What About GM?

Posted by on . 6 comments.

Commenter JRoth says (among other things) that I blew it on the issue of saving the automakers:

To my non-surprise, he’s written nothing. Back in the winter of ‘08-’09, he couldn’t say enough about the need to destroy GM: they would never be profitable again, it was a waste of money to save them, and they were an inherently wicked company. Three pages of GM-related posts come up on the site search, virtually all from that timeframe, and not a single one in the last year.

That would be the year that has proven Avent completely fucking wrong. His analysis, and his understanding of the facts, were completely mistaken, driven (I guess) by emotion and ideology rather than any kind of grounding in the history of industry, industrial policy, and deindustrialization.

For the record, I didn’t advocate that anyone “destroy” GM. My recommendation was that the government provide a delicate way to allow the company to fail (GM had no trouble bleeding cash all by itself). But how about it? Was I wrong?

GM did just announce a quarterly profit of $1.3 billion, which seems nice. I may have overestimated how much money they’d need from the government before turning a profit. But let’s be clear about this: as of March of this year, the government had $76 billion committed to the automakers. So it’s perhaps a bit soon to be declaring the rescue a success.

I also argued that economic transition in the Midwest was an inevitability — that American auto sales and auto industry employment were unlikely to ever recover their pre-recession levels. That continues to look like a pretty safe bet. American auto sales remain well below the typical levels before 2007: around 11 million annually compared to 16 million in 2006. The same is true for employment in automobile manufacturing. Around 700,000 people are currently at work building cars in America (for all manufacturers, not just the Big Three). That’s fewer than at the point the rescue was initiated, and well below pre-recession levels. In 2006, nearly 1.1 million people were building automobiles. In 2000, the figure was over 1.3 million. The long-term health of the Midwest will depend on the strength of industries other than the automakers. That was true in 2008. It’s true now.

The other obvious point to make is that we need to know what the counterfactual is here. I never proposed that we tell workers in the Midwest to go take a hike. My view was that rather than throwing money at companies that would employ steadily fewer Midwesterners, no matter what, it would be a good idea to invest in the people and infrastructure of the Midwest. Sure, GM had a quarterly profit of $1.3 billion. So what? Is that a better or worse outcome for the Midwest than we would have seen had the $85 billion committed to the automakers been used to retrain workers, support credit to businesses generally, and invest in the physical infrastructure of the region? That’s clearly unknowable, but if we could run a controlled experiment, I know which strategy I’d put my money on.

There’s nothing miraculous or special about the fact that companies propped up by billions in government money continue to exist. And if that’s the measuring stick you’re using, you’re using the wrong measuring stick. I don’t care about individual companies. I care about the broader economy and the people it employs. And my sense continues to be that the money provided to GM has done little to improve the long-run growth prospects for the Midwest and would have been better used on other investments.

Comments

  1. Doug says:
    August 12, 2010 at 4:01 pm

    I agreed then. I think you were right in general- much better to retrain than retain, but, speaking for myself, I also thought GM would hit the shoals anyway so I was wrong about that point.

  2. JRoth says:
    August 12, 2010 at 5:37 pm

    Before I reply, I do appreciate your quick response.

    But, as soon as next week, GM can run an IPO, and the odds are good that that IPO will repay the USG in full (and if they judge that it won’t, they’ll hold off until it does; it’s purely a matter of time). So you’re just kicking that particular can of wrongness down the road.

    And I’m not going to buy a distinction between choosing not to save a (large, irreplaceable) company (that can easily be saved) and destroying it. The company was drowning, in large part because of an extraordinary flood (and also, of course, due to its own stupidity), and the USG was standing at the shore with a lifeline. You advocated holding on to that lifeline.

    But what a weird argument you’re making about overall sales and employment. Care to name an industry – other than Wall Street, of course – that has fully recovered? Meanwhile, by the only metrics that matter – market share and profit per unit – GM is better off then they were before the bailout and before the recession began. No honest observer can deny that GM is a better, stronger company than they were 3 years ago.

    But let’s get to the meat of the matter. Precisely what jobs would the hundreds of thousands of GM employees (and the additional million employees at parts suppliers that everyone knowledgable consider entirely dependent on GM’s ongoing existence – Ford alone can’t support them) be doing after their “retraining?” I don’t know if you’ve noticed, Ryan, but there are no fucking jobs in America right now. There won’t be any new jobs in 2011 or 2012, either. If you want to argue that “retraining” and “infrastructure investments” will result in a 45 year old with lots of skills in a vanished industry getting a living wage job this year – or in 3 years, when he’s 48 and has been unemployed for 120 weeks – then you’re a fool.

