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Free Minds & Free Markets

How Not to Run G.M.

Obama's environmental and employment goals could undermine profitability.

On Monday, after President Obama unveiled his plan to nationalize General Motors, G.M. Vice Chairman Robert Lutz exulted, "Their No. 1 goal is to make us successful." But Obama seems to have three No. 1 goals: turning a profit, building cleaner cars, and creating American jobs. These priorities clash with each other, with the president's professed desire to "get out quickly," and with his promise of "a hands-off approach."

On March 30, Obama assured a wary public that "the United States government has no interest in running G.M." This was the same speech in which he announced his firing of G.M. CEO Rick Wagoner, demanded a more "credible" restructuring plan, suggested that G.M. had not "consolidated enough unprofitable brands," unilaterally promised government-backed warranties for G.M. cars, and argued that the company should focus on "manufacturing the fuel-efficient cars and trucks that will carry us towards an energy-independent future."

This week the president reiterated that "what we are not doing—what I have no interest in doing—is running G.M." This was the same speech in which he announced that the federal government was forcing G.M. into bankruptcy, deciding what creditors should get (regardless of what bankruptcy law says), and taking a 60 percent stake in the company.

Obama insisted "we are acting as reluctant shareholders—because that is the only way to help G.M. succeed." He took it for granted that letting G.M. fail, and thereby letting its assets be distributed to more productive uses, was not an option.

Although Republicans portray it as yet another example of Obama's socialist tendencies, his G.M. plan reveals him to be deeply conservative. He can imagine a world in which the internal combustion engine is obsolete but not one in which G.M. is.

"We cannot, and must not, and we will not let our auto industry simply vanish," Obama declared in March. "This industry is like no other—it's an emblem of the American spirit, a once and future symbol of America's success." On Monday he said G.M., "this iconic American company," must be given "a chance to rise again."

But Obama offers more than blind nostalgia to justify sinking $50 billion of taxpayer money into a company that is failing, by his own account, because of "bad business decisions." He offers jingoism too. Obama says he is "absolutely committed" to "one goal: The United States of America will lead the world in building the next generation of clean cars." If those sneaky foreigners think they're going to build nonpolluting vehicles and sell them to Americans at reasonable prices, they'd better think again.

It's not clear what Obama plans to do if it turns out that "building the next generation of clean cars" is not the best way for G.M. to "rise again"—say, because such cars cannot be produced anytime soon at a price consumers are willing to pay. Obama's decree that "G.M. will start building a larger share of its cars here at home" also may undermine the company's bottom line (and therefore taxpayers' return on their involuntary "investment") by increasing production costs.

"The federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions," Obama promised. "When a difficult decision has to be made on matters like where to open a new plant or what type of new car to make, the new G.M., not the United States government, will make that decision."

As long as the decision does not involve opening a plant in the U.S. vs. another country, hiring unionized vs. nonunionized workers, building SUVs vs. smaller, more fuel-efficient cars, or sticking with conventional cars instead of gambling on "the next generation of clean cars." After they see how Obama handles these and other corporate decisions, Americans may start to wonder whether a guy who claims to have no interest in running G.M. is the best candidate for the job.

Jacob Sullum is a senior editor at Reason and a nationally syndicated columnist.

© Copyright 2009 by Creators Syndicate Inc.

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  • ||

    Buy your Government Motors tshirt now.

    (Note: I have no financial stake in your doing so, I just thought the shirt was funny).

  • ||

    My humble advice? Make more money than you spend.

    Repeat as needed.

  • ||

    Jacob, Jacob, Jacob... Don't you get it?

    Businesses exist to provide people with employment. Everything else is just a bonus.

  • ||

    "Obama actually seems to have three No. 1 goals: turning a profit, building cleaner cars, and creating American jobs. Sullum says these priorities clash with each other"

    I'm certainly not sure of that. Most companies that make something do tend to hire more people when they turn bigger profits, and if the profits can be made in cleaner cars well...Now if what Jacob is getting at is that they must first aim to maximize profit and then the jobs will follow, but doing that in reverse may backfire, then yes, I tend to agree.

