Economics

Obama's Losing Bet on Detroit

Nationalization won't save General Motors

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If you had bought $1,000 worth of General Motors stock in 2000, your holdings would now be worth less than $40, for a loss of 96 percent. You could have made worse investments in that period—with Bernard Madoff, for one—but not many.

So anyone looking to participate in a viable business would look a lot of other places before they would look there. But the United States government thinks GM might just be a really smart place to put its money.

In its final weeks, the Bush administration lent the automaker $13.4 billion, along with $4 billion for Chrysler. On Monday, President Obama gave GM 60 days to come up with a better plan before deciding whether to sink more cash into it. But he placed a large bet on its survival by promising to guarantee all GM and Chrysler vehicle warranties.

He also held out a shimmering vision of the Big Rock Candy Mountain, expressing faith that his policies can lead to "a 21st-century auto industry that is creating new jobs, unleashing new prosperity, and manufacturing the fuel-efficient cars and trucks that will carry us towards an energy-independent future."

Truth is, that industry already exists. The Big Three just don't happen to be a part of it. The United States has robust, job-creating, fuel-efficient automakers, in the form of companies like Toyota, Honda, and Subaru.

But they don't count in the eyes of this president, presumably because their employees don't belong to the United Auto Workers union. So he apparently couldn't care less how much they resemble what he fantasizes GM and Chrysler will soon become.

And a fantasy it is. On what basis could anyone expect GM or Chrysler to achieve greatness? It's like expecting a glacier to appear in Phoenix. Just because it happened a long time ago doesn't mean it's going to happen again anytime soon, if ever.

At one time, GM accounted for 60 percent of the cars sold in America, but its market share has fallen to 22 percent. It has lost money for four straight years, including a staggering $31 billion in 2008, and things are only getting worse. Sales in February 2009 were less than half what they were in February 2008.

Chrysler has not exactly set the world on fire either. It torched $8 billion last year. Some of its investors now value their stakes at pennies on the dollar—or nothing. Its U.S. sales have plunged by nearly half over the last decade. In this year's Consumer Reports rankings of the 10 worst cars, seven are GM or Chrysler products.

The administration's own industry task force doesn't share Obama's unbounded optimism. In a report released this week, it noted that GM's supposed salvation, the plug-in hybrid Chevrolet Volt, "will likely be too expensive to be commercially successful in the short term."

It ridiculed GM's own cheery forecast, which assumes rising profits "despite a severely distressed market, lingering consumer quality perceptions and an increase in smaller vehicles (where the company has previously struggled to maintain pricing power)." Even under generous assumptions, it said, GM would keep losing money.

Given all these sad tidings, it's hard to avoid the conclusion that the only hope is bankruptcy court—where it could shed some of its obligations by stiffing creditors and rewriting union contracts. Obama seems to think the auto industry is too important to be subjected to such an indignity, though he has not ruled it out.

But to survive in the long run, a company has to provide consumers with products they want at a price that yields healthy profits. That is exactly what GM, like Chrysler, has consistently been unable to do.

In those circumstances, neither bankruptcy nor any other course offers a plausible route to prosperity. Plausibility, however, is not a consideration among politicians determined to keep the Big Three in business no matter what.

In recent months, we've been told that ambitious federal action is needed in the financial sector because unregulated commerce produced disastrously perverse results. But in the auto industry, competition has functioned reliably to reward sound companies and penalize bad ones. So clearly, there are only two occasions for massive government intervention: when the market fails, and when it works.

COPYRIGHT 2009 CREATORS SYNDICATE, INC.

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  1. I loved the way he said that the auto makers plans had been evaluated cautiously and in great detail. Then said how they were not suitable for sustaining the industry.

    So they can take time to evaluate in great detail the auto industries turn around plans but when it comes to spending over a trillion on a prostate stimulus package they can’t even bother to take the time to read the fucking thing before voting for it.

    I am all against any public funds bailing out any business but for them to say this about a few billion after what they did with 1000 billions is ridiculous.

