Should we let GM fail?

Marshall Auerback here:

The issue of GM cannot be divorced from the broader issue of health care. Companies like Honda operate out of countries that made health and retirement benefits a national responsibility. And the perennially high price of gasoline, a product of high gas taxes in virtually all other highly developed countries, has ensured a steady market for their smaller, more fuel-efficient vehicles. There’s no reason not to treat U.S. car companies, and car owners, the same way. So we have to address the broader issue of health care as well as the obvious demands for producing more fuel efficient cars. (NOTE: The Washington Monthly from Hilzoy today was VERY significant in my opinion. Other than in the Naked Capitalism blog, I’ve seen nobody else make reference to it).

For now, that would mean government would assume some health and pension obligations (which it would have to do in a bankruptcy anyway, though its Pension Benefit Guaranty Corporation) while subsidising the purchase of fuel-efficient cars (something it is already planning to do, thanks to recent tax changes). But the debate over a Detroit bailout should begin a larger political conversation, one that sprawls beyond the Midwest and the intellectual confines of lean production techniques and workers’ legacy costs. Whatever mistakes the Big Three and the UAW have made, their struggles are a pretty good indicator of why the government–not employers–should be responsible for providing health insurance and why, without broader action to fight climate change, improving fuel efficiency will be a struggle. Naturally, the Big Three should enthusiastically promote these reforms, something they haven’t done in the past.

Yes, management has sucked for years and should be replaced and the UAW has been somewhat complicit as well, insisting upon rigid work rules defining who could do what job and under what conditions. That, plus their fierce protection of jobs even at unprofitable plants, made it difficult for the Big Three to adapt as consumer desires changed. Detroit steadily lost business to companies like Honda and Toyota that managed to make cars more efficiently–and figured out, early on, that rising gas prices would increase demand for more fuel-efficient vehicles.

But the UAW is changing and so is Detroit, belatedly. GM actually is producing some good cars now, but their financing practices (like everybody else in America) has cannibalised a source for future demand. According to the most recent Harbour Report, the benchmark guide for manufacturing prowess, Chrysler’s factories now match Toyota’s for the most productive, while both Ford’s and GM’s are improving. (A Toledo Jeep factory was actually named the nation’s most efficient.) Consumer Reports now says Ford’s reliability is approaching that of perennial leaders Honda and Toyota, whose ratings actually slipped last year. In late 2010, GM will introduce the Chevrolet Volt, a plug-in hybrid that can go 40 miles without gas, and the Chevrolet Cruze, a compact that relies solely on gas but that gets 45 miles to the gallon. The Volt would represent a rare leap ahead of the Japanese, who never embraced plug-in technology with the same enthusiasm. It’s also typical of the better cars that observers say Detroit has in store.

From Consumer Reports: “There’s a lot of accumulated negativity about these companies out there,” says Wharton’s John Paul MacDuffie, who directs the International Motor Vehicle Program. “U.S. consumers gave the Big Three the benefit of the doubt for a long time before turning away from them, and now their reputation is worse than their actual performance and progress toward needed reforms.”

Of course, the progress is incomplete. As proof that Detroit still has a lot to learn, MacDuffie points to recent strategic mistakes like its overreliance on deep sticker-price discounts and large rebates, which dilute brand reputation and resale value. But Chapter 11 seems like a particularly poor way to fix these sorts of lingering problems. Bankruptcy is a messy, expensive process that would likely do more for lawyers than for the automaker, which has already taken the most obvious steps toward efficiency. “With the airlines, it was to get out of their labour contracts and to get out from under the underfunded pension positions they created,” says Mark Oline, a highly regarded automotive analyst with Fitch Ratings. “But, in the case of GM and Ford, they have done a very good job with the UAW to address those problems of wages and benefits.”

One of the things that came out in a conference I attended last Friday is the notion that we are too often inclined to use blunt policy instruments to “solve” problems and this often makes it worse. Barclay Rosser, a professor of economics at James Madison, gave an excellent talk on this and spoke as one example of the destructive impact of using the sledgehammer of interest rates to deal with bubbles in specific asset bubbles. Likewise, everybody is now saying “Use chapter 11 to sort out Detroit, like we do for the airlines”. Well, that might in fact make it worse and if anything, Chapter 11 might reinforce some of Detroit’s worst habits–starting with its tendency to seek the lowest prices from parts suppliers, even if that means switching companies frequently and paying relatively little attention to part quality. Toyota is famous for taking the opposite approach: It eschews easy savings in order to maintain long-term relationships with suppliers; these relationships, in turn, allow Toyota and its suppliers to collaborate on design and quality. It’s precisely the sort of production technique that the Big Three should be adopting. But, in a Chapter 11 filing, under pressure to improve the bottom line as fast as possible, they’d be unlikely to do that. And that’s assuming they even make it to Chapter 11. In the more likely event that GM had to shut down altogether under Chapter 7, as most experts I consulted predict, the company’s institutional knowledge would end up on the proverbial shop floor. Among the casualties could be the Volt–and any near-term hopes of a marketable plug-in for the domestic auto industry.

I guess finally philosophically, I get really annoyed at these armchair experts who simply say, “Shut down GM and destroy the pension benefits of the workers” with nary a thought of the social consequences. These economists who view everything through the prism of “the MARKET” and mathematical models and nothing else. If GM ends up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM’s business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation’s assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money. Gun sales are already going through the roof. Do we really want to light a fuse here and start a social revolution? Is this the kind of country we want to live in?