Working in Iowa

 

 

 

Holy cow! General Motors is bankrupt.  What was once the most dominant auto manufacturer in the world is reduced to a whimpering, handout begging pitiful vestige of its former self. My how the mighty fall hard. I have been asked two different questions about this of late: did the government do the right thing? And related: what was wrong with just letting GM go under?

 

Whether the federal government is doing the right thing remains to be seen.  What is happening is a highly structured process in which the federal government was calling the shots long before official bankruptcy was declared. The way that it is working out the U.S. will hold about a 70 percent stake in GM, the remainder to be divided by GM industrial bond holders and the labor unions.  How all of those interests will get along in light of a company needing to be nimble and profitable remains to be seen, but it is clear that the U.S. government believes the path that it is taking is much preferable to the alternative.

 

The alternative was letting GM go under.  My answer was that like many of the larger financial institutions there was an intertwining of the GM behemoth with the rest of the economy that made it too big to let fail, especially right in the middle of the worst economic downturn since the 1930s.

 

It’s called the multiplier effect.  A firm, especially a big firm, has an intricate relationship with an incredible array of suppliers. Car makers are really car assemblers relying on just-in-time parts made in large part by independent manufacturing suppliers. The more cars assembled, the more parts demanded.  The more parts demanded, the more those parts suppliers make demands on their suppliers.  This relationship goes on until there are no more multipliers left to count.

 

GM, or more precisely American automobile manufacturing, has very high multipliers.  If they cut back on production, then there is an immediate feedback into the economy that continues and continues.  In the end, it wasn’t just about the automakers; it was about the suppliers, and their suppliers, and so on.  The number of potentially lost jobs from an out and out GM collapse was frightening.

  

For every job at an automobile plant in the U.S., according to my models, there are 3.3 jobs supplying manufactured goods and other industrial services.  A loss of 10,000 jobs at a car factory yields 33,000 lost jobs in the supplying sectors nationally.  And when all of those workers stop spending at the levels that they have historically, another round of jobs gets cut that supplied goods and services to all of their households.

 

So that was what was at stake.  In the midst of a bad recession there simply was no ability to countenance the economic and political risks that cascading automobile failures would yield for the rest of the economy, the brunt of which would have fallen on the already devastated Midwestern economy.

 

But that was not all.  The previous analysis looked only at the supplying end.  There are also the distributional entities to consider.  Entire industries exist to serve the automobile customer.  There are of course the dealerships, which we now know will shrink, and there are insurers and financing firms that specialize in whole or large part in automobiles.  And these impacts have ripples that extend to community after community and add thousands and thousands of potentially lost jobs to the toll.

 

A bankrupt GM is a company that will reorganize its debt and its financial, labor, legacy, and supply relationships in very short order we’re told.  It will emerge with a super-structure and an infrastructure designed to leave it competitive and productive.  Whether it and its bankrupt predecessor Chrysler will indeed prevail remains to be seen, but courtesy of the American taxpaying public and bankruptcy law they have been given another chance.

 

And now we are in a very strange position because quite literally what’s good for GM is good for the American taxpayer, at least until we can get out from under financially boosting an American icon and capitalism failure.  The big question is whether this is the beginning or the end of large-scale industrial welfare.

 

Things have sure changed since Dinah Shore urged us to “see the U.S.A, in a Chevrolet,” and knowing, courtesy of Bob Seger, that their trucks are “like a rock.”  The rock has crumbled.

 

I wonder what rhymes with Chapter 11?

 

___________________________