    And this is why you were wrong, and why you continue to be wrong. You don’t understand deindustrialization, and don’t care to learn about it. Pittsburgh has recovered rather nicely from the loss of steel, and is certainly in better shape than, for example, Detroit. But the steelworkers who lost their jobs never worked in good jobs again. They never were productive parts of the economy again. Sure, a few of the young ones were able to start over (elsewhere), and a handful were able to transfer their skills. But the vast majority spent the rest of their lives unemployed or underemployed. And that’s the fate that you continue to wish on a million American workers, because you have a fantasy notion of “retraining” and “infrastructure.”

  3. JRoth says:
    August 12, 2010 at 5:49 pm

    One more thing:

    Aside from wrongness about deindustrialization, you were wrong about GM as a company. You insisted that its products were shitty and/or evil, and that was part of your reason for being willing to let it fail. Well, its products are well-regarded and selling without (significant) incentives, and the company is greener and more efficient than it’s ever been.

    It may not have been the case that you were anti-GM based primarily on your misperception of their products, but it surely contributed to your thinking, and you weren’t interested in hearing otherwise (I know, because I corrected you repeatedly on a couple of things that you kept blithely repeating without so much as acknowledging that you could be wrong).

  4. ryan says:
    August 12, 2010 at 6:25 pm

    Choosing not to save a failing company is not destroying a company. Many, many other large firms made it through the recession without government help. GM put itself in a terrible situation, and that isn’t my fault or the fault of the American taxpayer. It is not the government’s responsibility to save private firms, nor should it be; the assumption should be that a failing company will go under and have only itself to blame. To justify a departure from that assumption, you need to make a strong case — certainly a stronger one than was made.

    Sure, GM is better off than it was, thanks to government ownership and billions in taxpayer dollars. That’s not the point. But what’s the alternative scenario? What’s the opportunity cost? If you’re going to justify a massive government intervention and the potential risks and incentive effects that go along with it, you need to do better than two profitable quarters to declare it worthwhile. You haven’t remotely made the case that the alternative I’ve suggested — a similar-sized investment in the people and infrastructure of the region — would be considerably worse, other than waving your hands about high unemployment. The burden is on you to make this case, because large government interventions on the behalf of private companies are not something we generally look on as acceptable, and with very good reason.

    Market share and profit matter for GM. They don’t matter for the government. The justification for intervening on behalf of GM is that the cost in terms of employment would be unacceptably high. Well, the cost was unacceptably high anyway, and there is no sign that auto employment will ever recover pre-recession levels — as I noted before, employment fell steadily from 2000 to 2006, even as sales were rising. The government has delayed the inevitable here. And it might instead have employed those workers doing other things. It could have paid them to go to school. It could have paid them to sit around and do nothing. That $85 billion in allocated funds could have put a lot of people to work for a long time.

    I don’t wish the loss of an industry on any worker, but it’s not up to me. What I understand about deindustrialization, and what you don’t seem to appreciate, is that there’s really not much to be done about it — and believe me, many governments have tried much harder than America’s to prevent it. Economies change. Technologies change. You think I don’t understand this? I’m a journalist. My industry may be dead before American auto manufacturing. A lot of people in media would love a bailout. But they’re not going to get one. And I’m glad about that. No one deserves to hang on to a job after the job ceases to be useful. If we protected every threatened occupation, most of the country would still be farming, and we’d all be poorer for it.

    The decline of manufacturing employment is an old, old trend. The intervention on behalf of the carmakers isn’t going to interrupt it. The government had two options — support companies with questionable long-term futures, or do the best it could investing in the long-term future of the people of the Midwest. The right answer was the latter.

    I don’t care if GM is producing green products. If there’s a market for green automobiles, someone will build them, and it doesn’t matter to me, and shouldn’t matter to you, whether that’s GM or Ford or Honda or Ferrari. If the prospects for the manufacture of green vehicles in America are so great, and if American workers are so well suited to do it, then there was no need to save GM; we could have provided unemployed workers with money to stay afloat until a rival firm hired them to build green cars. And if the prospects aren’t great and American workers aren’t suited to building them, then it was a dumb idea to save GM anyway.

    I care very much about the future of distressed manufacturing areas and the people that live in them. And that’s why I was bothered by the bail-out. We can do better by the people threatened with the loss of their industry.

  5. Laurence says:
    August 13, 2010 at 5:05 pm

    “If there’s a market for green automobiles, someone will build them” – This is quite separate from the GM intervention, but there’s a fair case that there are some externalities and market failure here. Of course, the best thing government could do would be to enact a comprehensive climate change law. Governments make markets.

  6. Doug says:
    August 14, 2010 at 9:42 am

    Ryan, when you say ” Many, many other large firms made it through the recession without government help,” it’s also worth pointing out that many, many other big and small firms did not make it through the recession. Another problem I have with the GM bailout is that, because the industry is iconic, the government chose to save it while letting thousands of other businesses and the jobs they entail disappear.

    Even GM’s turnaround doesn’t answer why the government should have chosen GM for salvation.