

Tim Kern taught economics for fifteen years, and discovered that understanding life is easy; it’s recognizing reality that takes practice. He holds a music degree, and later earned an MBA in finance from Northwestern University. He has lived across the US, and now makes his home in Anderson, Indiana.

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