General Motors is in big trouble. How big? They’re asking for a loan measured in billions of dollars – $25 billion, to be exact, and all of it is taxpayer money.
    The company is positively hemorrhaging money, and sales are down 50 percent from this point last year. Executives are hoping with gas prices dropping to normal levels, sales eventually will pick up, but it is pretty close to impossible for GM to right the ship in time.
    In the current political climate, and in light of the banking crisis and response, it is perfectly natural for GM to come hat-in-hand to the government asking for money. Moral hazard strikes again.
    This is a little different from the subprime meltdown, though. For one, the Big Three U.S. automakers have a market capitalization of about $7 billion, which easily could be taken up by other companies.
    The banks taken down by the financial crisis had working business models being slogged down by bad loans. With GM, the business has been spiraling downward for decades. A sudden infusion of cash is not going to help their situation.
    However, we’re talking 266,000 employees for GM alone. There are about 3.1 million workers handling either the Big Three or related companies. Detroit has turned into the jewel of the Rust Belt without any failed companies and wouldn’t be helped by a GM collapse. In fact, many people would be hurt from a GM collapse.
    The political stars are in alignment for a bailout, but it doesn’t make economic sense. Sending GM the money is a stop-gap measure, not changing any of the underpinnings of this catastrophe.
    The United Auto Workers has created massive benefits for its members and prevented auto companies from making money. GM autoworkers get compensation totaling $75 per hour, while Toyota makes cars right here in the U.S. for $48 per hour, according to a recent article by Investor’s Business Daily.
    General Motors is banking on a return to the auto market of previous years, and it is possible it won’t happen. If it does, then it is possible Japanese car companies will claim even more of the market – for the first time ever, Detroit automakers have dropped below 50 percent of the total sales in America.
    Lastly, the entire infrastructure of GM is bloated. Other industries have moved into just-in-time manufacturing, but when GM has an inventory surplus and decides to idle its factories, workers get paid 95 percent of what they would for actually working. That is insanity for a company losing market share.
    None of these problems will be fixed with a large taxpayer-funded loan. GM needs large structural changes – if it wants to compete, it needs to become leaner and more efficient. This means the employees need to take a cut, people have to be laid off, and GM dealers are going to have to take a hit.
    At this point, though, GM might have passed the point of no return. Without a massive infusion of cash before year’s end, it is possible GM will have to accept Chapter 7 bankruptcy and shut down completely. That would hurt the economy at a sensitive time and leave lots of people jobless just before Christmas.
    The government can’t allow GM to fail, politically. The UAW is a powerful union, and the Rust Belt still carries considerable political clout. Democrats and Republicans alike will want to be seen doing something for Detroit. Kicking the problem down the road a few years looks much better than standing around and watching something as much a symbol of America as GM die.
    Ultimately, though, unless the government demands immediate and painful changes for General Motors and its workers, this is going to happen again down the road. Taxpayers are going to get short-shifted again and again unless the government stops taking responsibility for keeping businesses afloat.
    If the government bails out GM, what hurting corporation is going to come up next? And when are politicians going to be ready to say no?

Comments

2 comments

CLS

Mon Nov 24 2008 15:51

Give that mouse a cookie, but he ought to pour the glass for himself, K.

K

Fri Nov 21 2008 11:17

Though I understand what the author is trying to say, the fact of the matter is GM needs to be restructured. The only problem is the GM will not file Chapter 7 but Chapter 11, which will allow them to stay open and make the changes necessary. The government should keep their hands out of fixing problems with businesses because it only makes things worse. I am glad to see the author at least recognize the fact and ask the question when will it end with these bailouts. As the old children's book goes, "If you give a mouse a cookie, he's going to want a glass of milk."

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