Allowing GM to fail might threaten a million jobs, counting the domino effect (see this WSJ article). However, as Bruce MacEwen among others has said:
If the Big Three have demonstrated anything over the past 30 years, it is their unrivalled managerial genius at misallocating productive assets and falling ever further behind their rivals. Time, one might think, to give someone else a chance to deploy those assets.
Maybe. I’ve thought until recently that it was basically a governance problem. Maybe bankruptcy would solve that by getting the assets into, say, private equity's hands. But, then, Cerberus hasn’t made a go of it either. So who would buy GM in bankruptcy? The Japanese? Why should they do a better job?
Maybe, as David Yermack suggests, cars are just a bad investment. But, then, why are the Japanese companies at least surviving? And if cars are a bad investment, then the auto workers would be out of work and not just redeployed, which is probably not politically acceptable.
Of course you can’t ignore the huge elephant in the room of the legacy labor costs. And there’s also the CAFÉ fuel economy standards, which have forced US companies out of their main competence – building big, fuel-inefficient but heavy-hauling vehicles. Holman Jenkins would attack both problems by getting rid of the CAFÉ two-fleet rule and letting GM make the lower-margin small cars in low-wage factories overseas. That sounds promising. But if you just did that, you’d still have the governance problems.
What seems clear is that we’d be better off burning the money, as Yermack suggests, than just giving it to the existing GM management/labor structure. If the only reason for doing that is to save the jobs, then here’s an idea that would at least be better than burning the money: put the same money into a huge public works/job training program for auto industry workers. Maybe they could build public transit systems.
Now you might find it strange that somebody who’s argued for free markets would advocate a huge government program. However, giving the money to GM right now is basically the same as a government jobs program only worse managed, if you could imagine that.
Market discipline is what makes firms work. But massive government subsidies and the lock-in of overpriced labor short-circuit markets in this case. Without markets, we can't expect shareholder voting, independent directors or takeovers to do the job. It follows that a huge bailout now would make GM the old-economy version of Fannie and Freddie.
Bottom line: if government is going to spend a huge wad of money, why not at least ensure that the politicians are responsible for it? I know it's hardly an ideal outcome. But anybody got a better idea?
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