Memo To Washington: Let GM Fail

[doh]

http://www.forbes.com/2008/07/09/gm-...rtner=yahootix

There's an unpublicized view among foreign-car lobbyists that General Motors is much scarier dead or bankrupt than alive. When those lobbyists discuss what they fear most, increased stateside competition from our Big Three automakers pales in comparison to what the collapse of GM, Ford Motor or Chrysler might mean in terms of bad policy.

General Motors' (nyse: GM - news - people ) situation is particularly noteworthy, since its stock recently hit a 50-year low amid increased talk of bankruptcy. With a market cap of $5.7 billion, GM's market value is now less than that of Bed, Bath and Beyond.

While GM's vitality is increasingly irrelevant when it comes to the health and size of the U.S. economy, it is sadly a very relevant entity within the friendly confines of Washington, D.C. A collapsed GM would predictably lead to all manner of protectionist and currency-related punishment for those automakers who've apparently committed the grave offense of producing that which U.S. consumers want-- while being foreign.

GM's descent into pointlessness has occurred despite its status as one of the U.S.'--and the world's--most heavily subsidized companies. Those who doubt this need only reference the highway bills of the multi-hundred-billion-dollar variety that Congress routinely passes that make cars in the world's largest car market a necessity.

The highway subsidy isn't so bad when we consider Americans are at least free to use the roads, which have created a market for all carmakers irrespective of origin and which exist thanks to Congress' generosity with the money of others.

What's more offensive is that Americans have been routinely victimized by the automobile lobby in the form of voluntary export restraints imposed on Japanese producers, not to mention the tariffs placed on the exports offered up by those same producers.

U.S. carmakers have eagerly sought tariffs and various restraints on trade over the years, and they've burned U.S. consumers twice: first, for raising the prices of the goods they want and, second, for decreasing the size of overseas markets they themselves might like to export to. When we restrict the ability of exporters to send us what we want, we also restrict their ability to purchase from us.

But what's most problematic when it comes to U.S. automakers is their impact on U.S. currency policy. The Big Three have routinely agitated for a weaker dollar against the yen. In a 2005 op-ed in The Wall Street Journal, GM Chief Executive Rick Wagoner cast some of the blame for the company's poor performance on "unfair trading practices," in particular, "Japan's long-term initiatives to artificially weaken the yen."

Wagoner's thoughts were remarkable in a number of ways, but were notable because his comments about yen weakness were so impressively untrue. In reality, as recently as 1971, the dollar bought 360 yen. Today, it buys 107--a gain for the yen vs. the dollar of 236%! Over the last 22 years, since the imposition of the Plaza Accord meant to strengthen non-dollar currencies against the greenback, the yen has risen 124%. In the past year alone, the yen has risen 9% against the dollar.

Despite the dollar's collapse, GM's U.S. market share has continued to wither, falling from 41% in 1985 to less than 25% today. Over that same timeframe, GM shares have flatlined, while those of Honda (nyse: HMC - news - people ) and Toyota (nyse: TM - news - people ) have risen over 600% and 800%, respectively.

What's fascinating is that GM's management could be so obtuse about what aids its success. The obvious truth here is that, with GM a successful producer of large, gas-guzzling autos, a weak dollar has and always will be a killer for a shrunken unit of account, driving up not only the costs of commodity inputs for automobile production but also, more importantly, the price of oil itself. Not surprisingly, GM's shares rose 56% from June 1997 to May 2000--when the dollar was strongest and oil was cheap.

Some say GM's problems are rooted in bad deals made with unions over pay and defined benefit/health plans, but judging by the mistaken policies GM executives lobby for, it could realistically be said that GM suffers most from a lack of executive talent. It will never happen, but it is said that GM's saving grace would involve it moving its headquarters to either New York or San Francisco, two cities where there's human capital that would never live in the economic mistake that is Detroit.

So while GM and the Big Three take out ads in the major Washington newspapers that greatly exaggerate their economic importance to the overall U.S. economy, the unseen problem continues to be the negative impact of the unfortunate tariff and currency policies they've lobbied for, which restrict U.S. consumer choice while reducing the value of American paychecks.

Indeed, the dollar's sad enervation since the early '70s has materialized in the form of an increased tax burden on the incomes of U.S. workers. All that, and the resulting inflation, has curbed investment that would have helped the wages of those same workers not "lucky" enough to work for heavily subsidized U.S. automakers.

