Now that the inevitable deed is finally done, today’s financial pages–and most especially the opinion sections–are full of indignation over the losses imposed on bond and stock holders and ominous ruminations over the precedent set by government’s assumption of a 60 percent ownership stake in the fatally crippled carmaker. In principle the reorganization of GM and the liquidation of its worst-performing assets is is the right approach.
I’ve argued before–as have many others–that this is essentially what the government should have done with the banks: Start taking your write-down medicine, and the pain and dislocation that come with it, upfront. Get the bad debts off the books and build a foundation for future growth that’s unencumbered by all those crazy, opaque, irredeemable bets placed in the bubble years. This is what Sweden did in the early ’90s and Japan did not do in the late ’80s.
Unfortunately, there is no assurance the strategy will be a success in the case of General Motors. The investor class is all in a lather over the ownership shares of GM and Chrysler that their respective bankruptcy plans accorded to the United Auto Workers, but the near-term pain will be very much shared by workers–another 21,000 of the best-paying union jobs left in the U.S. will be lost in coming months at GM.
But the heart of the continued uncertainty over GM’s fate is a matter of two related long-term problems that are getting short shrift in the heat of the news cycle. The first is the lousy reputation here and worldwide of the cars they build. American automakers spent more than 30 years cementing their inferior status in engineering, reliability and fuel efficiency, and even though the past few years have seen the start of a turnaround in those areas, you don’t undo that kind of damage quickly.
The inertia of the American car companies is typically blamed on laxity in management, a refusal to recognize the world’s changing energy regime, inadequate regulation of mileage standards, the American taste for epic-sized gas guzzlers…. You know the list, and in a sense they’re all ways of saying the same thing: We didn’t notice the world was changing around us.
The tendency, in other words, is to count the downfall of the American car companies as a moral failure and a failure of vision. Who would disagree? But that’s not the whole story. In dollars-and-cents terms, there was another reason the American car companies fell behind the rest of the world in their investments in technology and quality control: health care costs. All through the period of its decline, the U.S. auto industry was forced to spend sums on worker health insurance that were unmatched anywhere else in the industrialized world, because the United States was the only one without a government-sponsored health care system.
And since those costs continue to race out of control, they will likely prove at least as damaging to the new GM as the old–if the new GM is to build its cars in America, that is. And if it’s not, what’s the point?
Links: The best commentary I’ve read so far is by Robert Reich in the Financial Times: “General Motors holds up a mirror to America.” News coverage: “GM seeks bankruptcy and a new start” (NYT); “GM files for Chapter 11 protection” (FT); “New era in autos as GM files for bankruptcy” (WSJ); “Workout will produce shared stress throughout the auto business” (WSJ); “GM to shut 12 more factories to speed bankruptcy exit” (Bloomberg).