Government Motors is no substitute for General Motors

America has a reputation of being the land of the free market. But the worsening of the financial crisis in the autumn prompted George W Bush and then Barack Obama to intervene in the private sector in new ways, and forced the country’s leaders to abandon any pro-market rhetoric. The effective nationalisation of General Motors last week marked another significant departure from the one-time ideal of laissez-faire capitalism.

After providing $20billion in bailout money, the US government pushed GM into bankruptcy. As part of the deal, the government will pour in another $30billion and take a 60 per cent ownership stake. The ‘new GM’ will consist of fewer models – about half will be sold off – and will have $79billion of its debts wiped off its books. The restructuring is extensive: the company is closing 14 factories, cutting 29,000 jobs and shedding 2,400 dealers.

Although bankruptcy was on the cards for some time, the finality of it was still something of a shock. GM was for many years America’s biggest employer, as recently as 1980 sold almost half the country’s cars, and until 2008 was the world’s biggest auto producer. As the postwar saying went, ‘What’s good for GM is good for America’. GM was associated with innovative design (chrome, tail fins, muscle cars, even catalytic converters), modern management and organisation (the multi-divisional structure) and modern mass marketing (‘a car for every purse and purpose’, as former GM president Alfred Sloan put it).

GM’s demise has been a long, slow process. The company let quality standards slide and became known for making poor quality cars; not all were lemons, but the bad ones tainted the entire brand. In particular, it was unable to respond in the 1980s to smaller, more fuel-efficient Japanese ‘transplant’ cars, produced in southern US with lower wage and benefit costs. Instead, GM put its emphasis on trucks and sports-utility vehicles (SUVs). Although GM instituted efficiency reforms and in 2007 negotiated concessions from its union, the United Auto Workers (UAW), its reputation and sales never recovered. Market share fell to about 20 per cent in 2007. Higher oil prices then hit sales of its gas-guzzling big cars and trucks, and the recession was effectively the last straw.

It is clear that GM has been a failure as a company, but the fall of GM is also emblematic of the failure of the market in the US more generally.

According to capitalist ideology, the invisible hand of the market is supposed to be self-correcting. Yet GM did not undertake any adequate correction. Its restructuring actions were usually too little, too late. The company often sought the easy way out, including a turn to greater reliance on credit, such as offering cheap loan terms to buyers (via its financing arm, GMAC, which became an increasingly important source of profits) and incentives to dealers to keep sales up. Business leaders are supposed to be ruthless in the pursuit of profit, but in the case of GM it took the state led by the Democratic Party – which is supposed to consist of second-rate bureaucrats who know little about the ways of business – to impose a more severe restructuring of the company.

The fact that GM could not restructure itself without state assistance is an indictment of the market. But GM is not an isolated case of sclerotic decline. The other Detroit carmakers have also been unable to regenerate themselves. Like GM, Chrysler was bailed out and forced into bankruptcy (and sold to Fiat). Ford has also had poor results, but avoided bankruptcy only because it took on a huge loan.

More generally, the GM bankruptcy has touched a nerve because it is symbolic of the broader decline of manufacturing production in the US. As people here say, you just don’t see ‘made in the USA’ that much any more. Such concerns have been around for a long time, at least since the 1980s. But the fact that the rise of newer industries since that time has not really touched the rustbelt Midwest – nor increased the net number of manufacturing jobs country-wide for that matter – means that the latest blows bring more anxiety and despair about the future.

And yet, for all that GM represents a market failure, it does not mean that the state can provide a sustainable answer to that failure.

Many believe that GM is an example of the state abandoning its hands-off approach to the market and stepping in to control the unbridled market and rescue the company. But that’s a misconception: the idea of a neo-liberal, free-market US economy is a myth. The US government has been intertwined with the nation’s economy for many years (including during the Reagan era); it’s not just jumping in now. The auto industry is a case in point. American politicians have protected the Detroit carmarkers in various ways for decades, most notably by restricting imports. And in setting its fuel economy rules, the government set a lower bar for pickups and light trucks, thus supporting Detroit’s decision to focus on those vehicles.