In the end, GM's continued existence will serve as an economic retardant not just for Michigan but for the whole U.S. economy. Thanks to GM's ability to punch well above its real economic weight in both Washington and Lansing, Mich., a fear of tariffs and currency devaluations will persist in undermining the nation's economic health. Meanwhile, Michigan's economy will continue to suffer from rising unemployment and lack of investment, the trade-offs that result when once-important companies are propped up as thanks for past glories.

Politicians known to be sympathetic to GM would do best by ignoring the company's alleged interests, all the while dusting off their unread copies of Adam Smith's Wealth of Nations to better understand what happens to stationary economies. Now, "stationary" describes General Motors, the State of Michigan and the entire U.S. auto sector.

[I-Love-Pontiac]

Yeah! Stupid GM. Let them fail. Let them take their 100,000 US employees and dealerships with them. And those billions of dollars they are bringing in from China? Who needs it!

[GMC-70]

So having GM around is now bad for the economy.... Ah ya---ok

[Buick61]

A lot of this article makes me angry.

And are they saying that the highways in this country serve GM's needs and not Toyota's?

And GM doesn't want a weak dollar. They want the other currencies to be brought into a realistic value without the dollar having to fall.

[jkennedy293]

Originally Posted by I-Love-Pontiac

Yeah! Stupid GM. Let them fail. Let them take their 100,000 US employees and dealerships with them. And those billions of dollars they are bringing in from China? Who needs it!

Don't forget the parts suppliers that will go out of business about 2 weeks after GM shuffles loose this mortal coil.

[FenwickHockey65]

Forbes...shut the freaking hell up. GM still employs thousands of people in this country, they're a big part of the economy, and if you haven't noticed, toyota's not exactly in a good spot either. This article is just a massive crock of bull**** worshiping toyota.
Sometimes I really wish these journalists attached a list of their credentials to the articles they write.

[tholland]

LOL... highways subsidize domestic auto makers. What a complete moron!

[Ambalanche]

I would have expected a better informed article from Forbes...

[BigAls87Z28]

More upbeat, death to GM editorials. This was the SAME tone that was carried last time the drums of Bankrupcy were stirred up. And then GM did well, its new products were getting somewhat good press, and then oil hit 130 dollars a barrell and all hell broke loose yet again.

I really think that Bob Lutz rant over some of these writer's dogs with one of his cars. Or maybe shot at them with one of his planes.
I dont understand how Americans can act like this.
I guess America is done helping out GM.

[ericmvest]

Memo To John Tammy: Your Article is a Disgrace

Where did this "journalist" learn about business and economics? Karl Marx Correspondence School? Its OK for American state and local governments to directly subsidize the transplants, allow Japan to shut the American automotive firms out of the Japanese market, and allow Japan to manipulate their currency to aid their exporters, but it is not OK to help our auto industry that is obviously trying very hard to address their competitive issues. A typical America last journalist. Him quoting Adam Smith is disingenuous.

[wolverine]

You know, I am so sick of hearing this f***ing Bull***t I am ready to scream. Enough of the doom and gloom crap!

[KingElvis]

Wow.

I thought Wall Street Journal was the most mean spirited rag out there.

I suppose the "economic mistake" of the midwest auto industry doesn't rival the "economic mistake" of Bears Stearns Vampires or Hedge Fund Vampires. They don't make mistakes. They don't make cars. They don't really 'make' anything.

They get their money the old fashioned way: Theft.

[tholland]

Originally Posted by BigAls87Z28

I dont understand how Americans can act like this.
I guess America is done helping out GM.

Done helping? They're lining up to kick them in the gut.

[Ambalanche]

I can't believe he actually said this:"It will never happen, but it is said that GM's saving grace would involve it moving its headquarters to either New York or San Francisco, two cities where there's human capital that would never live in the economic mistake that is Detroit."
What a prick! I hope someone of stature from Detroit or Michigan has something to say about this. Unfriggingbelieveable!

[DMD]

Wow, the author of this commentary John Tammy is a complete moron.

I remember reading in a business magazine a few years back that said 20% of the businesses in the US are at least in someway dependent on the US auto industry.

Tammy complains about the "subsidized" US auto industry with highway bills in the billion dollar plus league. Well, it is nice to see that congress realizes the importance of a well functioning and important transportation system. the faster and more efficinet the highways run the better items get to market there by helping commerce. Commerce means tax revenue and a better qualit of life for all if you look at the big picture. The billions spent annually on the roads and highways is a testament to how influential GM, Ford and Chrysler are in the eyes of politicians. I would rather have the car companies benefit because if they benefit with better roads and other apsects to transportation easing, than we all benefit, even the ever moronic John Tammy. Also if roads are improving at least I can point to something tangible where my taxes are going to where I can see an improvement. There aren't too many areas of government where you can do that.