  2. But they don’t count in the eyes of this president, presumably because their employees don’t belong to the United Auto Workers union. So he apparently couldn’t care less how much they resemble what he fantasizes GM and Chrysler will soon become.

    That could be the most insightful thing Steve Chapman has ever written.

  3. Yeah, this is how the Democratic party operates now. Pass all kinds of rules and regulations to destroy an industry, then when it goes down, blame everything on the management and “deregulation” and use them as an excuse to take it over, while picking and choosing who will survive and who won’t based primarily upon where their corrupt political friends and cronies are located.

  4. Obama is a fool for even getting involved in this mess. It is/was going to be a mess with or without him. I don’t see anything that can hold GM together. All the current economic climate did was speed up the oncoming wall that GM was eventually going to hit anyway.

    From a political standpoint it strikes me as naive. Maybe he can spin it as “I did all I could” but when GM fails he will have his fingerprints on it whether it is justified to blame him or not.

  5. Obama placed a large bet on its survival by promising to guarantee all GM and Chrysler vehicle warranties.

    This would be true if Obama was going to personally pay for repairs covered by GM warranties. Instead, he’s promising that the taxpayers (or hapless purchasers of T-Bills) will pay for them.

    Betting with someone else’s money isn’t gambling, it’s politics.

  6. Shakes,

    Negative. Obama will simply say “I tried but those free market lunatics ruined it beyond saving.” The media will then expunge Obama of any involvement and play up the anti-market rhetoric.

  7. That picture is a win.

  8. a 21st-century auto industry that is creating new jobs

    Maybe one of the members of the task force should take the Presidential Suit into the other room and explain “overcapacity” to him.

  9. Let the market decide through the process of bankruptcy. Whatever parts do have a value will be purchased by entrepreneurs who will risk their own money in the pursuit of value. Detroit carmakers need to go bankrupt, to allow for restructuring and oversight. Giving them money is like throwing it away. Bailouts never do more than defer unemployment, or interfere with the long term solutions of the free market? Bailing out the car makers is the wrong way to save jobs period. The right way to save jobs is maybe fund massive civic projects in every region of the country and let it all trickle down?.just a thought?its been done before so?

  10. Let the market decide through the process of bankruptcy.

    Not on MY watch!

  11. Yeah, this is how the Democratic party operates now. Pass all kinds of rules and regulations to destroy an industry, then when it goes down, blame everything on the management and “deregulation” and use them as an excuse to take it over, while picking and choosing who will survive and who won’t based primarily upon where their corrupt political friends and cronies are located.

    But comrade, of course it’s the fault of management.

  12. Obama placed a large bet on its survival by promising to guarantee all GM and Chrysler vehicle warranties.

    Actually, I think he was laying the groundwork for “bankruptcy” in 60 days.

    No way does he let a court restructure GM. There will be some kind of car czar restructuring that he can control.

    Chrysler, I dunno. If Fiat doesn’t buy it, he may let it go to court, although I don’t see how he treats Chrysler and GM any different at this point. The warranty guarantee may have been a sweetener for Fiat; we’ll see.

  13. Mike M.:
    Yeah, this is how the Democratic party operates now. Pass all kinds of rules and regulations to destroy an industry, then when it goes down, blame everything on the management and “deregulation”..

    The Japanese, Germans, and Koreans played by the same rules.. how is it that they can survive?

  14. Speaking of Detroit, I saw this quote today and nearly fell out of my chair:

    “This city is going back to the wild,” he says. “That’s bad for people but that’s good for me. I can catch wild rabbit and pheasant and coon in my backyard.”

    http://www.detnews.com/article/20090402/METRO08/904020395/To+urban+hunter++n

  15. The Japanese, Germans, and Koreans played by the same rules.. how is it that they can survive?

    Aren’t they all getting bailouts too by their home countries?

    But I agree that it wasn’t so much the gov’t regulations (CAFE, emissions, safety) as is often cited, it was their own union and dealer contracts that required them to cut corners on quality (to save cash to pay legacy/labor costs), build giant SUVs (couldn’t make profits on anything smaller), and have a gazillion brands around that they couldn’t afford to market. Cue $4/gal gasoline followed by a credit crisis, followed by higher unemployment and you’ve got the recipe for the end-times.

