Automotive News [sub] has seen an advance copy of an interview with president Obama on C-Span. Strangely, re: GM’s future, Barack doesn’t use the “b” word. But the prez does promise to return the automaker to private command and control. Eventually. “Ultimately, I think that GM is going to be a strong company, and we are going to be pulling out as soon as the economy recovers and they’ve completed their restructuring.” As my father is wont to say, how much is this boondoggle going to cost me? To recap . . . “The Obama administration has injected $19.4 billion to keep GM afloat since the beginning of the year, including another $4 billion on Friday. The government stake is commitment is expected to rise to $27 billion after June 1.” And the rest.
“Ultimately, I think that GM is going to be a strong company, and we are going to be pulling out as soon as the economy recovers and they’ve completed their restructuring.”
We’ll be out of Afghanistan long before we have stopped pumping our hard earned taxpayer dollars in to that bloated stinking corpse of a company.
want != wont
In the overall scheme of things in a $14 trillion dollar economy, $25-50-75 billion is pocket change. 1% of the economy is $140 billion.
A supplemental military spending bill for $97 billion for the wars was just approved with barely a whimper from anyone. Why is $75 billion+ for auto bailouts such a big deal? At least it gets spent here in the U.S. instead of being dumped down endless rat holes in Iraq and Afganistan with nothing to show for it.
97escort:
In the words of the late great Everett Dirksen: “A billion here, a billion there, and pretty soon you’re talking about real money”.
Maybe we should make that a trillion here, a trillion there …
Does everyone realize that bailouts are not handouts, they’re loans. Chrysler’s bailout in the 80s was paid back, ahead of time, and taxpayers actually turned a profit on the whole deal. And it wasn’t because Chrysler was making brilliant vehicles (K car, anyone?).
97escort gets it exactly right: its a drop in the bucket, and an investment in the economy. As opposed to far greater sums spent to get the WMDs in Iraq…whoops, I mean, get rid of a government in Iraq that supported Al Qaeda…whoops, I mean, turn Iraq in to a stable democracy that would show the way for the rest of the Middle East…whoops, I mean, turn back the tide of religious sectarian violence in the Middle East…whoops, I mean, liberate the people of Iraq – whoops again!
We spent far more on AIG, more of that money flowed through to Bear Sterns as the counterparty on CDS than the amount we’ve extended to GM and Chrysler. Big chunks of that money went to investors and firms in other countries, doing nothing for the US economy. And none of that money is ever going to be paid back.
Are the mangements of GM and Chrysler idiots? Sure. Did the UAW grossly overreach? Yup. Does that mean the best thing for the economy is to let several hundred thousand people stop paying taxes, go on unemployment, and possibly nuke much of the auto industry supply chain in North Amerca? Whoops, no.
Robert Schwartz- Is there a personal reason you want these companies to go out of business? Did they kill your family? Destroy your life?
Do you think you could do a better job?
Let’s do some simple arithmetic (some assumptions made to keep it easy)
– Share of “New GM” after 100:1 reverse split 600 million.
– Government ownership = 50% = 300 million shares
– Taxpayer “investment” $60 billion total
– Taxpayer investment per share = $200 / share
– GM market cap for Taxpayer to break even =$120 billion
Note: Current market cap of Toyota is $118 billion
Are they asking us to believe that “New GM” with:
– a stigmatized reputation
– products designed by the politicians
– reduced volume (fewer products, fewer dealers)
– diminished global reach
-C/O GM culture (very difficult to change quickly)
-UAW – not just as labor but also as major owners
– etc.
is going to push back all competitors and become more valuable than Toyota every again?
I don’t think so!
Okay mach1, lets do some math. Toyota and GM sell about the same number of cars. Shed the legacy obligations and why wouldn’t it be worth as much as Toyota?
But lets say its damaged reputation knock 25% off the market value. Which means taxpayers still get back 75 cents on the dollar, and lost $15 billion on the investment.
Now compare that to the costs of letting GM go under. Counting suppliers, you’re looking at around 400,000 people on unemployment. Say they collect about $10K each (a conservative estimate): that’s four billion. Now add on the lost tax revenue, if each paid taxes averaging $15K each (about what you pay in state and federal on an income of $60K) that’s another six billion.
