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Political Stakes High in GM Bankruptcy Plan

June 2, 2009 at 6:20 PM EDT
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The political stakes are high for the Obama administration in guiding General Motors into bankruptcy -- and allowing the government to take a majority stake in the company. Analysts examine the political and economic implications of the decisions.
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JEFFREY BROWN: And some thoughts on the economic and political stakes now from Megan McArdle, business and economics editor for The Atlantic, and Harold Meyerson, editor-at-large at the American Prospect and op-ed columnist for the Washington Post.

Harold Meyerson, how big a gamble is it? And was it one that had to be taken?

HAROLD MEYERSON, The American Prospect: Well, it’s a big gamble, but I think the administration felt that the bigger gamble was simply to let G.M. go under and deal with economic chaos in the Middle West, in particular, since it’s not just G.M. employees, but there are all kinds of folks working at parts factories, people in the supply chain. And in the middle of the worst economic downturn since the ’30s, that was a possibility they just did not wish to face.

JEFFREY BROWN: Megan McArdle, how do you define the gamble and the economic stakes here?

MEGAN MCARDLE, The Atlantic: Well, I think there are two different questions. The first is the political gamble of letting G.M. fail, which I agree would have been catastrophic.

Economically, I think it’s a little easier decision to make. It certainly would have been catastrophic had you let all of these suppliers and plants go under with no plan for dealing with any of the fallout, but there are probably better ways to deal with unemployed workers than to buy a company and keep operating it in order to provide them with jobs.

Political stakes for the president

Megan McArdle
The Atlantic
For years when people said, "What's good for G.M. is good for America," they meant that very sincerely. They were so totally intertwined that they've come to be emotionally almost synonymous, even now.

JEFFREY BROWN: But you started to say the political stakes. Do you mean the political stakes for the president?

MEGAN MCARDLE: Absolutely.

JEFFREY BROWN: Flesh that out a bit. What do you see as the political stakes?

MEGAN MCARDLE: Well, I mean, you've got two big issues here. The first is that auto manufacturing is the quintessential, iconic U.S. industry. It's the beginning of the assembly line. It's the beginning of modern manufacturing.

And for years when people said, "What's good for G.M. is good for America," they meant that very sincerely. They were so totally intertwined that they've come to be emotionally almost synonymous, even now.

And the second problem is, obviously, that Obama has his key constituents in the labor movement and a broader swath of people in an important swing state who would have been thrown out of work by this and who don't view, say, unemployment and transitional retraining assistance as the same thing as keeping their jobs. And they would have been very angry had he let...

JEFFREY BROWN: So, but do you think it's right to look at this through this political lens?

MEGAN MCARDLE: I don't think you can ask a politician to do anything else.

JEFFREY BROWN: How do you define the political stakes here?

HAROLD MEYERSON: Well, I think Megan is right, and you expect the government to be sensitive to the needs of its core constituents. That's not surprising.

In terms of the political stakes, yes, they've avoided Hurricane One, which would be a total wipeout in the Midwest. And it's not just Michigan. It's Indiana, it's Ohio, it's really the middle of the country. And so that's not a region any political leader would blow off.

On the other hand, they don't want to be on the hook continuing to feed money into General Motors now that it's done this major downsizing and re-crafting of its labor contracts and so on. So I think the administration sincerely hopes that more or less this is it and they don't want to be on the hook here to continue to go back and back and back to a continually beleaguered G.M.

Obama in 'difficult place'

Harold Meyerson
The American Prospect
In general this is just an incredibly tricky situation for the administration.

JEFFREY BROWN: Well, they sincerely hope that, but here you have the government with a 60 percent stake. Yesterday, President Obama repeated what he said many times, that he doesn't want to run this company. What kind of concerns do you have looking at this situation of a 60 percent ownership?

MEGAN MCARDLE: Well, I think that Obama is now in a really difficult place for a couple of reasons. The first is that you've now, obviously, still got a big labor constituency. You've still got to worry about all of these jobs, even the smaller number. They still want to save them.

But looking at the taxpayers, the taxpayers, as Harold says, do not want to keep funneling money into this company. But the issue is, can the government really be a hands-off profit-maximizing operator of an automobile manufacturer or do they have to start interjecting various political considerations?

What plants are in key districts? Are they going to get shut down in sort of a base closing system the way we shut down military bases rather than on the basis of which plants are most profitable? Things like, is G.M. going to push into small cars because that's what the environmental political demands are rather than necessarily because that's where most of the profit can be made?

