Memo to Washington: Let GM Fail
There’s a non-publicized view held among foreign-car lobbyists that General Motors is much scarier dead or bankrupt than alive. When those lobbyists discuss what they fear most, increased stateside competition from our Big Three carmakers pales in comparison to what the collapse of GM, Ford or Chrysler might mean in terms of bad policy.
GM’s situation is particularly notable owing to its stock having recently hit a 50-year low alongside increased talk of bankruptcy. With a market cap of $5.7 billion, GM’s market value is now less than that of Bed, Bath and Beyond.
While GM’s vitality is increasingly irrelevant when it comes to the health and size of the U.S. economy, it is sadly a very relevant entity within the friendly confines of Washington, D.C. A collapsed GM would predictably lead to all manner of protectionist and currency-related punishment for those automakers who’ve apparently committed the grave offense of producing that which U.S. consumers want while being foreign.
GM’s descent into pointlessness has occurred despite it easily being one of the United States’ and the world’s most heavily subsidized companies. Those who doubt this need only reference the highway bills of the multi hundred-billion dollar variety that Congress routinely passes, and which make cars in what is the world’s largest car market a necessity. The highway subsidy isn’t so bad when we consider that Americans are at least free to use the roads which have created a market for all carmakers irrespective of origin, and which exist thanks to Congress’ generosity with the money of others.
What’s more offensive is that Americans have routinely been victimized by the automobile lobby in the form of voluntary export restraints imposed most notably on Japanese producers, not to mention with tariffs placed on the exports offered up by those same producers. Tariffs and various restraints on trade have been eagerly sought by U.S. carmakers over the years, and they’ve burned U.S. consumers twice; first for raising the prices of the goods they want, and second for decreasing the size of overseas markets that they themselves might like to export to. When we restrict the ability of exporters to send us what we want, we also restrict their ability to purchase from us.
But what’s been most problematic when it comes to U.S. automakers has been their impact on U.S. currency policy. The Big Three have routinely agitated for a weaker dollar against the yen, and as recently as 2005 in a Wall Street Journal op-ed, GM CEO Rick Wagoner cast some of the blame for the company’s poor performance on “unfair trading practices,” in particular “Japan’s long-term initiatives to artificially weaken the yen.”
Wagoner’s thoughts were remarkable in a number of ways, but were most notable because his comments about yen weakness were so impressively untrue. In reality, the dollar as recently as 1971 bought 360 yen, but today it buys 107; a gain for the yen versus the dollar of 236 percent! Over the last twenty-two years since the imposition of the Plaza Accord meant to strengthen non-dollar currencies against the greenback, the yen has risen 124 percent. Over the past year alone the yen has risen 9 percent against the dollar.
Despite the dollar’s collapse, GM’s U.S. market share has continued to wither; having fallen from 41 percent in 1985 to less than 25 percent today. Over that same timeframe GM shares have flatlined, while those of Honda and Toyota have risen over 600 and 800 percent respectively.
What’s fascinating is that GM’s management could be so obtuse about what aids its success. The obvious truth here is that with GM a successful producer of large, gas-guzzling autos, a weak dollar has and always will be a killer for a shrunken unit of account driving up the costs of commodity inputs for automobile production, and even more importantly the price of oil itself. Not surprisingly, GM’s shares rose 56 percent from June 1997 to May of 2000 when the dollar was strongest and oil was cheap.
Some say that GM’s problems are rooted in bad deals made with unions over pay and defined benefit/health plans, but judging by the mistaken policies that GM executives lobby for, it could realistically be said that GM suffers most from a lack of executive talent. It will never occur, but it says here GM’s saving grace would involve it moving its headquarters to a New York or San Francisco; two cities where there exists human capital that would never live in the economic mistake that is Detroit.
So while GM and the Big Three take out ads in the major Washington newspapers greatly exaggerating their economic importance to the overall U.S. economy, the unseen will continue to be the negative impact of unfortunate tariff and currency policies that they’ve lobbied for, and which have restricted U.S. consumer choice all the while greatly reducing the value of American paychecks. Indeed, the dollar’s sad enervation since the early ‘70s has materialized in the form of a massive tax increase on the incomes of American workers. All that, plus the aforementioned inflation has curbed investment that would have helped the wages of those same workers not “lucky” enough to work for heavily subsidized U.S. automakers.
In the end, GM’s continued existence will serve as an economic retardant not just for Michigan, but for the U.S. economy overall. Thanks to GM being able to punch well above its real economic weight in both Washington and Lansing, fear of tariffs and currency devaluations will persist in undermining the nation’s economic health, while Michigan’s economy will continue to suffer from the rising unemployment and lack of investment that are the tradeoffs for once important companies being propped up as thanks for past glories.
Politicians known to be sympathetic to GM would do best by ignoring the latter’s alleged interests, all the while dusting off their unread copies of Adam Smith’s Wealth of Nations to better understand what happens to stationary economies. Right now “stationary” describes GM, Michigan, and more generally, the U.S. auto sector.
The above in mind, if the intent is to “help,” true help would involve letting the antiquated symbols of an overrated economic past fail or be sold. Only then will the capital that’s been wasted on them be redeployed in ways that create real jobs and companies not reliant on the state to achieve what has become the antithesis of success.