The Obama administration’s pre‐packaged bankruptcy plan for General Motors is a recipe for disaster. Even if President Obama were sincere in his claim that he doesn’t want to run a car company, it will be impossible for him to eschew policies that distinctly benefit GM. With taxpayers on the hook for $50 billion (just for starters), the administration will do whatever it takes to demonstrate the wisdom of its intervention.
That will require, at a minimum, a positive return on the coerced investment. But to merely break even on taxpayers’ 60% stake, GM will have to be worth $83 billion (60% of $83 billion is $50 billion). How and when will that ever happen? At its peak in 2000, GM’s value (based on its market capitalization) stood at $60 billion. Thus, the minimum benchmark for “success” will require a 38% increase in GM’s value from where it was in the heady days of 2000, when Americans were purchasing 16 million vehicles per year. U.S. demand projections for the next few years come in at around 10 million vehicles. Taxpayer ownership of GM is something we should all get used to, and the “investment” is only going to grow larger. Think Amtrak.
It should be obvious that the administration will rely on policy (tax policy, trade policy and regulations) to induce consumers to purchase GM products, to subsidize production and, indeed, to hamstring GM’s competition. This will have perverse effects on Ford and other companies that find it difficult to compete against a free‐spending Treasury. And all of this will happen even if the president is true to his claim that he doesn’t want to run a car company. He can take a hands‐off approach and tilt the playing field in GM’s favor at the same time.
But the president does want to run this car company. It is central to his mission of converting the United States from a carbon‐based economy to a renewables‐based one. “CEObama” already fired his predecessor, promised the United Auto Workers that GM won’t import small cars from its foreign plants and has vowed to turn GM into a model of green production. But the government has never been good at inducing carmakers to produce vehicles that people want to buy. If anything, government policy has encouraged auto producers to make vehicles that people don’t want to buy. Fuel efficiency standards have induced producers to make costly, high‐mileage vehicles over the years and sell them at no profit or at a loss because of limited demand. Accordingly, government policy is one of the reasons for GM’s collapse.
The only thing that can save America from this shotgun marriage to GM is a bankruptcy judge willing to reject the administration’s reorganization plan. It is possible that the judge will insist that GM raise equity from private bidders instead of taxpayers, but given this week’s rubber‐stamping of the administration’s plan for Chrysler, don’t count on it.