  • ||

    I translate the quote below to mean that GM will now become a place to put political cronies in high paying jobs (you know, fundamental corporate decisions, like who will be CEO, board members, etc.) just like the top jobs at Fannie and Freddie were.

    "The federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions"

  • Alan Vanneman||

    "Obama's environmental and employment goals could undermine profitability"? I'd say 'Obama's environmental and employment goals will eliminate even the slightest possibility of profit.' Not that stateside GM had much chance of being profitable anyway. As David Brooks points out, only 19% of GM's domestic products were recommended by Consumer Reports, versus 70% for Ford, versus 90%+ for Japanese manufacturers. (Chrysler? Forget it; they're already dead.)

  • ||

    MNG,

    To date, creating cleaner cars has not been a profitable strategy. But, once Obama tilts the playing field in favor of his chosen few, im sure that will change.

  • ||

    Since the UAW was given a large stake in the company [1] why don't they sell it off and take a one-time payment which they can invest elsewhere? Do the UAW workers really give a damn if the company succeeds or not? I doubt it; they just want fiscal security, not some job on an assembly line. The UAW should sell the company off, take the money and put it into an endowment for its members who can all retire immediately if they want.

  • ||

    [1] http://www.slate.com/blogs/blogs/kausfiles/archive/2009/06/03/obama-aides-mission-to-wapo-fail.aspx

  • ||

    There is a market for smaller, cleaner, alternative energy cars. They just haven't found a style/price point yet.

    I doubt GM will be able to find the sweet spot between the ugly granola mobile, and the desirable car that just happens to be "good" for the environment. But then, GM not finding that has nothing to do with it being run by the government, and everything to do with the R&D and design sector of the domestic auto industry coasting on "Buy American" hargle-bargle for decades.

    P.S. Any replies to this comment will most likely consist of ad homs, as libertarians concede my points and show their childish, anti-intellectual nature.

  • ||

    Just out of curiosity, if anyone knows, what impact should the acquisition of an ownership interest in GM have on the UAW's relationship to it?

    If the purpose of unions is to get shareholders and company CEOs to "share the wealth", how can the UAW have an ownership/managerial interest AND a labor interest?

  • Guy Smiley||

    Well-written article.

    It looks like I picked the wrong Administration to stop drinking.

  • ||

    There is a market for smaller, cleaner, alternative energy cars.

    That market, modest as it is, is quite adequately served by Toyota and Honda. The chances of GM ever making a profit in that business are about the same as the proverbial snowball's chance in hell.

    -jcr

  • ||

    Do the UAW workers really give a damn if the company succeeds or not?

    The entire history of the UAW would indicate that the answer is "no".

    -jcr

  • ||

    If the purpose of unions is to get shareholders and company CEOs to "share the wealth", how can the UAW have an ownership/managerial interest AND a labor interest?

    Wanna make a bet that Michigan becomes ground zero for a massive resurgence in cognitive dissonance? All unions have at this point is naked class warfare. I can't really see them giving that up.

    My preference? Give the entire fucking thing to the UAW, enforce the bailout repayments, and then make sure they don't get another dime from the government. Let's see if the UAW's rhetoric translates into sound business practices or if what they had to offer all along was mere parasitism.


    P.S. Any replies to this comment will most likely consist of ad homs, as libertarians concede my points and show their childish, anti-intellectual nature.

  • PbP||

    Step 1: Build Cars
    Step 2...
    Stap 3: PROFIT!

  • Guy Smiley||

    TAO,

    Because, the real owners of GE now are the taxpayers. And we mustn't be allowed to keep too much of our money.

  • ||

    "The federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions," Obama promised.

