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The High Price of the GM Bailout

August 9, 2010, 5:07 pm

This week in Forbes, I argue that tallying up the taxpayer money that has been poured into GM actually under-estimates the price of the bailout.

So what if the U.S. government had let GM's bankruptcy proceed unhindered? Allowing the GMs of the world be liquidated, with their assets and employees taken up by more vital entities, is critical to the health of our economy and the wealth of our nation. Assuming GM's DNA has a multiplier below one, releasing GM's assets from GM's control actually increases value. New owners of the assets might take radically different approaches to the automobile market. Talented employees who lose their jobs in the transition, after some admittedly painful personal dislocation, can find jobs designing and building things people want and value. Their output has more value, which in the long run helps everyone, including themselves....

This is the real cost of the GM bailout--not just tens of billions of dollars of wasted taxpayer money, but continued unimaginative use of one of the largest aggregations of wealth and talent in the world.

Tags: , , ,
Category: Economics, General Business
  • http://www.howtovanish.com Bill

    This is a great perspective. I had not thought about the misallocation of wealth and human capital in this context before. I really hope that anyone with talent is able to adapt and become a net producer in the digital age economy. Unfortunately, I think that a lot of those talented individuals in an organization like GM have relied on a failing system for so long that they may have lost the ability to adapt easily. I truly hope not.

  • richard

    Warren,

    Small point: I thought Fiat took 20% of Chrystler, not GM?

  • Eric Hammer

    Great article. The point about how bad corporate DNA (incentives, culture, processes etc) can make smart people stupid is not well enough understood and applied.

    The bit about Wal Mart selling fashions, did you write about that before? That paragraph sounded really familier, and the only places I have heard those metaphors used are here and in Origin of Wealth. Maybe I just need more sleep...

  • http://evilredscandi.blogspot.com Evil Red Scandi

    Great explanation! It has already promoted deeper some thinking on the subject with some of my friends that have read it.

  • Some guy named Dan

    Something else to remember is that any business, no matter how succesful its business model, is one paradigm shift from bankruptcy.

    You mentioned how the American auto makers missed the mark building smaller cars in the 1970s. In retail, see Sears Roebuck and Montgomery Ward failing to follow their customers into the suburbs.

    The next most likely to fall is Microsoft, if they don't successfully manage the transition from multi-function PCs to smart devices. Wal Mart as well could find itself as an overdeveloped real estate company with a retail branch if online marketing continues to erode sales at even the big box retailers.

    So the issue is, should it be the government's role to prop up the companies that fail to foresee and adapt to these karket changes? I think that if anything the record shows that government is even worse at choosing the right direction of future growth, and insttead has all the incentives in the world to try to preserve the status quo.

  • JDE

    I firmly agree. The best possible outcome would have been to dissolve GM and allow something more useful to grow in it's place. Sadly though the bailout was a foregone conclusion. Major unions related to the auto manufacturers will not allow such a lucrative source of union dues to disappear. The Democrat party is firmly beholding to said unions. Match set and game and after a vast amount of money there's no change. We're just waiting for the next fumble and wondering how much that one will cost us.

  • GaryP

    Is it possible that rather than just a downside to the GM and Chrysler bailouts (lost money, economic distortions, etc.) that there is also an upside?
    Perhaps politicians (not so likely) and/or the public will yet learn from that debacle and make an even larger repeat less likely?
    Sometimes natural consequences are the best teacher. When GM and Chrysler fail again (and it just a matter of time--not too much time for Chrysler IMHO) perhaps the trama will be just one more nail in the coffin of corporate statism (facism, in my opinion) that we are moving toward under the current mis-administration.
    Just a cheerful thought for a dreary day (in southern Ohio anyway).

  • caseyboy

    I am a bigger believer in the concept of economic value added "EVA". Stated in its simplest terms EVA exists when a company's return "R" on capital exceeds its weighted average cost of capital "*C". R > *C = value added. R = *C = treading water. R < *C = destroying value. Needless to say operating at a loss destroys value. Operating at a sub-standard profit also destroys value. GM has been destroying shareholder value for many years and should have gone bye bye.

  • http://sovereignthink.wordpress.com sovereignthink

    The Great Shell Game of America
    The basic theme of Orthodox Historiography or at least the storyline we were all taught in school and of almost all historians has been;
    ‘The rise of federal state regulation and the progressive period basically came about because in the late 19th century we had the massive rise of big business. This large scale industry became uncontrollably ‘monopolistic’ and overbearing within the free market.
    And…
    Due to the overbearing evils of monopolistic industry that were perceived by a rising group of workers, farmers and reform intellectuals, this groups organized, regulated and corrected these evils during the measure of the great progressive period, the new freedom, the fair deal, the new deal, the new era, the new society, the great society, the new nationalism, etc.
    These are needed programs that arose to fight the evils of and to reform big business monopoly that could only have been accomplish due to the imbalance of freedom in the market’
    However…
    The true story of what happened is almost exactly the opposite. Big Business did not lose, they did not give up, they did not ‘pull a Grinch’ and ‘have a heart grow three sizes that day’, They WON.
    What actually occurred with the rise of big business and large scale industry was a truly progressive (in the small p sense), increase in industrial output/invention, standard of living and productivity in the highly competitive free market.
    Many big business interests would have liked to achieve market control through cartels, monopolies and trusts in the free market and many of these cartels were attempted across the nation; however they almost all failed and quite miserably because of rapid winds of competition in the freemarket. (This is demonstrated excellently in Rothbard’s lectures: links below)
    Various Big Businesses, having seen that these attempts were complete failures, turned to the state apparatus to do the cartelization for them, to create the monopolies that they could not achieve in the free market.
    This is the simplified but correct historical interpretation of the Progressive Movement, The New Nationalism, The New Socialism, etc. of the Progressive Period.
    http://sovereignthink.wordpress.com/2010/06/21/the-great-shell-game-of-america/
    Roger Rabbit’s ToonTown A Corporatoon's Story in the Defence of the Public Domain
    The Wizard of Oz is to unrestricted Interest Free government Bi-Metalism, 1789 => Gold Standard, 1900 => Fiat Debt/Interest Based Land of Balloonist/Inflationist Make-Believe Standard, 1913.
    As
    Who Framed Roger Rabbit is to Corporation Personhood, 1895 => Corporate Charter Mongering, 1920 => Total Corporate Autonomy, Consolidation and Ownership/Partnership of the Public Domain by National-ess Corporate Statism, 1945.
    Judge Doom Dipped the Public Domain. The ToonTown Merry Go Round Broke Down and Dorothy Never Clicked Her Silver Slippers.
    http://sovereignthink.wordpress.com/2010/07/23/oz-vs-toontown-genius-all-around/
    End of the US Century with over 70% dominance in the entire world’s Currency. The World Reserve Currency will no longer be in Bankcorupt US Dollars.
    http://sovereignthink.wordpress.com/2010/07/30/end-of-the-dollar-world-domiance/