Economics, Pethokoukis

Is what’s good for General Motors bad for America?

Image Credit: spirit of america /

Image Credit: spirit of america /

During the 2012 election season, one of Joe Biden’s campaign applause lines was a version of this one he told a Labor Day crowd in downtown Detroit: “You want to know whether we’re better off? I’ve got a little bumper sticker for you: Osama bin Laden is dead and General Motors is alive.” And the crowd roared. They also loved it at the Democratic National Convention. The vice president can really deliver a line with gusto. He surely can.

But that “General Motors is alive” claim is looking like less of a major achievement these days. New GM CEO Mary Barra is testifying in Washington today about GM’s recall of 2.5 million small cars for faulty switches linked to 13 deaths. Bailing out a failing company is a lot easier than turning around a troubled company so it once again makes a quality product. Maybe President Obama knew this. I guarantee Mitt Romney knew this. As he wrote back in 2008: “With a bailout, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.”

Washington didn’t save GM, if by “GM” you mean an innovating, value-adding, self-sustaining automaker. That’s just not something government really knows how to do. Check out this analysis from a 2014 Harvard Business School working paper:

General Motors was once regarded as one of the best managed and most successful firms in the world, but between 1980 and 2009 its share of the U.S. market fell from 62.6% to 19.8%, and in 2009 the firm went bankrupt. In this paper we argue that the conventional explanation for this decline-namely high legacy labor and health care costs-is seriously incomplete, and that GM’s share collapsed for many of the same reasons that many of the other highly successful American firms of the 50s, 60s, and 70s were forced from the market, including a failure to understand the nature of the competition they faced and an inability to respond effectively once they did.

For decades, GM was a company in denial. And once management woke up, it had trouble changing. Incumbents firms are commonly unable to respond effectively to disruptive innovation from new competitors. Here is another version of the decline of Detroit from MIT: 

Disruptive innovation has been credited as the strategy that led to Japan’s dramatic economic development after World War II. Japanese companies such as Nippon Steel, Toyota, Sony and Canon began by offering inexpensive products that were initially inferior in quality to those of their Western competitors. This allowed the Japanese companies to capture the low-end segment of the market. As the performance of their products improved, they began to move upmarket, into segments that allowed them more profitability. Eventually, they captured most of these segments and pushed their Western competitors to the very top of the market or completely out of it.

Last December, the Treasury Department sold the last bit of its GM stake. Government Motors, no more. GM was back. But not really. The Guardian’s Heidi Moore in a must-read piece:

Less than four months later, it seems foolish that any of GM’s fairy tale was believable to anyone. After the recalls and the estimates of driver deaths, all of that talk – of the reborn American automaker, of bets paid and dollars won – seems like a hollow spectacle. And it has to make us wonder: how much were US taxpayers and the government complicit in sustaining a company that researchers had already suggested was unable to compete in the modern automotive industry?

“It’s no ‘new GM’ if they’re doing this,” Dartmouth Tuck School of Business professor Paul A Argenti tells me. “If this has been hidden for 10 years, there’s nothing new about the company. It’s old-school GM. It’s stuff you can’t even imagine a company could do in the 21st century.”

Failure like this doesn’t come out of nowhere. It’s buried in a company’s corporate culture.

And there is not much a $50 billion government check can do about a dysfunctional corporate culture except temporarily paper over it. Look, a dynamic economy promotes free entry of new firms and easy exit of uncompetitive incumbents. Government is there to provide a safety net for workers, not for corporate entities. Being pro-business is not the same as being pro-market, pro-consumer, or pro-worker. Bailouts and barriers to entry — crony capitalism — saps an economy of its vigor. What’s good for Big Business is sometimes really bad for America.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

6 thoughts on “Is what’s good for General Motors bad for America?

  1. From the HBS paper: “In this paper we argue that the conventional explanation for this decline-namely high legacy labor and health care costs-is seriously incomplete, and that GM’s share collapsed for many of the same reasons that many of the other highly successful American firms of the 50s, 60s, and 70s were forced from the market, including a failure to understand the nature of the competition they faced and an inability to respond effectively once they did.”

    This smells a classic attempt to dress something old up as something new to get published. High labor and healthcare costs can hardly be considered independently of the rest of the business, once a company is paying so much more than it’s competitors to make a car the difference has to be made up elsewhere. Naturally profits will be under pressure but so will every other cost, “understanding the competition” costs money and only pays out down the line, “responding effectively” is much the same.

    The UAW has shown time and time again it is willing to drive companies out of business to preserve member benefits and compensation in the short term. Forcing a pull back on R&D and market research is just another manifestation of the self destructive instinct that ensures union membership dwindles every year in America even as the unions spend millions on recruitment and lobbying.

  2. Steve, I agree with you. The problem is that our president is still trying to save the unions at whatever cost, without taking into account that what he is committed to save is the entire USA. The rest is dirty politics.

  3. I feel that both management and the Union are to blame for the distraction of GM.

    The union forgot the their business was to provide a premium worker for a premium wage. In my Dads day if a worker wasn’t doing their job the Union would correct the problem by taking appropriate actions up to pulling their card if they continued to shaft their Union brothers by not pulling their weight. In the 1970′s this concept had so deteriorated that a member could sabotage equipment bringing a line down and the Union would spend however much it took to keep them in their job.

    Management is as much to blame. When they were in negotiations they would constantly cave to Union demands because they thought that they could always pass the cost on to the consumer. They also came up with the concept of planned obsolencence and cars that kill people like the Corvair. It is obvious that they continue to prefer to still kill people to protect profits.

    The culture at GM hasn’t changed for either Union or Management and now they are merged. It is just a matter of time before they are back for another bailout or they collapse.

  4. When communists start running a capitalist business, the business has to fail. Giving away free stuff for little work, and promoting people for time spent instead of rewarding real hard work is not the same thing as building a car that never breaks down and works every time you turn the key.

    Doing cocaine on the bumpers as the cars go through the assembly plant is not helping either. (real report by real union members to me.)

    Communism cannot do anything but leach off of capitalism.

    A woman CEO is not really helping either. They want to be seen as equal to a man but then act like a girl.
    Go Get the job done, no one cares what your skin color or privates look like.

    Epic Failure 101 = GM.

  5. Hey Joe Berdaus,
    I met with the head engineer at Chrysler as an engineer for another company. During the conversation the Chrysler guy said Chrysler made cars to last one day after the warranted was over. I told him that is why I will never buy another American car.

    Of course he kicked me out of the building.

    planned obsolescence = stealing peoples money

    I can buy a used Mercedes for a fourth of the price, that looks better and gets twice the gas mileage.

    And I wont die if I get in wreck.

    America went from “better than everyone else”, to lets just get by and get a paycheck.

    They call that communism.

    Now the new CEOs explanation is that no one told her what was going on.

    Lady that’s your job to find out what is going on. Its your job to be a man and make everyone tell you everything or fire them.

    You have to put on your big boy pants and be the man.

    Maybe the phone book is a better head hunter. Just flip and pick and you would get a better CEO.

    And did not the unions just keep putting the same defective part in every car. Did they not drive them off the assembly line. Did they not o any quality control.

    unions are evil communism. companies that make products that dont last go out of business.

    If unions think they can run a car company, don’t infest one and get the president to take it over for you and run it out of business with your communism.

    Start your own CommieMotors. it will fail because communism always fails and kills a lot of people along the way.

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