    Translation from Obamaspeak into English: "The federal government will make all the important decisions. But, the engineers will be free to decide the shape of the bolts holding together the cars we will force them to build that consumers will not want to buy, at price points that are not competitive. And, ummm, step 3: PROFITS!"

  • ||

    At most, I've only made hundreds of semi-retarded posts

    Throw one of those fake sponge rocks then.

  • ||

    Honda Civic sales were off 61% in May from one year ago. This was attributed to gasoline prices dropping. Other small car models showed similar declines. About the only way to get Americans to buy small, fuel efficient but expensive cars, will be for the Obama administration to mandate it: draconian increases in gasoline taxes or outright banning sales of new cars that don't get XXX mpg.

  • ||

    wrong thread - sry

  • ||

    The taxpayers will nominally be owners of GM but not in fact.

    But in fact it is the Obama administration that is the owner and the decisions made in the name of the "taxpayer" will actually be made based on Democratic party politics.

    One of the best examples of that right off the bat is that GM won't be allowed to import cheap foreign cars for sale and instead must build them here in UAW staffed plants.

    Now how is that any sort of benefit to the REAL taxpayers? How is that a benefit the GM bondholders who are already being fucked over just like the Chrysler bondholders? How is that any benefit to the car consuming public?

    Answer: it's no benefit at all to any of those groups. The only beneficiaries are the UAW and the Democrat party which gets substantial political contributions paid out of union dues.

  • ||

    "Obama actually seems to have three No. 1 goals: turning a profit, building cleaner cars, and creating American jobs. Sullum says these priorities clash with each other"

    I'm certainly not sure of that. Most companies that make something do tend to hire more people when they turn bigger profits, and if the profits can be made in cleaner cars well...


    Profitable companies tend to fire people who cost more to employ than the marginal increase in revenue they generate. Profitable companies often drastically shrink their workforces in order to remain profitable.

    And spectacularly unprofitable companies like GM don't tend to turn that around when the person effectively running it is a career politician who owes his job to labor unions, and has never run a private for-profit enterprise.

    The short version? Don't buy a GM car. You will likely regret it.

  • ||

    It looks like I picked the wrong Administration to stop drinking.

    It looks like I picked the wrong Administration to quit sniffing glue.

  • ||

    Fool-proof GM recovery plan

    Step 1: Build Cars
    Step 2: Buy Franklin Mint stock
    Step 3: Replace GM logo with a special edition Obama "O" made by the Franklin Mint
    Step 4: Profit

  • ||

    Gill,

    That's a better plan than anything the government, GM management, or the UAW is likely to come up with.

    -jcr

  • ||

    That's a better plan than anything the government, GM management, or the UAW is likely to come up with.

    The sad thing is, people would buy those shits. Probably airbrush naked Obama riding a unicorn on the hood, too.

  • Warty||

    Step 3: Replace GM logo with a special edition Obama "O" made by the Franklin Mint

    I saw an I ♥ OBAMA bumper sticker today. You can sell anything to an idiot.

  • ||

    Probably airbrush naked Obama riding a unicorn on the hood, too.

    Hey! You peeked at my Trans Am, didn't you?

  • ||

    GM, Amtrak for the new millennia

  • ||

    Just this morning while exchanging cars at a local auto rental shop with which my company does business, I observed two "greatest generation" types bitching that "there's nothing here but fucking jap cars." One of them asked the clerk, "don't you have any american cars?"

    Whereupon I intervened and inquired, "does it bother you that the japanese make cars so much better than our communist companies?" They did not like my question. I did not have much time-otherwise, I would have....had some fun.

  • ||

    Hey, Sugarfree. Love the new sig.

  • ||

    Hey, Sugarfree. Love the new sig.

    I'm thinking that that ought to become a thing. Start towing the lion, Art!

    P.S. Any replies to this comment will most likely consist of ad homs, as libertarians concede my points and show their childish, anti-intellectual nature.

