Motor city is shrinking

Neil Young saw it all coming in 1981, on his re*ac*tor album:

Everyone has an opinion on GM’s Chapter 11 bankruptcy filing this week, as well as the Obama Administration’s bailout/buyout of the carmaker.   Robert Reich gets it right, I think, in a Financial Times column, “General Motors holds a mirror up to America.” Reich asks what the goal of the bailout is, and rejects a few possible answers before concluding that it’s basically a cushion, designed to give GM’s workers and community some time to adjust to still-harder economic and psychological blows ahead.  People are queasy about the idea of bailouts, but they sense that they could be next and so do not protest too much.

‘ . . . why would US taxpayers want to own today’s GM? Surely not because the shares promise a high return when the economy turns up. GM has been on a downward slide for years. . . .  Given this record, it seems doubtful that taxpayers will even be repaid our $60bn. But getting repaid cannot be the main goal of the bail-out. Presumably, the reason is to serve some larger public purpose. But the goal is not obvious.

‘It cannot be to preserve GM jobs, because the US Treasury has signalled GM must slim to get the cash. It plans to shut half-a-dozen factories and sack at least 20,000 more workers. It has already culled its dealership network.

‘The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganisation under bankruptcy would do.

‘Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars. Congress has already given carmakers money to do this. Besides, the Treasury has said it has no interest in being an active investor or telling the industry what cars to make.

‘The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60bn than to buy GM? The funds would be better spent helping the Midwest diversify away from cars. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

‘But US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.

‘So the Obama administration is, in effect, paying $60bn to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

‘Behind all of this is a growing public fear, of which GM’s demise is a small but telling part. . . .

‘ . . . Job security is all but gone. And the nation is more unequal. GM in its heyday was the model of economic security and widening prosperity. Its decline has mirrored the disappearance of both.’

That still leaves open the question of why only GM and its workers, as opposed to other nonfinancial companies and their workers, get bailed out.   GM is bigger than any of those other failing companies, so its failure affects more people, but is that all?  Critics on the right have been all over the pre-bankruptcy deal worked out by the administration for allegedly giving a much better debt-for-equity deal to GM employees than to bondholders.  Legal scholar Michael Levine lays out the bill of indictment in the FT, charging that the administration favored the United Auto Workers (UAW) in order to pay a political debt.  Under U.S. bankruptcy code, he says, the workers would have gotten much less.   He says a better solution would have been to let the bankruptcy courts (“one of the best financial reorganisation processes in the world”) handle the restructuring, and for the government to use the $60 billion in bailout funds for more direct measures like unemployment insurance and aid to state governments.  Some defenders of the deal suggest that GM’s obligations to its workers’ pensions ethically should come before their obligations to bondholders, and I tend to agree, but evidently the bankruptcy code says otherwise.  What if the government had spent $60 billion guaranteeing those pensions instead?  (A slippery slope?)

Elsewhere in the FT, John Griffiths offers a quick history of GM.  Of note:  GM’s market share peaked at 54% in 1954, so in a sense it had been declining (gently at first) for 55 years; it was already imploding in the Roaring 1990s, with market share under 20% and a two-month UAW strike in 1998 and the spinning off of its huge components subsidiary Delphi.  Robert Wright offers a short history lesson from the bankruptcy filing of the Penn Central railroad in 1970, which at the time was the largest U.S. bankruptcy on record.  One doesn’t normally think of the American railroads of the last few decades as an economic success story, but Wright says the bankruptcy prompted the 1970s deregulation that brought about a healthy industry by the 1980s.   Notably, although deregulation is given the credit for turning the tide, Penn Central’s operations were basically nationalized, with its passenger services going to government-funded Amtrak and its freight services going to government-owned Conrail.  Also notable is that it took about ten years for the railroad industry to recover.  “Motor industry executives can only hope that their industry can be returned to sound health more quickly,” concludes Wright.

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