Robert Reich: GM Bailout A Wasteful Way to Ameliorate Pain

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The last person one might expect to criticize the Obama Administration bailout of GM is a unapologetic liberal like Robert Reich, labor secretary under Clinton. Yet he does precisely that in today’s Financial Times.

And his logic is similar to the arguments made here and elsewhere against the bank rescue operations. Unlike some other commentators, who would be happy to Big Auto fail and devil take the hindmost, Reich believes the social cost would be so great (if nothing else, the whackage to GDP), that means to address the fallout are warranted, But he strongly disagrees with the bailout program, seeing it as wasteful and intellectually dishonest.

Bizarrely, the rescue, by throwing dollars at the problem, somehow looks more surgical and hands-off. Indeed, in the various announcements of the imminent GM bankruptcy filing, the powers that be have gone to some lengths to say they will be a hands off 60% owner. Yet the sort of active measures that Reich calls for, such as retraining programs, extended unemployment (and I would add relocation aid) weirdly raises the specter of “big government” in the public mind more than just writing very large checks. So we’ll go for costly and indirect rather than focused, cheaper, but more moving parts.

From the Financial Times:

As president of General Motors when Eisenhower tapped him to become secretary of defence in 1953, “Engine Charlie” Wilson….asked whether he could make a decision in the interest of the US that was adverse to the interest of GM, he said he could.

Then he reassured them that such a conflict would never arise. “I cannot conceive of one because for years I thought what was good for our country was good for General Motors, and vice versa. Our company is too big. It goes with the welfare of the country.”….

In 1953, GM was the world’s biggest manufacturer…It generated 3 per cent of US gross national product….It was also America’s largest employer, paying its workers solidly middle-class wages with generous benefits.

Today, Wal-Mart is America’s largest employer, Toyota is the world’s largest carmaker and General Motors is expected to file for bankruptcy. And Wilson’s reassuring words in 1953 now have an ironic twist. There will be little difference between what is good for America and for GM because it is soon to be owned by US taxpayers who have forked out more than $60bn (€42bn, £37bn) to buy it.

But why would US taxpayers want to own today’s GM? Surely not because the shares promise a high return when the economy turns up. GM has been on a downward slide for years. In the 1960s, consumer advocate Ralph Nader revealed its cars were unsafe. In the 1970s, Middle East oil producers showed its cars were uneconomic. In the 1980s, Japanese carmakers exposed them as unreliable and costly. Many younger Americans have never bought a GM car and would not think of doing so. Given this record, it seems doubtful that taxpayers will even be repaid our $60bn. But getting repaid cannot be the main goal of the bail-out. Presumably, the reason is to serve some larger public purpose. But the goal is not obvious.

It cannot be to preserve GM jobs, because the US Treasury has signalled GM must slim to get the cash. It plans to shut half-a-dozen factories and sack at least 20,000 more workers. It has already culled its dealership network.

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganisation under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars. Congress has already given carmakers money to do this. Besides, the Treasury has said it has no interest in being an active investor or telling the industry what cars to make.

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60bn than to buy GM? The funds would be better spent helping the Midwest diversify away from cars. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

But US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.

So the Obama administration is, in effect, paying $60bn to buy off both constituencies….But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

Behind all of this is a growing public fear, of which GM’s demise is a small but telling part. Half a century ago, the prosperity of America’s middle class was one of democratic capitalism’s greatest triumphs. By the time Wilson left GM, almost half of all US families fell within the middle range of income. Most were headed not by professionals or executives but by skilled and semi-skilled factory workers. Jobs were steady and health benefits secure. Americans were becoming more equal economically.

But starting three decades ago, these trends have been turned upside down. Middle-class jobs that do not need a college degree are disappearing. Job security is all but gone. And the nation is more unequal. GM in its heyday was the model of economic security and widening prosperity. Its decline has mirrored the disappearance of both.

Middle-class taxpayers worry they cannot afford to bail out companies like GM. Yet they worry they cannot afford to lose their jobs. Wilson’s edict, too, has been turned upside down: in many ways, what has been bad for GM has been bad for much of America.

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  1. Whatta

    a point that Reich misses is that if GM fails again…it will be bailed out again…we now have precedent.

  2. Skeptical Economist

    R. Reich deserves some credit just for getting the quote from Charlie “Engine” Wilson right. Almost everyone else misquotes him as saying “What is good for GM is good for America”.

  3. tradelite

    Total credit market debt as a percentage of GDP has risen from 130% of GDP in 1952 to 350% of GDP today. The various bailout and stimulus schemes enacted in the last year will drive

    this percentage above 400% in the near future. When a country allows this much debt to accumulate versus its GDP, they have done something seriously wrong. The country’s politicians, business leaders, and citizens have all contributed to this disaster.

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