  • ||

    I'm certainly not sure of that. Most companies that make something do tend to hire more people when they turn bigger profits,

    They hire more people if doing so will result in more profits, sure.

    But hiring people to hire people, as a goal in and of itself, is antithetical to the goal of making profits.

    The smaller eco-cars will only begin to capture significant market share if and when gas exceeds $4.00 a gallon for a significant period of time. That, of course, is bad for the American consumer and bad for the economy as a whole. It is also, I firmly believe, a goal of the Obama administration, whether through cap and trade or just straight-out higher gas taxes.

    Of course, assuming that high gas prices create the market, GM has to capture market share. I doubt they can do that without major restrictions on their foreign competitors. We've seen the camel's nose under the tent on that one with GM saying they won't import eco-cars from China but will build a plant to make them in the US.

    That shows that the goal of making a profit is secondary to the goal of providing jobs.

  • ||

    "Step 1: Build Cars
    Step 2...
    Stap 3: PROFIT!"

    The Seat Belt Gnomes will build the cars, after they steal the seat belts from our cars. :)

    Great South Park reference.

  • ||

    ""does it bother you that the japanese make cars so much better than our communist companies?""

    Yeah LM, Japanese car companies are models of laissez-faire capitalism at its best!

  • ||

    "If the purpose of unions is to get shareholders and company CEOs to "share the wealth", how can the UAW have an ownership/managerial interest AND a labor interest?"

    I'm not sure I see what is so hard here, they will want the company to be profitable and to "share" those profits with the workers in the form of benefits and wages.

    BTW-All workers would like to get the company or boss they work for to share whatever wealth is being generated more with them. How many pay raises have you turned down?

    Boss: TAO, I think you deserve a raise.
    TAO: Sorry boss, I have to decline, that would harm the economic efficiency of the enterprise overall. In fact, I'm offering you half of my current salary and my breaks, as they are not helping our productivity either.

  • ||

    Yay for layoofs!

    You realize you libertarians would be the bad guy in Tommy Boy, right?

    Setting yourself against Chris Farley, man no wonder you guys can't crack 1% ;)

  • ||

    I'm not sure I see what is so hard here, they will want the company to be profitable and to "share" those profits with the workers in the form of benefits and wages.

    This requires the company to actually be profitable; demanding wages and benefits in excess of the enterprise's ability to pay them is the problem.

    But the "mission" of employers is to employ people.

  • ||

    "demanding wages and benefits in excess of the enterprise's ability to pay them is the problem."

    You've got a tiny imagination. Let me help: Two companies.
    1. Makes X amount of profit. Gives 60% of that to shareholders and management, 40% to employees as raises/bonuses.
    2. Makes same profit. Gives 40% of that to shareholders and management, 60% to employees as raises/bonuses.

    I imagine a union run company would be more likely to be like the latter. That's certainly not economic insanity Mr. Brooks...

  • Seward||

    MNG,

    Actually, the record of Japanese government involvement is at best problematic; for example, MITI never envisioned that Honda would be a car company; they expected that Toyota and Nissan would the car manufacturers of Japan exclusively. Imagine a world without Honda cars. More on MITI, etc. and Japan here.

    Anyway, the historical record is littered with companies which were failing that the state attempted to revive and failed in doing so. Which is an incredible waste of resources.

  • ||

    Since the UAW was given a large stake in the company [1] why don't they sell it off and take a one-time payment which they can invest elsewhere?



    That's exactly what the head of the union said they planned to do. That might certainly provide enough to pay off the existing retirees.

    You can be sure that to the extent that the UAW keeps members they will not be these kinds of benefits in future negotiations.

    And, naturally, look for increasing pressure on the Democrats to lift more of the pension and healtcare burdens from them.

  • Seward||

    I suspect that the efforts to save GM and Chrysler will be roughly as successful as those which were made to save British-Leyland (which eventually became the Rover Group). Last time I heard the Rover Group was in receivership (after being bought and sold by a number of different firms), with part of it being sold off to a Chinese car company.

