In his seminal economic work, Capitalism, Socialism and Democracy, Schumpeter (1942) argued that innovation is the process by which economic growth occurs. At times, this means that old, established technologies and companies must be destroyed, but that the net effect will be beneficial. This sentiment runs counter to the theory that the economy would be better off if GM were saved. The economic costs might be high today -- the $150 billion or more figure is not disputed -- but that in the long-run the benefits would outweigh these costs.
In a later elaboration, it was demonstrated that big business turnover specifically resulted in smaller government, stronger rule of law, less bank dependence, stronger shareholder rights and greater transparency (Fogel et al., 2008). Bailing out General Motors therefore harms the economy because it stifles growth and innovation, increases bank dependence (or in this case government dependence) and reduces shareholder rights.
The notion of government dependence is at the heart of this argument. At present the government's steps to bailout General Motors can be viewed as a short-term rational investment. However, the situation with GM is not like the situation with AIG. There is not viable, profitable business. There is only the potential for one. If the government demonstrates that it is willing to bail the company out, there is little incentive for the company to take the steps necessary to improve itself. The government is only partially willing to take those steps. It got rid of Rick Wagoner but replaced him with one of his underlings, when the real change most likely needs to be wholesale and dramatic (Flint, 2009).
Worse, bailing out GM under the rationale that it is necessary for the health of the auto industry as a whole encourages increased government dependence on the part of the entire industry. It creates a situation where an entire industry feels that the government is willing to protect its right to exist, without ever questioning its own practices. This dependence creates, in a sense, an ongoing obligation on the part of government to ensure the viability of the entire industry.
Additionally, proponents note that there is a significant benefit to sending General Motors into bankruptcy. One of the major reasons why General Motors is unprofitable is because the company's cost of labor is substantially higher than that of many competitors. This is a 'legacy' issue in that the firm has an enormous retired workforce dating from the days when automaking was labor intensive. There are more retired GM workers in America than there are active GM workers in America. Competitors such as Toyota, which only began to manufacture in the U.S. In the 1980s, enjoy labor costs as much as $20 less per hour. If GM went into bankruptcy, it could shed the legacy union contracts, giving them significantly reduced fixed costs. For the company, this is clearly the best route. Government intervention, however, indicates that the social and political damage of eliminating the union and pension benefits would be high for elected officials who must deal with the human aspects of such an eventuality.
Lastly, opponents argue that the lack of success at the automakers is of their own making. Other automobile manufacturers are struggling through the downturn, but as more successful firms they have the cash reserves to withstand the downturn. General Motors, with a string of poorly designed and poorly constructed vehicles, lost its market share fair and square. Interference by the government, it is claimed, is pointless. It delays the inevitable, just as happened with the UK auto industry in the 1970s, and as a result represents billions of taxpayers' dollars flushed away. The outcome is inevitable, regardless of government intervention, so the failure should simply be allowed to occur.
The only reason why a company that has made its own bed would receive a bailout is because of its lobbying strength. It has been shown that firms that are well-connected politically are more likely to receive bailouts (Facio et al., 2006). It is also well-known that automakers were the first in line when Obama won the election, meeting with Nancy Pelosi right away to discuss how they could be bailed out (Langfitt, 2008).
Building a Bridge
The third option for GM is to provide bridge financing that would allow the company to restructure, and potentially be sold off. Proponents -- President Obama seemingly one of them -- note that the company still has a decent market share, strong brand equity, and $148 billion in sales. Essentially, despite the heavy losses, there is value in General Motors. The plan for GM, though, is less clear than it is for Chrysler and Ford. The latter has backed away from bailouts for the time being. Chrysler is...
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