The Liberty Papers

So the big debate is whether the gov’t should sell their post-IPO shares in GM. At current prices, they’d [unsurprisingly] be losing money on the sale, compared to the amount put up in the bailout.

So we have to ask — was it worth it? To determine that, we can’t base our entire calculation on the return of the bailout. A bailout is offered with the expectation that you might not get *any* return — you bail to prevent the craft from sinking; anything else is gravy. So to determine the worth of the bailout, we have to ask what would have happened in the absence of a bailout. Thankfully, the Center for Automotive Research released their prediction back in 2008:

Researchers at the Center for Automotive Research (CAR) in Ann Arbor, Michigan, estimate the impact on the U.S. economy would be substantial were all—or even half—of the three Detroit-based automotive manufacturers’ U.S. facilities to cease operations. The immediate shock to the economy would be felt well beyond the Detroit Three companies, negatively impacting the U.S. operations of international manufacturers and suppliers as well. Nearly 3 million jobs would be lost in the first year if there is a 100 percent reduction in Detroit Three U.S. operations.

“Our model estimates that a complete shutdown of Detroit Three U.S. production would have a major impact on the U.S. economy in terms of lost wages, reductions in social security receipts, personal income taxes paid, and an increase in transfer payments,” said Sean McAlinden, CAR chief economist and the study’s leader. “The government stands to lose on the level of $60 billion in the first year alone, and the three year total is well over $156 billion.”

Yikes! Sounds bad!

But would the automakers “cease operations”? Would they disappear into an economic black hole, never to be seen again, with only confused and unemployed UAW workers left behind like the un-Raptured masses?

Or would they, as Warren of Coyote Blog suggested way back when, be freed from working for an unproductive corporate environment and re-deployed in ways that their contributions will actually generate value?

So what if GM dies? Letting the GM’s of the world die is one of the best possible things we can do for our economy and the wealth of our nation. Assuming GM’s DNA has a less than one multiplier, then releasing GM’s assets from GM’s control actually increases value. Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value. Their output has more value, which in the long run helps everyone, including themselves.

I can’t find the specific post, but he has another where he suggests that if GM were even to face liquidation, it would not entail the loss of GM’s assets, much of its workforce, or its supply chain. The failure of GM [or Chrysler] would be painful, but fundamentally going through a serious bankruptcy [and/or liquidation] would free GM from its worst corporate problems, possibly returning them to a point where they actually generated value from their operations rather than losses.

Liquidation, of course, is the worst-case scenario. And there were plenty of folks suggesting that liquidation was impossible in the 2008-2010 era, because credit markets had seized and there was NO way anyone in the world would have the capital to buy up assets. But is it true?

Nope. Not at all. You need look no farther than Nortel. Nortel was a MAJOR telecommunications company, existing in one form or another since the late 1800’s, back in the days of the first telephone. It was built into an absolutely enormous conglomerate during the technology boom of the 1990’s, but like many companies in that sector, fell on hard times after the tech crash. They fought through bailouts in 2003 and 2009, but ultimately they declared bankruptcy right in the heart of the credit crunch, hoped to escape intact, but eventually had to go through liquidation. Between then and today, Nortel has basically ceased to exist. A look at the Wikipedia page for the liquidation results suggests that seized credit markets didn’t exactly stop them from finding buyers for their assets.

As an engineer who has dealt with what used to be Nortel and is now a collection of disparate companies that have purchased their assets, I can attest that Nortel has not “ceased operations”. That’s not to say that the changes over the last few years have been pain-free. There has been dislocation, there have been layoffs, and from my discussions with former Nortel employees as well as being a supplier, many things have changed. Fundamentally, though, Nortel’s business units are still in operations under different names. Many Nortel engineers are still employed within the same organization, only with a different letterhead on their business card. And as a supplier, I can say that the disruptions at Nortel have not put all of their suppliers out of business. Being a supplier has become more difficult in many ways — largely because the companies that bought Nortel units are run more efficiently than Nortel was, and this means that supplier competition is tougher — but that is fundamentally a good thing.

Would the experience of Nortel be the same as a potential GM or Chrysler bankruptcy? Obviously, it’s impossible to prove a counterfactual. But that also doesn’t mean that we should accept the claim that bailouts “saved the US auto industry” at face value. Had GM or Chrysler gone bankrupt, it’s likely that their various brands would have been picked up on the open market at various discount rates. Some might have been purchased for their own brand value, others might be purchased to use their factories and design engineers to produce vehicles under different nameplates.

One thinks, then, that the fear was not that the American auto industry would evaporate. The fear, instead, was that the psychological pride of having the “Big Three” would disappear. They didn’t care about jobs, they cared that Americans might be employed working for Toyota rather than for GM. It was nationalism, not economics, that drove decisions. As a result, the US taxpayer is going to prop up a manufacturer with a history of failure and little incentive to change (since one bailout can easily become two or three) solely in order to be able to say that GM still exists. You didn’t save an industry, America. You saved your ego.
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