Apply Economics, Not Politics

Member Group : Glen Meakem

What’s shocking about the firing of General Motors CEO Richard Wagoner is not that Wagoner was fired. After all, he racked up more than $70 billion in losses, failed to control costs and saw GM’s stock price tank. What’s shocking is that he was fired by President Obama, not GM’s board of directors.

General Motors once was the largest industrial corporation in America. It made five out of every 10 cars sold here. But at the height of its power in the 1970s, GM began to fail to keep pace with its innovative competitors.

Competition is the fundamental characteristic of our market economy. Success demands innovation and change. New companies are continuously created by entrepreneurs bringing disruptive new technologies, products and competition to market.

GM was a disruptive innovator in the early 20th century. More recent examples include Microsoft, Dell and Google. Those that can’t adapt — think Pan American Airways, Woolworth’s and computer maker Wang — die.

Such necessary "creative destruction" is fueled by freedom and competition. It made the United States the world’s leading economy with the largest middle class and highest standard of living.

But Detroit couldn’t keep pace with more innovative, foreign-based manufacturers, many producing their vehicles on American soil by Americans. And by last year, GM was manufacturing only two out of every 10 vehicles sold in America.

With average total labor costs of $73 per hour versus $44 at their nonunion competition, the United Auto Workers made GM and Chrysler uncompetitive.

In 2008, the recession caused a sharp decline in new vehicles purchased by Americans, from a peak of 18 million in 2005 to only 13 million. Under this pressure, high costs and unpopularity finally caught up with GM and Chrysler. By December, they were insolvent.

The United States has laws to deal with this. In the past, companies like LTV Steel, Polaroid, United Airlines and many others have gone through court-supervised bankruptcy. Sometimes the result is liquidation. Other times it is reorganization, which allows companies to emerge that are more competitive.

GM and Chrysler should have filed for reorganization under Chapter 11 laws. They then would have begun the process of rationalizing plants and car models and renegotiating contracts with bondholders and the UAW under court supervision, outside the political pressures felt by Congress and the president.

Instead, President Bush enabled the companies to survive by lending $12 billion to GM and $5 billion to Chrysler. The loans required both companies to develop survival plans by the end of last month and effectively put the two ailing companies under government control. All it did was waste $17 billion of taxpayer money and place the U.S. auto industry under political, not economic, decision-makers.

When economic decisions are made based on politics and not economics, the result is an inefficient and unfair economy. History teaches that lesson well.

By the end of March, both GM and Chrysler had yet to solve their cost and popularity problems. Both continued to bleed cash. But instead of stepping aside and allowing the rational bankruptcy proceedings to begin, Obama, whose Democratic Party received almost $70 million in campaign contributions from unions including the UAW during the last election cycle, delayed again. He made additional taxpayer dollars available to both companies, giving General Motors 60 days to create new agreements with the UAW and bondholders, and giving Chrysler 30 days to sell itself to Fiat, the Italian automaker.

But in his efforts to placate the UAW, Obama is delaying the inevitable. Without the discipline of Chapter 11 bankruptcy, GM and Chrysler cannot begin the real reform and change they need to survive.

"Creative destruction" must be allowed to work.

Glen Meakem is managing director of Meakem Becker Venture Capital. He was the founder, chairman and CEO of FreeMarkets Inc. of Pittsburgh.