Friday, May 20, 2011

Let's not celebrate just yet...

Paul Krugman makes two interesting statements about the auto industry in today’s New York Times about the rebound underway in American manufacturing:
“the U.S. auto industry, which many people were writing off just two years ago, has weathered the storm. In particular, General Motors has now had five consecutive profitable quarters.”
He continues later to say:
“And then there’s the matter of the auto industry, which probably would have imploded if President Obama hadn’t stepped in to rescue General Motors and Chrysler. For those companies would almost surely have gone into liquidation, closing all their factories. And this liquidation would have undermined the rest of America’s auto industry, as essential suppliers went under, too. Hundreds of thousands of jobs were at stake. “
Now, I’m the first to admit that I don’t have a Nobel Prize in Economics in my back pocket, but these two statements reek of misdirection and exaggeration.

It is indisputable that GM has recorded accounting profits for five straight quarters.  Well done GM. However, to infer that GM “weathered the storm” is incredibly misleading.

It would be accurate to say that Ford Motor Company “weathered the storm” since it avoided bankruptcy and multi-billion dollar taxpayer bailouts during the recession and then generated $6.6 billion in profits in 2010. Not sure if Krugman forgot about this success, didn’t know about this success, or didn't mention it because it doesn’t fit within his “government spending is great” narrative.

GM and Chrysler were saved by having the government come in and expunge debts (crushing bondholders and public shareholders in favor of the unions) and provide truck loads of cash ($50 billion+). If you consider this “weathering the storm” then I guess Krugman is correct.

It’s as if Ford and GM were both king crabbing boats stuck off the coast of Alaska in a storm worthy of a the best “Deadliest Catch” episode ever.  Ford was able to quickly plug the holes in its boat and navigate its way out of the storm to live another day.  Meanwhile, a few miles away, GM continued through the storm, oblivious to the holes in its boat, and just before those holes caused the ship to sink, a luxury cruise liner captained by Presidents Bush and Obama rescued them and awarded them with a brand new, debt free crabbing boat to use in competition with Ford.

Let’s not celebrate GM as a success until the taxpayers get their money back. If a business can’t turn a profit after a bailout of those proportions, it should just rename itself the US Postal Service.

Which leads to Krugman’s second statement…

President Obama is not responsible for saving the auto industry from implosion. He might be able to take credit for saving Chrysler and its cars that nobody buys, but the industry as a whole, including a GM reorganized through a normal Chapter 11 bankruptcy proceedings (i.e. not a government orchestrated and pre-approved Chapter 11 proceeding), would have survived and thrived without government intervention. The suggestion that all the factories would have been shut down, and hundreds of thousands of jobs would have been lost is preposterous.

GM, and its brands, factories and inventory, were entirely too valuable to abandon. Chevrolet, Buick and GMC aren’t exactly the gold standard in the auto industry, but they have a considerable amount of value -  way too much value to just throw away. Seriously, to have a Nobel Prize winning economist suggest this outcome is shocking.

The sole purpose of the government bailout was to reorganize GM in the most politically advantageous manner possible, which - SURPRISE! - provided the unions, a major factor in GM's problems, with preferential treatment.

I wonder if Krugman will be able to make the same claim after five years instead of five quarters. As an American I hope so, as a realist, I’d be surprised. The taxpayer rescued GM from the storm, but can management and the UAW keep GM in calm waters? That remains to be seen.


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