Every recession is a critical test of an economy's resilience and flexibility, both in terms of purely operational linkages and more importantly in terms of political tolerance for change. We often hear politicians claim the rhetorical mantle of change, but a cycle of creative destruction is the ultimate litmus test of their credibility. With America's three major domestic automobile brands facing dire conditions that will arguably lead to bankruptcy, the test for America's political economy is as real as it gets.
As a student of Schumpeter and son of Michigan, I am infatuated with the current dilemma of General Motors. And I am hopeful that finally our country has lost its patience with the embarrassing decline of Detroit. There have been too many decades of decline, an industrial sickness that has been a permanent part of the Michigan narrative for the entire lifetime of anyone under 50. The time has come to close this chapter, let the dinosaurs die, and let Michigan's entrepreneurs begin a new chapter.
Look, I love Michigan. If anyone thinks this author is a typical egghead economist with no sympathy for real people, listen up. I was born in Michigan. I vacationed at Wampler's lake last summer. Three of my grandparents are buried under Lansing soil, and the fourth is in a Lansing nursing home. My wife got an MBA from the University of Michigan. I have family in Detroit, Livonia, Grand Rapids, and more. My whole life, I have witnessed the little guy in Michigan facing ever higher taxes and burdens because the state plays favorites with the "Big Three." That model worked when they were oligopolies, before globalization. But that world is passed, and the Big Three fundamentally refused to change with the times.
Chapter 11 bankruptcy is what General Motors faces when Congress turns down its bailout request. Congress might disappoint me, but they also might offer loans only if the companies agree to enter Chapter 11 re-org first. Or maybe Congress will do the right thing and offer a multi-billion dollar stimulus to the state of Michigan to use as it sees fit -- preferably as a tax rebate directly to the people, instead of sure-fail industrial policy. In a state with 10 million residents, just one billion dollars breaks down to $100 per head.
So if we're talking $25 billion (their request last month), that equates to $10,000 for a family of four. If we're talking $34 billion (the total request as of Tuesday's Congressional hearings with GM, Ford, and Chrysler executives), it equals $10,000 for a family of three. Do you really think Rich Wagoner can spend that money more wisely than my Aunt Molly? Aunt Sheila? Aunt Judy? Aunt Loretta? When it comes to efficiency, that CEO couldn't touch a one of 'em. I think the people of Michigan could somehow make it through the "Winter of Bankruptcy" with that kind of cash. Maybe a couple winters.
Speaking of credibility, the CEOs have been quick to wrap themselves in the flag, emphasizing how important their survival is to the national economy. Despite the fact that I believe the opposite to be true - the bankruptcy of GM would help America's long term economic growth - what is most disturbing about their patriotic argument is its hypocrisy. Bankruptcy is probable at this point. The patriotic thing to do would be for this giant firm to prepare for as soft a landing as possible. Instead, it seems that GM refuses to plan for the worst. "No Plan B" is Wagoner's motto. So, GM is threatening to destroy itself and its supply chain if deficit money isn't shoveled to them.
Because of its refusal to make plans for a bankruptcy, GM is "courting a Lehman-like situation," said a person familiar with the matter. Lehman Brothers, the storied investment bank, collapsed into a court-protected reorganization unprepared to remain in business. "They are on the train tracks and won't get off them," the person said.
It is time for the executives in Detroit to sharpen their pencils, and get ready for plan B. Let's not forget that GM lost $4.2 billion last quarter. It cannot sell enough cars. Funny thing is, the last line of defense is that if they (GM or Chrysler) go into bankruptcy, they won't be able to sell enough cars. According to the WSJ:
Both companies have said they don't see bankruptcy as a viable option for any auto maker. They believe customers would stop buying cars and the company would be forced to liquidate.
This line of argument is critical to the dinosaur business model. It has been parroted by the UAW, and the reason is that bankruptcy will revolutionize the insane labor policies that haunt Michigan. But it is not true that customers won't buy from a bankrupt company. Happens all the time. So I have been thinking of some way to put a nail in the "won't buy cars from a bankrupt company" claim.
Here is my pledge: I will buy a new vehicle from the first American auto company to enter bankruptcy. I will buy it within six months of the date of entry, on the condition that it has to be a real bankruptcy, and the company must follow through with real restructuring. This is not an easy pledge to make, and my wife may kill me. But nothing could be more valuable for my country's economy than for one of these companies to re-organize. I could have hope for my state again, which is worth a lot more than the price of a car to me.
Who else will take this pledge? (I think I can get you a discount!) Send an email to firstname.lastname@example.org and I will add your name to the list.
(UPDATE: I made an error in the original post -- 1 b divided by 10 m is not $100,000 per person, but $10,000. My apologies for the error.)