Now we’re down to a $5 billion difference. The people who lost their health insurance will still get sick and injured, costing taxpayers money. Several hundred thousand unemployed will hurt businesses in their communities, causing more lost tax revenue. Some of them will turn to crime, which has associated costs. More foreign car sales will drive up our trade deficit, weakening the dollar as we ship capital overseas.
And all of this assumes the supplier network can even survive GM going under. If not, you’re looking at most or all of the North American plants shutting down, or at least Ford and Chrysler’s. That gets you up in to a million jobs lost, by some estimates up to three million. Start toting up the lost tax revenue and unemployment payouts in that scenario.
You do the numbers, and keeping GM afloat, or even winding it down slowly over a period of years, looks like a good investment for the taxpayer. So many people look at the costs of keeping GM open, but closing it would cost the taxpayer a huge chunk of change.
And that’s change you can believe in ;)
Boraxo
The federal government has unofficially announced its intention to “forgive” ALL of these “loans.” In other words, they are within days of officially becoming a handout. As they were from the git-go.
I bet Dick Shelby is so happy he killed a deal that would have given Congress some oversight. He was so intent on spanking the UAW that now a consortium of the Feds and the UAW will own GM & Chrysler.
yoderizer :
want != wont
First thing I saw, too. Made me wonder about the background of “wont”; or even what it means. I’m embarrassed to say that I’ve probably used it without truly knowing what it meant. At least in retrospect, I am confident that I used it in the correct context…
So Wikipedia took me to a page about a radio station.
Dictionary.com gave me a useful definition. It’s a “threefer” (noun, adjective, and verb):
wont /wɔnt, woʊnt, wʌnt/ Show Spelled Pronunciation [wawnt, wohnt, wuhnt] Show IPA adjective, noun, verb, wont, wont or wont⋅ed, wont⋅ing.
–adjective
1. accustomed; used (usually fol. by an infinitive): He was wont to rise at dawn.
–noun
2. custom; habit; practice: It was her wont to walk three miles before breakfast.
–verb (used with object)
3. to accustom (a person), as to a thing.
4. to render (a thing) customary or usual (usually used passively).
–verb (used without object) 5. Archaic. to be wont.
So I learned something today. Can I go back to bed now?
27 Billion by June?
How much is this per “actual” taxpayer? I don’t mean per resident, or per tax filer (we should not include thoses who file but actually end up paying no net taxes or who even receives more money than they pay)…how much per actual living taxpayer who PAYS taxes?
So many people look at the costs of keeping GM open, but closing it would cost the taxpayer a huge chunk of change.
You put up the linear first order costs. The price to be paid downstream is potentially far more.
Significant job loses without an immediate new source of employment is seriously deflationary, in addition to other sources right now, and deflation is death for economies predicated on growth. This is why you’ll see modern economic masters do anything, anything to snuff it out. This is also why libertarian/conservative free-marketers don’t have to fear deflation, because the kind of economy they advocate doesn’t grow.
Funny enough, the type of people who don’t believe this are also those who tend to believe in miracles. Make of that what you will.
I think that GM-supplied H2’s and H3’s, upgraded with state-of-the-art armor would be much more suitable for the narrow trails of Afghanistan.
oops
This is why you’ll see modern economic masters do anything, anything to snuff it out.
Did someone leave the window open? A chill just went up my spine.
Boraxo:
Thank you for your lengthy response to my original posting. It shows that you thought at length about what I wrote. I have a different view of things and don’t agree with most of your arguments.
The one point you made that I do agree with is “winding [GM] it down slowly over a period of years, looks like a good investment for the taxpayer.”
GM should be taken out of the Emergency Room and put into Hospice where the immediate pain is managed and their next of kin can adjust their passing. Keeping GM on life support indefinitely would be hugely expensive in terms of direct costs as well as the hidden costs of damage to Ford and the other companies.
“Toyota and GM sell about the same number of cars.” . . . . . “why wouldn’t it be worth as much as Toyota?”
Because GM will not sell nearly as many cars as Toyota in the future and GM has been buying market share for years by selling cars at a loss
“You’re looking at around 400,000 people on unemployment.”
