With Bankruptcy Looming, Obama's New GM Begins to Emerge
By - May 30, 2009

With an almost certain bankruptcy filing days away, General Motors is beginning its reinvention, planning to retool one factory to make its smallest vehicles ever in the U.S. and rid itself of the biggest. As GM's board began two days of meetings Friday to make a final decision on the company's fate, GM was also closing in on a sale of its European Opel unit, and its main union overwhelmingly approved dramatic labor cost cuts. A deal to sell its rugged but inefficient Hummer brand also appeared on the horizon. "They've eliminated their legacy costs. They've already invested in new product that's coming. They have the ear of the government unlike any time in their history, and the government has said basically 'we are going to help you survive and thrive,'" Bragman said. – AP

Dominant Social Theme: From beastly to beautiful …

Free-Market Analysis: We are not convinced this is going to end happily. We've already written that the government-induced fascination with small cars may put GM on the wrong road to recovery. But that is just the beginning. What's going on is that the company, and those in the political arena, are hauling a "new GM" into the future with a preconceived idea of what the market wants – rather than what it WILL want. Here's some more from the article:

GM is banking on more demand for smaller cars previously shunned by Americans. The government decided earlier this month to raise fuel economy standards for the entire U.S. fleet by 2016. The new standards were one of the biggest factors in GM's announcement to build subcompacts in the U.S. rather than in China, said a person familiar with GM's plans who spoke on condition of anonymity because of the sensitive nature of the plans. Chrysler LLC, already in bankruptcy protection, is banking on the same thing. It wants to sell all its assets to Fiat Group SpA so the Italian automaker can start building its sophisticated small cars on this side of the ocean. The strategy is still a big gamble.

What's going on here seems clear. The Obama administration decided to force a new paradigm onto the American public: One of smaller fuel-efficient cars to take the place of the big clunky ones that kept GM afloat throughout the 2000s. We've heard Obama say as much in speeches … that the reason GM failed was not because of labor costs or the economic crisis. GM failed because it didn't give the American public what it wanted, which was smaller, more fuel-efficient cars.

This is a load of hooey. What killed GM were government enforced labor laws that didn't allow GM to streamline costs when it needed to. The every-day manufacturing costs GM could avoid by going overseas (as it still will do) but the legacy retirement and health care responsibilities finally amounted to an overwhelming fixed cost that the company could not overcome in a bad economic climate.

There are several reasons why the GM bankruptcy is taking place the way that it is. First of all, the Obama administration would have preferred not to have a bankruptcy, but in giving away as much as it did to GM's unions, it alienated the bond-holders who normally would have received more. Second, the Obama administration was determined to utilize additional funding as a lever to reward UAW support. Finally, the Obama administration expects to use its financial muscle to remake GM into an automobile company that provides the teensy cars that everyone in America supposedly wants.

It is more than a little strange. The economic crisis was caused by quasi-governmental action – central banking monetary stimulation leading to a massive bust. The bust basically pushed a lot of fragile companies off a cliff including GM. Then the Obama administration came along and, in return for providing a financial lifeline, mandated a bust-up of GM that rewarded its union supporters, penalized bond-holders and set up a management team devoted to building smaller cars.

The Obama administration has obviously taken advantage of the GM situation for political gain. More than that, it has shoved Chrysler in the same direction. Ford, intimidated by the fate of its brethren, may move along the same path voluntarily. Thus, with the power of its federal pocketbook, the Obama administration will have done, via money-pressure, what generations of powerful American political leaders have not been able to do by jaw-boning – reshape the American auto industry along Green lines.

Count us among those who are less-than-impressed. We don't think you can necessarily inflict a vision, long-term, on the market. Leaving aside internal industry struggles, we think the idea of tiny cars is a relative non-starter. Unless the Obama administration can basically gin up taxes and create an ongoing oil-shortage, gas will remain relatively plentiful in the US, in our opinion (especially if someone simply removes a few of the environmental regs that stand in the way of drilling up billions and even trillions of barrels of oil out West). That means sooner or later the price of gas could go down and stay down. And GM will return to making bigger cars, if it still can.

It is always possible that Obama et. al. can pull it off. Maybe gas will go up to US$4-5 a gallon and stay there forever. But if it does, there will be a lot of unhappy Americans, many of them former Obama supporters. Beyond the questionable economic assumptions, something else disturbs us: The arrogance of the thinking behind this reshaping.

And that seems to be that the Invisible Hand does not apply to whatever issues are under discussion at the moment. From bank bailouts, to Wall Street's wages, to GM's makeover, the Obama administration sends a message that it is providing "grown up leadership" (their words) by imposing top-down solutions on complex industries.

Our point of view is that it is not grown up. It is a vision bereft of free-market solutions. We just don't believe an economy as vast as America's can be reshaped via this sort of command and control. It doesn't help that Europe and Britain follow Obama's lead – when they are not racing ahead. Yet regardless of Obama's confidence, there is no way to repeal the law of supply and demand or to make the concept of marginal utility disappear. Adam Smith lived. The Austrian school lives, even thrives.

After Thoughts

Those who believe governmental involvement can cultivate "shoots of green" may well be caught by surprise when the positive rhetoric does not match the negative results. The new, improved GM may come to resemble Amtrak rather than the old auto powerhouse. Central banks may not be able to easily reset the global economy. Inflation, in our opinion, will not be brought under control. The recession will not be V-shaped. Unemployment is going to rise much further – along with the price of gold and silver which could run up as high US$2000 an ounce and US$100 an ounce. And that's increasingly a moderate forecast.

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