Should GM and Ford Be Bailed Out or Not?
This is the question facing politicians today. But it also represents a case study in the conflict between short-term costs and long-term benefits - probably the most difficult conflict faced by businesses and governments today.
If we bail them out, then we definitely avoid a lot of pain over the next year, as thousands of workers retain their jobs, as auto assembly lines keep ordering parts from suppliers, and as thousands of car dealers continue to have uninterrupted supplies of inventory. But using taxpayer dollars to save these misfiring corporate giants today will almost certainly cost us a great deal more in the long term. For a variety of reasons, the business models that GM and Ford are operating make them completely uncompetitive with rivals like Toyota, Nissan, and even Mercedes - all of whom also employ thousands of other Americans in their U.S.-based manufacturing facilities and dealerships.
If you want a terrific explanation of some of the fatal and probably irreconcilable flaws in the very structure of the GM and Ford businesses, when compared to their most immediate competitors, see this Wall Street Journal article by NYU Distinguished Research Scholar Michael Levine.
In the long term, what should be clear is that Ford and GM will NEVER succeed against lower-cost, more nimble and innovative competitors. So while there will be some pain over the next two or three quarters if they fail now, saving them doesn't prevent that failure - it just postpones it. And the longer it gets postponed, the more pain will ensue.
GM and Ford's bankruptcies don't necessarily mean that no cars at all will be produced, or that the assembly lines will simply shut down entirely. Depending on the type of bankruptcy reorganization chosen, it may simply result in a "re-pricing" of non-productive assets, as they are transferred to other shareholders. You may buy Christmas gifts for your family this year from a retail store operating under bankruptcy protection. If you're a frequent traveler, you've probably flown on an airline operating under bankruptcy protection sometime in the last four years or so.
Innovation cannot happen without trial and error. And guess what? Without error, there can be no trial. History shows that for a company to be resilient and innovative, it must have a culture that tolerates failure, because for every successful new idea there may be a dozen or more that don't pay off. The more innovative you want to be, as a firm, the more experimentation you have to be willing to do.
Countries and economies are the same way. The more new ideas and innovations you want, the more failures you have to be willing to tolerate. The more vibrant and resilient our economy is, in other words, the more economic friction will likely exist under its surface, as new ideas constantly supplant old ones. This is why free-market economies make progress in a process of "creative destruction." But if there's no occasional destruction, there can be no creativity.
My suggestion, if Congress just has to burn another $25 billion or so, is to invest that money not in prolonging this train wreck, but in directly educating and re-training automotive workers themselves, relocating them if necessary, and otherwise helping them to re-enter the "real" economy of competitive wages, benefits and prices.
(Full disclosure: 25 years ago I worked directly for Michael Levine, the author of this WSJ article, when I was the marketing director at the start-up airline New York Air, and he was the CEO. He's one of the smartest guys I ever met in business, and one of the most bluntly candid, too.)