This is a transitional condition and those who are unemployed will find new employment as soon as they adjust to the idea that it may not be at the same pay, doing the same thing and in the same locale. Perversely, unemployment allows some people to put off this adjustment. However, unemployment compensation is a humane way to help people bridge the gap to their next job
“Now add on the lost tax revenue”
You assume that the economic activity from declining GM production is lost when, more likely, it is transferred to other manufacturers who produce vehicles in the USA. Ford stands to pick up a lot of former GM and Chrysler customers as will the transplants. They will pay the taxes. and may pay more taxes because they will be profitable!
“The people who lost their health insurance will still get sick and injured, costing taxpayers money.“
There is no fundamental reason for the taxpayer to be responsible for medical care. In reality, there is an extensive system of safety nets that provides for basic needs.
“Several hundred thousand unemployed will hurt businesses in their communities”
An economic event like the decline of GM will cause pain in some communities and prosperity in others, This is how it is supposed to work – the price of economic failure is reallocation of resources to more successful places
“Some of them will turn to crime”
Sad but true.
“More foreign car sales will drive up our trade deficit, weakening the dollar as we ship capital overseas.”
There is enough production capacity in North America to meet the demand. The GM plants will still be there and those that can efficiently produce vehicles can be migrated to other companies where it makes sense. The inefficient plants need to close under any scenario.
“All of this assumes the supplier network can even survive”
The supplier network is in peril now precisely due to the fact that GM chose to produce more vehicles than they could sell at a profit. GM put huge downward pressure on suppliers to reduce costs to try to overcome their own burdensome cost structure.
“So many people look at the costs of keeping GM open, but closing it would cost the taxpayer a huge chunk of change.”
Keeping GM (and Chrysler) alive weakens everyone else due to extreme over capacity and distorts the efficient allocation of assets that is the basis of the capitalistic system.
We each view this situation from different points of view so I doubt we will ever agree completely. However our debate is healthy and may spark others to have better ideas.
PS: I am truly sorry to see GM decline and regret that so many people will be adversely affected.
“…and we are going to be pulling out as soon as the economy recovers and they’ve completed their restructuring.””
No one reading or posting will be alive when both events happen.
Robert Farago :
May 23rd, 2009 at 8:40 pm
Boraxo
The federal government has unofficially announced its intention to “forgive” ALL of these “loans.” In other words, they are within days of officially becoming a handout. As they were from the git-go.
Not entirely correct. The loans are to be converted into stock after BK. It’s a debt-for-equity swap…not unheard of in business.
But then again, we have the alternative, circa late last year: watch GM and Chrysler go broke and be dissolved, which would cost taxpayers untold billions of dollars in government aid (unemployment, Medicaid, job retraining, on and on), plus untold billions in lost tax revenues from all the laid-off workers.
And then we have hundreds of thousands of retirees whose pensions and health care benefits would vanish. Well, kiss that tax revenue goodbye as well…and while you’re at it, add them to the Medicaid rolls as well.
I think $27 billion is on the CONSERVATIVE side of what the country stands to lose by letting GM and Chrysler go under. At least now we have a chance at recouping our investment.
mach1 :
May 24th, 2009 at 9:16 am
“You’re looking at around 400,000 people on unemployment.”
This is a transitional condition and those who are unemployed will find new employment as soon as they adjust to the idea that it may not be at the same pay…
Here’s what you’re missing: Because GM and Chrysler operations are based so heavily in industrial states, where the economy is already on the ropes, liquidating these companies will do nothing but further damage local and state economies. The first industries that will collapse will be the ones with the lower-paying jobs you’re talking about – retail and service.
There will be NO lower paying jobs for the former autoworkers to take.
A liquidation of GM and Chrysler wouldn’t be a “readjustment” – it’d be the beginning of an economic death spiral for the entire industrial Midwest. Think what happened in Flint happening in dozens of other mid-sized cities, and Detroit. This would be a complete economic contraction from which they would NEVER recover.
