Bailing Out GM
Talk is heating up on both sides over the issue of government bailouts of troubled industries. Last week, Treasury Secretary Henry Paulson announced that he’s changed the way he uses the $700 billion authorized by Congress to purchase toxic mortgage assets and is, instead, using the money to recapitalize troubled banks. http://www.time.com/time/business/article/0,8599,1858631,00.html.
The latest debate concerns a troubled GM, and the effect on the economy of allowing GM to declare bankruptcy. This is a very difficult issue and would be a complicated situation even in good economic times. It seems to me that the issue boils down to this; GM cannot afford the legacy costs it negotiated into its labor agreements and retool to meet new CAFE standards while remaining competitive in the face of non-union auto assemblers Toyota and Honda.
There is no good answer here. If GM enters bankruptcy, it is widely believed that retirees of the automaker will pay the ultimate price as GM abrigates its huge legacy costs for pension and health care commitments. The pensions are guaranteed by the federal government so the taxpayers will pick up some portion of that, but the health care costs remain an issue. It is likely that the contracts with existing employees will be tossed out and the fall-out of renegotiating in light of the non-union shops in Indiana, Tennessee, and other states will put downward pressure on pay and benefits. The ripple effect on suppliers and the support businesses in communities through the country is enormous.
On the other side, will consumers buy vehicles from a bankrupt GM? It’s one thing to buy an airplane ticket from a bankrupt Northwest Airlines – the relationship ends when the plane lands. But a car is expected to last for ten years or more. Will the bankruptcy affect the warranty? What will happen to service and parts? These may be unknowns too great to tolerate keeping customers away and hindering GM’s ability to come out of chapter 11.
Even with all the unknowns, I remain an unabashed believer in free market capitalism. The business cycle has been occurring for decades – only the severity changes. Businesses come and go. There are short-term disruptions that are not pleasant for anyone. But the markets are very effective at cleansing out practices that are no longer efficient. Competitors keep excess profits in check, customers demand innovation, and change is constant and fast. Bankruptcy is a government bail-out program that gives companies an opportunity for a do-over. It is an orderly system that enables organizations to make the kind of fundamental changes to their organization that will enable them to continue. Those changes often happen only when forced upon an organization by the bankruptcy process.
A government bail-out may remove some of the pain for the employees for a period of time, but it risks preventing the kind of fundamental changes that are desperately needed. Sometimes you just have to take your castor oil. It’s high time to hold our collective noses and take our medicine. If we don’t do it now, the medicine will be much harder to swallow later on.
