Vice President Biden proudly proclaims that “Bin Laden is dead. GM is alive.” That may be true for now, but in the near future GM will also be dead. Ironically, it will be President Obama that killed GM. How can that be?
GM was on the verge of bankruptcy in 2009. President Obama said that if GM went out of business, hundreds of thousands of jobs would be lost, noting GM employs about 200,000 people. The ripple effect of that, since companies that supply parts to GM would also either close or dramatically reduce production, would be that another few hundred thousand jobs would be lost.
So President Obama committed about $80 billion of taxpayers’ money to save GM. Although much has been repaid, the final price tag will be that the taxpayers will lose about $25 billion. But if it keep GM in business, the President said, it was a worthwhile investment for taxpayers. Was it?
Candidate Romney says he would have allowed GM to file for bankruptcy protection without any taxpayer assistance, as allowed by the legal system. He is ridiculed for this position and indeed it is likely to result in Obama winning the key battleground states of Ohio and Michigan. The reality is that Romney’s position was more likely to result in long term health for GM and the saving of more jobs here in the US.
GM was a bankrupt firm because its cash flow was not sufficient to cover expenses. The reasons for this were that 1) the great recession reduced demand for cars so GM sold far fewer and 2) expenses were way too high primarily because GM’s labor cost was about $80 per hour while other auto companies had labor cost of about $40 per hour.
As a condition for the funding that the President provided, GM had to reduce labor cost to the $60 per hour range and protect the retirement packages of their employees. They did this through a pre-negotiated bankruptcy filing approved by President Obama and eventually the bankruptcy court. While this temporarily saved GM, it probably won’t work in the long term and GM will die. The reason will be that their labor costs are still too high and they make cars that consumers really do not want. We see today that, even with an occasionally good rate of monthly sales, the long term prospects remain dim as their market share has dropped from a high of 48 percent to less than 18 percent today. Within the next year or so, GM will likely face another crisis which could bring on its death. Ironically had President Obama not intervened, GM would have a greater chance of future success.
Candidate Romney, an experienced businessperson who has successfully dealt with situations like this in the past, had a better plan. By allowing GM to seek “managed” bankruptcy protection free of taxpayer intervention, they would be forced to reorganize in a manner that would increase the chance of future success rather than the Obama approach which limited their options.
Romney’s plan would have had the labor contracts renegotiated and approved solely by the bankruptcy court based on economic rather than political reasons. The GM that emerged from bankruptcy would have raised capital in the private sector where stockholders (owners) would have insisted that GM utilize its resources to build cars that consumers wanted rather than build cars the government wanted and which few people actually purchased. The Chevy Volt for instance, is an electric car approved for production and subsidized by the Obama administration. Unfortunately consumers aren’t buying them and production has been halted.
While Obama’s actions appear to have saved GM, the reality is that it simply “kicked down the road” the real bankruptcy. The jobs that Obama claims to have saved are mostly outside of the US since about 140,000 of the 200,000 GM employees work outside of the US. And it is likely that the taxpayers will lose about $25 billion from this failed bailout.
Romney would have saved the taxpayers the $25 billion by allowing GM to go through the same bankruptcy that any other firm faces when it is mismanaged and the economy is weak. The result would have been a leaner GM, with more reasonable labor costs and a product line that consumers actually want to buy. And there would be a brighter future.
Michael Busler, a public policy analyst, is an Associate Professor at Richard Stockton College.