Imagine the wholesale collapse of the entertainment business and what it would do to Las Vegas…or the wholesale collapse of the energy business and what it would do to Dallas or Houston…or the wholesale collapse of the banking and investment industry and what it would do to New York. Those wouldn’t be “readjustments” – they’d be a blow from which their economies would never recover. That’s what we’re talking about.
If you’re Ok with letting that happen in the name of “capitalism,” then frankly, capitalism is a bankrupt philosophy.
This is a transitional condition and those who are unemployed will find new employment as soon as they adjust to the idea that it may not be at the same pay, doing the same thing and in the same locale.
People say this as if they’re unaware of the current job market. I also wonder if that’s part of the free-market promotional literature: “Vote for Us! Shit jobs for all!”. Hell, before labor law came into effect, it’s even historical true unlike their usual claims.
–
Did someone leave the window open? A chill just went up my spine.
People should fear this with their cushy middle-class lives. Deflation, it kills economies dead*.
*low-level economies with no expectation of growth excepted.
I’ve been saying for years the economy was teetering on the edge of collapse. Merill Lynch VP friend kept telling me, it’s only an automotive thing, the economy is the strongest it’s been in history… Led to several interesting discussions. Guess automotive was the canary in the mine.
Now, to those that believe you can find a job, good effin luck. I’ve been laid off for several months, searching the ENTIRE COUNTRY, and not finding anything. Two degrees, engineering license, multiple patents, experience in multiple systems, blah blah blah… Even my kids are having a tough time finding a job. Oldest is extremely hard working, intelligent, just graduated high school. She’s applied to about 50 jobs in the last three weeks. So far no luck. Unemployment numbers are bad, but the number that is even scarier, is the unreported chronic unemployed.
agenthex :
“People say this as if they’re unaware of the current job market.”
FreedMike :
“Here’s what you’re missing: Because GM and Chrysler operations are based so heavily in industrial states, where the economy is already on the ropes,”
I understand as well as the next person. I’ve lived in and around Detroit for more than 40 years. I drive by the boarded up shops and abandoned shopping centers every day in what used to be prosperous area, At a personal level, I watched my son search for over a year to find his first job after graduating from the University of Michigan. He took a low paying job in his field to get some experience and then had to leave the state to find something better I and several of my friends and neighbors were encouraged to retire ahead of schedule to preserve the jobs of younger employees. I’ve seen my retirement health care go from plush to spartan and my life insurance cut by 75% I’ve seen the value of my house decline by 35%. I’ve watched 401K morph into a 201K. I don’t get a large pension (although I am thankful for what I get).
I fully understand the consequences of living life in the good times spending all you can earn and most of what you can borrow – this applies to individuals, corporations and governments at all levels. Eventually, the economy will right itself and we can move forward again.
Keeping failed companies alive by artificial means may appear kind but it really isn’t. The changes GM really needs to make would take a decade or more and require a fortune that we don’t have. It’s like battlefield triage – the fatally wounded are allowed to die so that those with a chance to live get the help they need
I hope we move into the next phase with a more sober attitude about leverage and risk and recognize the virtues of living beneath our means.
Keeping failed companies alive by artificial means may appear kind but it really isn’t.
As has been said by me (and probably others) from early on, at this point it’s not about GM anymore. GM as an individual abstract entity is not worth saving. However the economy as a whole generally is.
What’s hugely ironic is that there are adults trying to save capitalism as we know it with varying degrees of success and at great expense due to prior asinine kiddy mistakes, and then you have this side show of clowns who think it’s “socialism”, because, uh, they think it’s an impressive big word to wield and they don’t really know what they’re talking about.
Look at how the same bank rescue probably cost significantly more to avoid the appearance of impropriety aka “nationalization”. Unfortunately, we have a president who feels it’s more important to appeal to what is considered moderate knuckle draggers voters to expanse his base, instead of dishing it straight to the dunces at the kid’s table. But that may be ok since despite the superficial politics, there hasn’t been any major fuuckups behind the scenes. That’s the price to be paid for a poorly educated democrat populace.
Despite all the good hearted reasons our Lefty friends give here to justify this government take over of an industry, I can’t help feel that abandoning the things that made this country great over the past 200+ years is not the right thing to do. Nothing anyone says will convince me otherwise… I mourn the coming of the USSA.