The Agenda

Why I’m Pessimistic About GM

Check out this post by my colleagues at Economics 21:


The coverage of the GM IPO has been favorable in part because expectations for the automobile industry have fallen so low. As Dave Kansas of the Wall Street Journal’s Deal Journal has observed, GM’s estimated value as recently as late October was between $50 billion and $70 billion. The results of the IPO suggest that GM’s value is much closer to $50 billion, well below the point at which taxpayers would have been made whole.

Defenders of the auto bailout insist that allowing GM to fail would have caused considerable economic dislocation. Last week, the Center for Automotive Research released a report that claimed that a failure to rescue GM and Chrysler would have reduced tax revenue and increased social spending by a total of $28.6 billion. This, of course, raises the question of whether taxpayers might have been better served by offering $25 billion in transfers to workers and their families in southeastern Michigan and other affected regions, allowing them to use the resources to resettle or retrain.

Instead, the Obama Administration chose to invest heavily in a large manufacturing concern that continues to face dire prospects. During the debate over the bailout, Sen. Bob Corker of Tennessee proposed an amendment that called for reducing total compensation for GM’s unionized workforce to levels matching those of its U.S.-based Japanese competitors. The UAW chose not to embrace the Corker proposal, rightly sensing that it could win a more generous settlement from the White House. This will have long-term implications for the cost structure of “New GM,” which bears more than a passing resemblance to that of “Old GM.”

A number of industry watchers predict that the automobile market will change dramatically as Chinese and Indian manufacturers introduce lower price points, and as niche players like California-based Tesla that focus exclusively on the manufacture of electric vehicles gain ground. Between 2002 and this year, GM’s share of the U.S. automobile market has fallen from 29 percent to 18.3 percent, below the 19 percent assumed by the federal government’s bailout plan. It is possible that GM’s decades-long slide will end there. But it’s not obvious.

Part of the longer-term problem facing GM and the U.S. automobile industry more broadly is that while automobile sales in emerging economies are increasing robustly, they are decreasing in the mature economies of Europe, North America, and Japan. Aging populations, deleveraging households, higher gasoline prices, denser metropolitan areas, and the advent of sharing platforms like Zipcar have dampened demand, and many if not all of these trends are likely to accelerate. We can expect governments throughout the industrialized world to continue subsidizing “national champions” in the automotive sector, creating a powerful beggar-thy-neighbor dynamic that could badly undermine free trade. As this dynamic unfolds, the U.S. will be in no position to lecture its trading partners.

I’m still not sold on the view that the GM bailout was worthwhile. I can understand the idea that it made sense to prevent a GM collapse in the fall of 2008, but beyond that I think we’ve made a serious, if understandable, mistake. Oddly enough, only the Swedish government has been sensible during the latest round of auto-mania. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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