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What's the Collateral Damage of GM's Bankruptcy?

Question: What's the collateral damage or ripple effects of GM's bankruptcy?

Paul Solman: Funny you should ask. We're in the process of scripting a brief story for tonight's NewsHour addressing this very question. (Brief for us, that is: For the commercial nightly news, its length would qualify for the adjective "epic.") Tonight's story features testimony from in and around Detroit, which should speak for itself. But the larger issue, which we touch on only lightly, is macroeconomic.

The great fear -- confirmed by the experience of the past year -- is that an economic slowdown can feed on itself. You've heard it before and if you've read this page much, you've been subjected to the idea time and again: the downward spiral.

I get laid off and can no longer afford to drink at your Starbucks, so you have to lay off one of your employees -- call him Ishmael -- and he has a whale of a mortgage, which he can no longer pay, thus hurting the bank that swallowed it, which has to lay off ITS employees...down, down, down it goes, round and round it goes, the economy in a spin, the old black magic of the negative accelerator, the downward spiral, etc.

And if there's no end to it, or only an end in the very long run, then government should arguably come to the rescue. This is the notion so wittily laid out and energetically hyped by English economist John Maynard Keynes during the Great Depression and subscribed to by "Keynesians" ever since: that the government must spend when individuals and businesses will not in order to turn the vicious circle virtuous. (Folks say vicious "cycle" these days, but it doesn't really describe an ever-descending gyre, I don't think.)

Thus does the Obama administration, as did the Bush administration before it, justify the bailout of GM: precisely so that the collateral damage will not damage us all. No one can know what would have happened had GM been simply allowed to "fail." Those in power have deemed the risk too great.

Finally and somewhat relatedly, a last word (for now) on the UAW:

At the risk of seeming a union plant, let me relay a statistic used by Ron Gettelfinger about which I was skeptical, but have since "researched" (meaning I wrote to David Cole, chairman of the Center for Automotive Research and a sometime contributor to this page).

What percentage, do you suppose, of the average GM vehicle's cost is represented by the UAW, including so-called "legacy" costs: pension and health care (VEBA)? Ten percent.

Thus, if the UAW's contract were sliced in HALF, so that workers made an average of $12-$14 an hour (as "second-tier" workers indeed will) AND pension benefits were cut in half as well, including health care, the average GM car would drop in price by...5 percent. I guess I should have realized this, since I, among many others, have reported over the years that legacy costs added something like $1,500 to the cost of a union-made car. That sounded like a lot and over time, in terms of reinvestment in new technology and quality, it surely is. But I find the overall percentage surprising.

-- Posted June 3, 2009 | Comments (2) | Permalink