What was good for GM turned bad for the country

James Quinn

lives and writes in Harleysville

General Motors was founded in 1908 in Flint, Mich., and grew to be the largest corporation in the world. In 1953, at the peak of GM's dominance, company president Charles Wilson declared before Congress that what was good for the country was good for GM, and vice versa.

The story of General Motors is the story of America. Its rise to power and decline toward insolvency parallel the rise and fall of the great American republic. For the past few decades, hubris, lack of courage, foolish decisions made, and crucial decisions deferred have been hallmarks of both.

GM's market share peaked at almost 50 percent in the 1960s. It reached a historic low of 19.5 percent in January. GM has too much debt, too much bureaucracy, too many plants, too many lines, too many employees, and too many future health-care and pension obligations.

Of course, only decades of mismanagement can put a company in such a position. GM promised tremendous pensions, lifetime health benefits, huge pay increases, and onerous work rules that gave management no flexibility. It created an unsustainable cost structure, paying more to retirees than to workers. The troubling facts were ignored because it still had 45 percent market share in the 1970s.

In the 1990s, GM sold its soul to the devils of debt and high-margin, low-mileage vehicles. SUVs generated profits of $10,000 to $15,000 each, even with bloated costs. Rather than improve efficiency, design, and quality, or shore up its balance sheet, the company used its GMAC subsidiary to give subprime borrowers 120 percent of the cars' value.

After 9/11, GM showed its patriotism by giving away cars with zero percent financing. Amazingly, by giving zero percent financing to people with 550 credit scores, you can sell millions of Escalades and Hummers.

Giving away cars was so successful that GM decided to parlay its expertise into giving away homes. It bought Ditech in 1999, just in time for the biggest housing bubble ever. Ditech pioneered giving borrowers more than properties were worth, and it specialized in no-documentation loans.

How could lending someone 125 percent of a home's value, with no proof of income or assets, possibly go wrong? Not surprisingly, GMAC lost $8 billion in the last two years.

The only logical solution for GM now is bankruptcy. Shareholders and bondholders would be wiped out; they made a bad investment. Plants would be closed, contracts restructured, management replaced, employees fired, debt written off, and future obligations reduced.

A much smaller company, capable of competing in the 21st century, would exit bankruptcy in a year or two. Profitability with low market share is preferable to high market share with billions in losses.

GM's decline shows how poor strategic decisions over the course of decades will ultimately lead to collapse. The United States has followed the GM model for the last three decades.

The United States has too much debt, too much bureaucracy, too many government-supported industries, too many agencies, too many employees, and $53 trillion in unfunded future liabilities.

The United States peaked as a manufacturing economy in 1960, with manufacturing employees making up 26 percent of the workforce. They now make up less than 10 percent.

The United States decided to outsource manufacturing jobs because we were going to do the thinking for the world. The country decided to take the easy path of financial engineering, rather than the hard path of creating products that other countries would buy.

The trade deficit reached $677 billion in 2008. Borrowing from the Chinese and Japanese to buy stuff produced by China and Japan could not go on forever. Instead of realizing this imbalance and taking steps to correct it, our financial leaders reduced interest rates and encouraged further imbalance.

Decades of allowing our economy to be hollowed out and shipped to China are coming home to roost. Our financial geniuses have essentially brought down the world financial system by selling foreign countries mortgage-backed securities, collateralized debt obligations, and the like. That has been our contribution to the world for the last eight years.

Now we have delegated responsibility for our corporations to the U.S. government. And rather than address the structural problems of our health-care and Social Security systems, politicians delay until the next election, as they have for 30 years.

Former U.S. Comptroller General David Walker has described these politicians as displaying "laggardship" rather than leadership. They flounder from crisis to crisis, using stopgap measures to plug holes in the ship of state while ignoring the iceberg on the horizon.

While the United States steams full speed ahead toward unfunded Social Security, Medicare, and Medicaid liabilities, politicians spend our tax dollars digging holes and filling them up again. The government's strategy is to print money, keep interest rates at zero, devalue the dollar, and hope for the best.