What’s good for GM is good for America, they used to say.
Well, you could make an argument that a long spell of restructuring in the safe harbour of Chapter 11 bankruptcy proceedings would be good for America. But that’s not going to happen.
However, that’s where the car giant, once America’s biggest company, has now found itself. It’s the third-biggest bankruptcy in world history.
The bad news is that this won’t be good for GM. And it certainly won’t be good for America…
We’ve come a long way in this financial crisis
We’ll get back to GM in a moment. But first, let’s try to get a bit of perspective on what’s happening here. We’ve come a long way in this financial crisis. So much has happened, so many once-unthinkable events have become common place, that it’s easy to lose sight of just how much has changed.
The idea behind capitalism is that you leave the state out of things as much as possible, and allow the forces of supply and demand – the market – to allocate capital in the most efficient way possible. So money flows where it will deliver the greatest risk-adjusted return. Entrepreneurs take big risks in the hope of reaping big rewards. Those who get it wrong, see their businesses fail, which is painful, but this frees up those resources to be used in pursuing other, more profitable opportunities. Joseph Schumpeter dubbed it “creative destruction”.
But the state can’t stay out of things. Voters like economic growth. Years of recent experience suggest that you can do pretty much what you want as long as the economy keeps growing. Much as I think the holding of MPs to account over their expenses is long overdue, the story has only grown as big as it has because house prices are no longer rising.
The role of the state in distorting capitalism’s most basic functions is most obvious in the financial sector, which has operated with the implicit backing of government for a long time. The clearest manifestation of this backing was the “Greenspan put” – Alan Greenspan’s habit of slashing interest rates any time the Dow Jones index threatened to fall by more than a few hundred points. The free licence that this backing gave Wall Street to misbehave is one of the main reasons we’re now in this mess, as the Institute of Economic Affairs confirmed in a recent report into the causes of the crash. If you remove the risk of failure, all you’re left with is returns – so you chase the biggest.
And governments across the globe are continuing to back the financial sector now. Bear in mind that it’s not just the nationalised banks that owe their continued existence to the government. The knowledge that the entire sector is backed by the taxpayers of the world is the only thing that has kept many of these companies afloat, even those still ostensibly in the private sector.
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Perhaps saving the banks was better than letting them collapse. In any case, it’s the option Governments chose. However, we now need to make sure that we don’t end up with companies that are “too big to fail” again in the future, by breaking them up if necessary. Yet now that we have a rally in progress, any sensible discussion of how to go about this is migrating from the backburner to the long grass.
Saving GM
Meanwhile, the state is continuing to creep ever further into the economy. That’s where we come back to GM. At first sight, the whole Chapter 11 idea sounds great. Under Chapter 11, a company is protected from its creditors for a period, rather than being liquidated. It gets a chance to restructure and work out a plan to repay its creditors, and as long as they can agree, then ideally it comes out fighting fit and ready to take on the world again.
That’s the idea with GM. Frank Henderson, the chief executive, said that “the GM that has let many people down is history.” The new GM will be “built from the strongest parts of our business including our best brands and finest products.”
The plan involves shutting down 14 plants and shedding between 20,000 and 30,000 of its 90,000 US workers in total. During the process, the US and Canadian governments are supplying around $40bn to fund the group’s operations. That’s on top of the $19.8bn in emergency loans the US taxpayer has already stumped up.
When the company emerges from Chapter 11 (which is meant to happen in 60 to 90 days), it’ll be leaner and meaner. It’ll also be 60% owned by the US government, 11.7% owned by Canada, and the rest will be in the hands of the United Auto Workers union and GM’s bond holders.
The flaws in the plan
This is where the flaws in the plan start to become apparent. As Tracy Corrigan points out in this morning’s Telegraph, if private money, “which seems to be flooding into other distressed assets” isn’t willing to touch GM, then maybe the reality is that it’s unsalvageable. “Global car production… is currently twice as great as demand, and GM is not best placed to survive the inevitable cull.”
The simple issue is that there’s too much car-making capacity and not enough demand. That means some car-makers have to go. But political expediency means that this isn’t being allowed to happen.
And since the government has now committed to GM, all manner of other problems will arise. In its need to make a success of the new company, we could easily see protectionism become an issue – there have already been calls for assurances that jobs will not be lost to China.
The other big problem of course is that not all of America’s car makers have needed bail-outs. Ford has so far managed to stand up on its own two feet. And then there are the Japanese auto makers, who have also survived by being good at what they do, rather than too big to fail. Now, as Rob Cox and Antony Currie point out on Breakingviews.com, they all face having to compete with a government-owned GM.
It’s not much of a reward for playing by the rules. And it means that overall we face a weaker global car industry, as sales and profits that should accrue to the most efficient producers end up being siphoned off into ‘zombies’ like GM. In the long run, that’s bad news for everyone, not just America.
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