  • ||

    "Two companies.
    1. Makes X amount of profit. Gives 60% of that to shareholders and management, 40% to employees as raises/bonuses.
    2. Makes same profit. Gives 40% of that to shareholders and management, 60% to employees as raises/bonuses."

    I wonder which one would attract more invesment and better management.

    The notion that any company could be set up on any kind of set formula like that is, frankly, laughable.

    This kind of zero sum (or piece of the pie) thinking is exactly why interventionist's schemes generally fail.

  • ||

    GM does have one chance, but it is a slim one:
    That all the liberal elitists of the U.S. (and possibly the world), start buying Obama's new econo-technoboxes irrespective of value (kind of like how they pay extra for "organic" fruits/vegetables).

    It's slim because liberal elitists just love to hate American corporations. Have you ever noticed how few liberals own American vehicles? (even though the American car companies are the liberal model of how all corporations should treat their employees)

  • ||

    I can't believe you people dare argue with MNG. He's by far the most intelligent commenter here AND he has a PhD.


    P.S. Any replies to this comment will most likely consist of ad homs, as libertarians concede my points and show their childish, anti-intellectual nature.

  • ||

    matters like where to open a new plant

    ROFLMAO

  • ||

    Oh, and the south is a poverty stricken land of inbred, racist, backwards, bigoted hicks who eat roadkill. I've never been there, but I know it's true cuz this super smart dude from Baltimore with a PhD in political "science" told me so.

    P.S. Any replies to this comment will most likely consist of ad homs, as libertarians concede my points and show their childish, anti-intellectual nature.

  • ||

    The governments idea of a "hands off approach" is to bury the entire arm of government up each of our asses to turn us into sock puppets. Call it the hands off, arm up approach. But they are tightening their belts and eliminating lubricant to save .000000000000000000000000000001% of the budgeted money for lube they used to spend.

  • ||

    Obama's idea of a clean car is a rickshaw: no fossil fuels used, renewable energy source, and each vehicle creates a job.

  • ||

    Makes same profit. Gives 40% of that to shareholders and management, 60% to employees as raises/bonuses.

    2) ????????
    3) PROFIT!!!


    Come on, MaunderingNannyGoat- don't you remember? In the Workers' Paradise, "shareholders" and "management" will go the way of the Dodo. There will be only the Workers' Co-Operative Committee; at the end of the day, they will empty the cash drawer and divide the contents amongst themselve equally (or is it "equitably"? I can never remember).

  • ||

    I hope that this GM fiasco turns out to be a drawn out disaster money pit that never turns out well and ultimately leaves the UAW workers homeless.

    Hell, we've already flushed only a few trillion dollars down the drain...might as well have some fun and get a few laughs watching the obamatards throw hundreds of billions into this shitty coporation, simultaneously trying to maintain UAW contracts and try to run something they know nothing about....then try to rationalize it to an increasingly skeptical country.

  • ||

    MNG, your business plan is fatally flawed.

    Overpaying employees by diverting 60% of profits to them raises your cost base. When your industry cycles down, you are fucked because your cost base stays high.

    Underpaying investors by only allowing them to participate in 40% of profits will raise your cost of capital.

    High cost of capital + high employment costs = failed company.

  • Seward||

    R.C. Dean,

    My prediction: in five to ten years GM and Chrysler will be far reduced in size, there will be far less interest in them, and we'll see their obit (via liquidation, being directly bought, etc.) buried in some small print link way down on the bottom on a news providers front door.

  • ||

    Dudes, the 60 and 40% figures were just made up, the general point is a bigger share to the workers relative to the holders/management. I fail to see how come that is fatally flawed...

    "I wonder which one would attract more invesment and better management."

    But couldn't you say "I wonder which one would attract better workers" for the other one? Or doesn't labor productivity matter Kreel?