  16. Mickey Kaus has covered the topic of failing US auto makers a few times. He makes a good point that companies like Toyota often give higher salaries, but that the biggest burden to US manufacturers is the inability to become more efficient because the UAW is fervently opposed to accepting any innovation that leads to fewer jobs.

  17. Bad economics, Reason!! You wrote, “So anyone looking to participate in a viable business would look a lot of other places before they would look there.”

    Why? GM was a bad investment at $1000, now worth $40. But it may well be a great investment at $40. [just making a general point. GM of course, is a lousy investment today too.]

    There is no such thing as a good or bad investment. There is only a good or bad investment AT A GIVEN PRICE. I assume Reason knows this.


  18. The Japanese, Germans, and Koreans played by the same rules.. how is it that they can survive?

    They survived by having grown up AFTER the age of unions. There is little difference between the big auto companies besides the size of their respective legacy burdens from the golden age of the UAW. Their modern quality, technology, organizational structure, supply chain, and pay are pretty similar.

    Frankly, luck has a lot to do with who lives or dies in the corporate world, though most Libertarians would never admit to such. Companies can sink or leap ahead based on one bad accident, one well-timed or poorly-timed major investment or financial decision, or one fad.

  19. Here’s the deal: I’m the “Original Baby-Boomer”, being born in 1946. With Obama “socializing” the auto industry, I’m done! I thought I’d buy a new Detroit-made car in a year. However, with Obama as the CEO, a non-sensical “government – warranty” (Ha!), I’m buying “foreign” (No, NOT Fiat!) for the 1st time in my life.

    My assets have been “moved” – some of them to safety-deposit boxes (I get as much interest there as I do in the “government-owned banks!”

    My house has been remodeled, I will stay in it until the coroner comes for my body, and I just shoveled over 6 inches of “Global Warming” off my driveway last week.

    Confidence? In what? In whom? Certainly not anyone from Washington! And, No! I’m NOT “depressed” – I’m CONVINCED!

    So long, America as I’ve known it!

  20. I understand the general frustration with bail-out mania and distaste for unions, but let’s think like a true libertarian for a minute…

    You will not buy a car from a U.S.-based company because two of the three are receiving government aid. Instead, you’ll buy an import from a company that receives aid from a foreign government (in the form of socialized medicine, pensions, or direct subsides). Which foreign governments? Governments of countries for which the U.S. has been providing the bulk of their national defense for the past 60 years (Germany, Japan, S. Korea).

    So, either way, your buying from an enterprise that would not exist if not for the U.S. taxpayer.

    BTW – Ford is making some great vehicles these days and did not take government money.

    btw2 – Consumer Repots is a bunch of hooey. Take the time to read how they actually come up with their recommendations. Dependability ratings come from consumer surveys, which are more insightful about the people who fill them out than the vehicles they evaluate.

    The key thing to keep in mind is that Consumer Reports uses different standards to evaluate different companies. Toyota and Honda, for example, are given a free pass on dependability because they have a good reputation. Domestics cannot be given a recommended buy until the vehicle has been in the market for a couple years. Toyota actually lost their ‘exempt’ status because of all their recent quality problems (yes, it’s true), but I understand they are once again receiving preferential treatment.

    A better representation of quality and dependability is JD Power, which usually places the domestics on par with imports.

  21. pc,
    You’re absolutely right regarding the foreign automakers. My next vehicle will most likely be a Ford product.

    I also agree with your take on Consumer Reports. One of the things that tipped me off about their bias is that, in the past at least, they always rag on GM and Ford for their “cheap, plasticky interiors”, yet you look at a Toyota or Honda and they’re made of the exact same materials and sometimes look even worse. Then, little or no regard is paid to the lower price on the American car (or they’ll just compare MSRPs when all the American manufacturers have large rebates and/or other incentives almost year-round).

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