And if you make too many of these political decisions, you are going to end up in a situation where you have to keep piling money into the company, because you're politically unable to make the decisions and allow G.M. to actually make a profit.

JEFFREY BROWN: This is a fine line, then, that they're walking?

HAROLD MEYERSON: Inevitably, it is. It has to be. Now, some of the plant closings that were announced just yesterday, I think it's pretty clear there weren't political considerations in that. I don't know that there necessarily would be henceforth, but in general this is just an incredibly tricky situation for the administration.

JEFFREY BROWN: I mean, we just saw in that setup where you have local officials saying, "Hey, open up our plant," right?

HAROLD MEYERSON: Yes, but, you know, the federal government and an administration and a president deals with those kinds of issues all the time, not as directly as, you know, given that the government now owns this company, but those kinds of issues are issues that come to the fore at any time, you know, the federal budget is being discussed.

Fate of U.S. manufacturing

Megan McArdle
The Atlantic
In the 1950s, you had manufacturing jobs where someone with a high school education could really make a great living and raise a family on a single income, and that's not really possible now.

JEFFREY BROWN: What about the stakes for not only U.S. auto manufacturing, but U.S. manufacturing, period? Should we be thinking about all this as a kind of key moment in what kind of manufacturing sector we have in the future?

HAROLD MEYERSON: Well, I think it's vitally important that we revive a manufacturing sector. Manufacturing has shrunk to about 11 percent of our gross domestic product. It's very hard to see how we can recover swiftly from the current economic downturn, if it's that small. It's very hard to see where the middle-income jobs of the future are going to be if we have such a small manufacturing sector.

And it's impossible to project any way to reduce our trade deficit if we're inherently, you know, the nation that goes shopping but isn't really making things and selling things to other nations.

JEFFREY BROWN: But what role does the government have in fomenting that kind of future for American manufacturing?

MEGAN MCARDLE: Well, I'm a little less worried about the decline of American manufacturing. Everything from, you know, new medical procedures to computer software, those are services. And they're really important in both increasing quality of life, and they can be export goods.

But I think the bigger question is, what's the government going to do with keeping up the productivity of low- and medium-skilled labor? And in the 1950s, you had manufacturing jobs where someone with a high school education could really make a great living and raise a family on a single income, and that's not really possible now.

Those questions have been proven incredibly thorny for the government. And I worry that, with things like G.M., we're piling into trying to preserve these old jobs, making cars that people don't necessarily want, in order to preserve that dream of a great living for a high school graduate, rather than, A, up-scaling our workforce, and, B, looking for what new sectors we could provide high productivity jobs.

Will lending be affected?

Harold Meyerson
The American Prospect
I just don't think we can get from [...] an economy which has lost middle-income jobs to an economy that needs to generate middle-income jobs, absent the kinds of education priorities that Megan alluded to, but absent a manufacturing sector, too.

JEFFREY BROWN: Well, by the same token, do you worry about what's next -- is G.M. a special case? Or suppose the next company comes along from another kind of industry, where do you draw the line, in terms of government stepping in?

MEGAN MCARDLE: Well, I think that's going to be a real question for the administration, not just because the administration is really stretched tight, and how many more resources do they really have available to start running big manufacturing sectors, but also because, when you look at the credit markets, what's happened with G.M. and Chrysler has arguably raised the premium on being an old-line manufacturing industry with a powerful union.

And so there is a real worry that people are going to stop lending to any company that might be able to get the government to intervene on their behalf in, say, a bankruptcy and change the seniority of the creditors or take some other action.

So I think that, in the future, some of the things that the administration has already done is actually going to make it harder to provide those kinds of old-line manufacturing jobs. It's going to be...

JEFFREY BROWN: Do you worry about that?

HAROLD MEYERSON: Well, not that the bailout is going to deter future bondholders and future companies, because I think these really are special cases, for some of the reasons that Megan said at the very top of this segment, that this is this emblematic company, also that it's geographically concentrated, so that its demise poses more political perils than a company that's spread out more across the landscape.

So I'm not really concerned that this sets a pattern, but I am concerned about the decline of manufacturing generally. I just don't think we can get from here to there, from an economy which has lost middle-income jobs to an economy that needs to generate middle-income jobs, absent the kinds of education priorities that Megan alluded to, but absent a manufacturing sector, too.

JEFFREY BROWN: All right, we'll leave it there. Harold Meyerson, Megan McArdle, thank you both very much.