  • ||

    "In the Workers' Paradise, "shareholders" and "management" will go the way of the Dodo."

    Interesting bubble you live in there Mr. Brooks!

  • ||

    We're all stakeholders, now.

  • Tomcat1066||

    For a company to be viable, there has to be a balance between good wages and good profit. What has happened is the UAW has become so focused on the wages that they don't really care how solvent the company is during economic downturns such as this one. High wages are all fine and good, but without that balance, the whole thing will come crashing down sooner or later.

  • Seward||

    R.C. Dean,

    Anyway, you'd have to explain why a firm like that would exist in the first place. The "theory of the firm" is always struggling with that issue to begin with.

  • ||

    hmm, I'm not worried. I'm confident we will see much higher gas prices within 5 years (and probably 1-3)
    due to a combination of
    falling dollar
    lack of investment in oil production
    increased consumption from China, and India etc

    So with gas at $4-5 a gallon there will be demand for small cars.

    Now that doesn't mean GM will actually have learned to make a good one...

  • ||

    Dudes, the 60 and 40% figures were just made up, the general point is a bigger share to the workers relative to the holders/management. I fail to see how come that is fatally flawed...

    Because the bigger share to workers raises your cost base and your vulnerability to a downturn.

    Because a smaller share to capital raises your cost of capital.

    Its not that hard, MNG.

    But couldn't you say "I wonder which one would attract better workers" for the other one?

    Its unionized, so even if you did attract better workers, you can't turn over your workforce with any speed to put them to work and raise your productivity. Not to mention the difficulty in changing your work rules to allow better productivity.

  • Seward||

    R.C. Dean,

    Right. One of the most significant problems with unions (or guilds and other similar institutions) is that they do not as a general rule reward greater work performance, etc.

  • ||

    "But couldn't you say "I wonder which one would attract better workers" for the other one? Or doesn't labor productivity matter Kreel?"

    Labor productivity is far more dependent on good management and capital investment than it is on wage levels.

    And minimizing employment to the levels required for maximum profitability are plain and simple good business sense. It is not a uniquely libertarian idea.

    And minimizing employment means either getting the lowest number of employees possible through mechanization and automation (said employees necessarily being quite well paid) or be able to minimize wage levels if one's business is labor intensive.

    Companies should exist to earn profits for their investors, creating employment for the "masses" is a side benefit.

    And, however it's done providing "fringe benefits" is something that needs to be ended ASAP.

  • ||

    Mr President Obama,
    Please complete this standard business priority planning graph for each of the businesses your administration now has a controlling interest in:

    Maximize Secondary Accept
    Profitability | | |
    Greenness | | |
    Job Count | | |

    Remember you can one and ONLY ONE check per row and per column.

    Further Note: To those idiots who've never seen a chart like this, or don't understand what it means. Please remember that this is NOT saying that you will have NONE or whatever is in the "Accept" category, and it's also NOT saying that adding some of one category will always subtract from another category. It is simply forcing you to say what you would prioritize between every category and each of the other categories.

  • ||

    ...sadly the comments box is in monospace font while the comments themselves are not. Hopefully you all can figure out what the above should look like.

  • ||

    I think we should start taking bets on when GM will ask for another subsidy, and/or be back in bankruptcy court.

    My hope, which is (yay) likely to be bourne out, is that Government Motors will be short lived.

    I mean, how long can Obama maintain his entanglement with the auto industry? I don't think it is winning him too many points politically.

  • ||

    "But couldn't you say "I wonder which one would attract better workers" for the other one? Or doesn't labor productivity matter Kreel?"

    Overall company productivity is what matters - not "labor productivity".

    The biggest productivity increases in the auto industry have occured when people were replaced by robots. The UAW has lost more people to automation than it has to the foreign competition they are always squawking about.

  • ||

    "Obama's environmental and employment goals could undermine profitability" Oh, ya think???

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