There has not been a bright line separating the market and state in the US. The GM case is a change in degree, not in kind. What’s new about GM is that government intervention is taking the form of direct ownership, which means a qualitative increase in control.

The Obama administration believes that the reorganisation of GM is the best solution given the circumstances. It feared that liquidation of the company in the midst of a potential Great Depression could have set off a dangerous chain reaction, as it might have increased unemployment substantially (not just among GM employees, but among suppliers, too) and hurt business confidence. Obama said that the government took ownership reluctantly, will not micro-manage and will seek to sell off its stake as soon as possible.

But it is hard to believe that the Obama administration will be hands-off. For one thing, Obama’s auto task force rejected an alternative, less interventionist approach: a regular ‘chapter 11’ bankruptcy, with the government providing a loan, rather than taking stock. For another, the task force has already been intimately involved in the operations of the company: it sacked CEO Rick Wagoner, negotiated a deal with the UAW union, and had a hand in helping factories to stay open. Members of Congress are now lobbying to keep sites in their own states open.

Most importantly, there is an inherent conflict in the approach the Obama team is adopting: the lifeblood of a market economy is profits, and yet the administration is using the government’s ownership stake to require that GM follow objectives other than increasing profits. Obama has stated that fuel efficiency will be a key objective of the new GM. He wants to turn GM into an exemplar of his green goals of reducing oil consumption and carbon emissions. But Americans have not shown an inclination to buy large quantities of the smaller, eco-friendly cars that he prefers. Based on evidence to date, it would take a big hike in oil prices or a new tax for that to happen.

The government-imposed restructuring represents a significant clearing of the decks, with a focus on the more profitable models, lots of debt wiped off, factories and jobs slashed, labour costs cut, and working conditions rewritten. These actions, in combination with the $50billion in support, will no doubt help GM move towards showing a profit in the near future. Moreover, GM had made improvements in quality, and it is relatively strong in emerging markets, including in China, where GM is in a leading position to capture a good portion of the growing car sales market.

But the company’s prospects are far from assured. GM’s labour costs are still higher than its competitors, and its brand has been even more tarnished by the bankruptcy announcement. The bottom line is that the company has yet to prove it can make quality cars that people want to buy, at a profit. And even if the company manages to return to profitability, it is unlikely that the government will get its money back: that would require a market capitalisation of $83billion, and GM’s previous highest market value (on a much bigger profit base) was $60billion in 1999.

What is certain is that GM’s workers are the losers. Job losses for them are not news, as GM has been shedding hundred of thousands of jobs for many years: worldwide employment peaked at 853,000 in 1979, and after bankruptcy will be about 215,000. Job reductions in the car and related industries have had a devastating effect on Detroit itself, which has lost 50 per cent of its population since 1950. But the fact that jobs have been disappearing for some time does not lessen the blow that the bankruptcy represents.

Unfortunately, Obama’s reorganisation via bankruptcy does not provide the remaining GM workers with a secure future. It is more likely to slow the decline rather than reverse it. Workers need reliable, high-paying jobs and those can only come from a dynamic, high-growth economy. Pouring government money into less productive manufacturers like GM may temporarily stop the haemorrhaging, but it is not a viable way forward. Radical filmmaker Michael Moore, who is from Michigan and made a movie about GM called Roger and Me in 1989, says Obama must ‘immediately convert our auto factories to factories that build mass-transit vehicles and alternative-energy devices’ (1). That’s not going to happen, and Obama’s more modest promise to support the creation of ‘green jobs’ over time will not come anywhere close to replacing the jobs that have been lost.

The Obama administration no doubt believes it is only directly intervening in the ownership of GM because it is necessary in unusual conditions. But its response just delays the inevitable, at a significant cost to the government’s deficit (which will be a drag on future growth). Contrary to what Obama argues, his GM plan won’t save jobs in the long run, nor is the government likely to get its money back. In announcing the bankruptcy plan, Obama said: ‘I refused to kick the can down the road.’ But the truth is, that is what he did.

Sean Collins is a writer based in New York.

(1) ‘Goodbye, GM’, by Michael Moore, The Daily Beast, 1 June 2009