The Steps Necessary to Save GM

Can GM be saved? Sure. Here’s all that Congress would have to do in its lame-duck session starting next week:

1. Pass H.R. 6690, a bill that would stabilize the dollar at a gold price of $500/oz. This would restore sanity to the financial markets and stabilize gasoline prices in the $2.00 - $2.50/gallon range.

2. Pass H.R. 25 to implement the FairTax. This would cut the cost of manufacturing automobiles in the U.S. by about 20% and reverse the tax advantages that imports now enjoy. It would also raise the value of all existing U.S. housing units by about 10% and touch off an economic boom.

3. Repeal the Corporate Average Fuel Economy (CAFE) law, which prevents U.S. companies from specializing in the large vehicles that they can make and sell at a profit.

4. Amend the Endangered Species Act and the Clean Air Act to prevent these laws from being used to regulate carbon dioxide emissions.

5. Make it illegal for companies to offer benefit plans that create unfunded liabilities (as GM’s promises of health care for retirees did).

Even if all five of these measures were passed, GM would still have to go through Chapter 11 bankruptcy to get its cost structure in line and rationalize its dealer networks. However, the capital markets would almost certainly provide the “Debtor in Possession” financing required for this.

Baring these drastic actions, GM cannot be saved. The best that the “bailout” plans currently being proposed could do is to turn GM into “Amtrak on rubber tires”, a UAW-staffed, taxpayer-subsidized museum of mid-20th-century American business glory.

This sounds harsh, but let’s look at the facts. As a company, GM’s peak was in 1965-1966, when it had more than 50% of the total U.S. vehicle market (vs. around 20% today). This period also just happens to have been the peak of real American prosperity. In January, 1966, the “real” Dow Jones Industrial Average, which is the DJIA divided by the market price of gold, peaked at 28.00. After that, the Bretton Woods monetary system started breaking down and the government started raising taxes. The U.S. economy began to decline, and GM declined with it. Today, despite 42 years of capital investment on the part of the Dow companies, the real DJIA is less than 12.00. “Engine Charlie” Wilson, then GM’s CEO, was prophetic when he said in 1953, “What is good for the United States is good for General Motors, and vice-versa.”

The post-Bretton-Woods unstable dollar has been disastrous for GM. The automobile industry is extremely capital-intensive, and inflation raised the real cost of capital in the U.S. vs. Japan. Also, it can take as long as 6 years to develop a new vehicle. In the past six years, the price of gasoline in the U.S. has gone from under $1.50 per gallon to over $4.00/gallon and then back to $2.00/gallon. All of this was the result of the unstable dollar. Although the price fluctuations were not “real”, they had a huge impact upon GM’s sales and product development.

In the mid-1960s, GM’s costs were lower than those of its competitors, who, for practical purposes, were just Ford and Chrysler. This allowed GM to offer more car for the money while still earning higher profit margins. The spectacular styling of the 1965 GM big cars (Chevrolet Impala, etc.), which propelled GM to its market share peak, was made possible by the use of curved side glass. This was more expensive than the flat side glass used by Ford and Chrysler on their 1965 models, but GM could afford to offer it.

Japanese imports got their foothold in the U.S. when the collapse of Bretton Woods in 1971 led to two inflation-driven oil price bubbles, in 1973-1974 and 1979-1980. Americans bought Japanese cars to get higher fuel economy and discovered that they also had much higher quality. Even more worrisome for GM, the Japanese companies, which were not organized by the UAW, had lower costs.

In the 1970s, GM needed to either fight the UAW to the death to get its costs down, or to abandon the small car market and focus on large vehicles. It lacked the courage to do the former, and the Corporate Average Fuel Economy (CAFE) law, which was passed in 1975, prevented it from doing the latter.

It is difficult to overstate the damage that CAFE has done to GM over the years. The entire purpose of CAFE is to force companies like GM to do something other than build and sell the vehicles that would earn them the greatest profit. Otherwise, there would be no point to the law.

CAFE has bled GM of tens of billions of dollars in profits over the years. If they had all of those dollars in the bank today, they would not be on the brink of bankruptcy. CAFE forced GM to build millions of small cars and sell them at a loss. To make matters worse, CAFE made it illegal for GM to exploit its single most profitable brand, Cadillac.

Once a brand is established in the public’s mind, it is impossible to change its image. A Cadillac is either the biggest, flashiest vehicle available, or it is nothing. The iconic Cadillac is the 1959 model, a land leviathan with huge fins and bullet taillights.

Small Cadillacs don’t sell. The only really profitable Cadillac in recent years has been the Escalade, which is the biggest, flashiest vehicle available. People who can afford Cadillacs can afford the gasoline to run them. CAFE pushed these customers into the arms of Mercedes and Lexus and cost GM billions of dollars in lost profits.

So, Congress, please don’t put GM on life support with a feeding tube full of taxpayer dollars. If you undo all of the things you did to put GM on its deathbed in the first place (see the list above), the private markets will finance GM’s recovery. If you are not willing to do that, please just let GM die a quick and merciful death.