The auto makers, the big three in this country, must resist the easy solution to their problems. Easy money will not solve their problems - government control of the market, and that is what will happen here as they dictate what the auto makers must build, what the government believes the public wants, read this as centralized planning, will in the end waste the billions given and the auto makers will go under anyway. The market was not allowd to do it's job and let these companies and unions go under, reorganize and come back stronger than ever. But no, the new socialist government knows what's best for everone. Billions wasted again.
The author here fails to mention what part the unions play in all this - their part is equally important as they are responsible for $2600 per car more than their competition. What should the unions do to help solve this problem? Apparently, according to the new president, nothing. hmmmm - go figure.
Keep the faith -
Pulling Plug On GM Would Help Both Auto Industry And Michigan
By JOHN TAMNY
Posted Tuesday, November 11, 2008
Ludwig Von Mises once wrote that the entrepreneur who fails to use his capital to the "best possible satisfaction of consumers" is "relegated to a place in which his ineptitude no longer hurts people's well-being."
The latest losses at General Motors reveal yet again that it is the living embodiment of managerial ineptitude, and to ensure that it no longer fails its customers while harming the well-being of Americans more broadly, it's essential to let the firm die.
Many will of course blanch at the presumed loss of jobs that would result from GM's death, but judging by the high level of unemployment in Michigan, it would be more realistic to say that GM's continued existence under weak management has served as a capital repellant such that capital and jobs will continue to flee the state if GM is saved with the money of others.
Worse, business history, from ships to farming to mining, shows that sectors reliant on government help are invariably weakened as opposed to strengthened. The above is the case because businesses rarely fail due to a lack of money. Instead, poorly run businesses find it hard to raise money in the capital markets. Government money allows the architects of bad decisions to continue making mistakes that cause a company to be capital-deficient to begin with.
This distinction is important, considering the efforts of GM's present management to secure more funds on top of the low-interest loans that Congress recently approved. Were GM a well-managed company, it would have no need to run to the federal government. But because its management has proved time and again that it lacks ability, capital is correctly searching for better opportunities.
Some argue that the release of rescue funds should be contingent on a change of management. That sounds good at first, but then if GM had better management, it would decidedly not need the federal funds it presently seeks.
Last Friday, President-elect Barack Obama described U.S. carmakers as "the backbone of American manufacturing." While his claim is charitably dubious, assuming that he's right, he merely strengthens the argument suggesting GM should be allowed to go bankrupt. That is so because, paradoxical as it sounds, GM's bankruptcy would be a boost for Michigan's economy and the U.S. auto sector generally.
Far from vanishing, many of GM's assets would be quickly purchased by competent foreign automakers eager to expand their capacity in what is the world's largest auto market. Happily, the list of well-run car companies, from Toyota to Nissan to Porsche, is long. How this helps Michigan, the auto sector and smaller firms reliant on the latter's health is pretty clear. With capable auto executives finally overseeing GM's poorly deployed assets, the value and utility of each would rise, thus perpetuating the existence of jobs in the sector, all the while ensuring that other businesses that exist due to GM will enjoy more stable commercial relationships with competent management.
So while the cries of certain Armageddon would be ear splitting in the event of a GM failure, the U.S. auto sector would actually emerge much healthier thanks to a change in ownership that would be the certain result of GM going under. Obama also noted that "we are facing the greatest economic challenge of our lifetime, and we're going to have to act swiftly to resolve it." While some would find Obama's strident tone overdone, if he's in fact correct, his stance speaks to the importance of the government standing aside with regard to GM's troubles rather than giving the firm more capital to destroy.
That is the case because economies only struggle when capital is lacking. Otherwise, they grow, with capital funding new and existing ideas that create wealth and new jobs. So in a sense there's a moral aspect to letting GM implode. Indeed, with companies not in the auto sector presently shedding workers due to a lack of funds, how could Obama or the outgoing administration take even more precious capital from the private sector in order to keep alive a firm notorious for its prodigious misuse of the money offered it?
The better answer for a capital-starved economy would be for the federal government to once again get out of the way, and in doing so, allow funds flow to the very best ideas to ensure as quick a recovery as possible. Importantly, if investment proves nonexistent for GM absent government largess, it's a certainty that foreign carmakers will step in amid the firm's bankruptcy in such a way that job losses will be much less of a problem than is often assumed.
If there's a defense of GM at this point, it has to do with dollar policy in this country that has made long-term planning very difficult. GM did relatively well when the dollar was strong due to lower gasoline prices that made its large vehicles very popular. But as GM presently seeks to create new, smaller models for a world allegedly running out of oil, a stronger dollar has driven down gasoline prices, which means its inventory might yet again not match future economic realities.
The complication there is that GM's management has regularly advocated a weaker dollar, so the problem remains one of management clueless when it comes to understanding what makes the firm prosper.
In the end, the state of Michigan and the U.S. automobile sector are struggling not due to bad luck, but precisely because they cling to a company that investors no longer value. And with GM shares near all-time lows, those with capital are stating loudly that so long as GM remains as is, the funds necessary for job creation will continue to flee.
So rather than waste precious capital in the naive hope of propping up that which investors don't value, it's essential to let GM fail. Only then will a necessary change of ownership occur; the latter change the only solution when it comes to properly utilizing assets whose misuse is presently destroying a formerly great company, not to mention the economic health of the state in which it is headquartered./
Tamny is editor of RealClearMarkets
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