Save General Motors From Bankruptcy, Vote For Mitt Romney

President Obama has been touting his bailout of General Motors as a reason for people in Michigan and Ohio to vote for him.  However, there is one small problem with his argument.  Regardless of the past, GM’s only hope for long-term survival nowis if Mitt Romney wins on November 6.

If Obama is reelected, GM is doomed to a second bankruptcy (or to another taxpayer bailout).  This is because Obama is committed to doubling down on the two policies that drove GM bankrupt in the first place: a weak, unstable dollar, and unrealistic corporate average fuel economy (CAFE) requirements.  In contrast, Romney has promised to replace Fed Chairman Ben Bernanke, and he has expressed skepticism regarding Obama’s insane 54.5 miles per gallon (MPG) CAFE target.

Hey, wait a minute!  Isn’t GM highly profitable and doing great?  No, it’s not.

GM’s U.S. market share continues to decline, its management is in turmoil, its Opel subsidiary in Europe is foundering, and its finances are far more precarious than bailout supporters would like to admit.

Here are two data points regarding GM’s overall financial condition:

• The Obama administration “invested” $67.5 billion* in order to create a company with a tangible net worth of $3.1 billion**.
• As shown here, as of the end of the second quarter, GM’s “Altman Z-Score” was only 0.66.  For a manufacturing company, an Altman Z-Score, “…of less than 1.81 indicates that a company is in the danger zone for going through bankruptcy proceedings in the future.”

GM’s first bankruptcy was a 40-year-long case of murder-suicide, with the federal government playing the part of the murderer, and a succession of weak and confused GM CEOs contributing the element of suicide.

In the mid-1960s, GM so dominated the automobile business that there was talk of bringing an antitrust action to break it up.  Over the ensuing 40 years, this American industrial powerhouse was laid low by the relentless debasement of the U.S. dollar, and by the CAFE law, which was the federal government’s ill-conceived response to the run-up in oil prices that it caused by devaluing the dollar.

Today, GM’s only truly profitable business opportunity is the same as it was 50 years ago: to manufacture large vehicles for the North American market.  Fifty years ago, this opportunity existed in abundance, and GM was free to pursue it.  Today, such is not the case.

America is a big country, and its people like big cars and trucks.  Big vehicles are safer, more versatile, more comfortable, and more stylish than little ones.  And, there are no physical, technical, or economic reasons that Americans should not have the large vehicles that they desire.  Despite what you might have read, the world is not running out of oil.  And, even if carbon dioxide emissions are causing global warming, and even if global warming is a bad thing (both of which are questionable), U.S. gasoline consumption exerts a relatively minor influence on CO2 levels in the atmosphere.

Now, here is the anatomy of a murder: how the federal government killed GM.

Starting in the late 1960s, Johnson, Nixon, and the Federal Reserve devalued our dollar.  This had two effects: an increase in the cost of capital, and a speculation/inflation-hedge-driven surge in oil prices.  In GM’s case, the damage caused by our sinking dollar was amplified by its relationship with the United Auto Workers union (UAW).

Capital and labor split the sales dollar between them.  When the cost of capital rises, wages must fall, or capital will flee, and jobs will disappear.  One consequence of our fiat dollar regime is that the average real wages of “production and non-supervisory workers” are lower today than they were in 1973.

Wage flexibility allowed the U.S. to avoid the double-digit unemployment rates that became chronic in Europe, but our monetary errors resulted in a huge reduction in worker living standards.

The UAW was fiercely opposed to the decline in real wages that would have been required to keep GM viable.  In the process of resisting the inevitable, the UAW saddled GM with a cost structure that was hopelessly uncompetitive.  The UAW’s efforts to maintain above-market wages also caused their membership roles to fall by 1.14 million (a full 77% of the total), from 1979 to 2009.

GM’s initial response to the problem was to try to cut costs by reducing product quality.  GM’s new-for-1971 full-sized cars, which were designed in the late 1960s, were shockingly shoddy compared with their predecessors.  The fake wood used in the interior of some of the Cadillacs of this era looked like dime store contact paper.

Things went downhill for GM from there.

In the early 1970s, crude oil and gasoline prices rose sharply.  They were simply following gold prices, which were being driven upward (in dollar terms) by the falling value of the U.S. dollar.

The higher gasoline prices of the 1970s did not reflect economic fundamentals, and they were not sustainable in real terms.  However, they served to open the door to penetration of the U.S. automobile market by small, fuel-efficient Japanese cars, which also had higher quality.   Thus began GM’s long, agonizing decline in market share, from 48.3% in the 1960s, to 18.1% for the first 9 months of 2012.

One side effect of the rising cost of capital was an enhancement of the importance and power of GM’s financial staffs.  The CEO that built General Motors, Alfred P. Sloan, was an engineer.  However, monetary instability brings financial people to the fore, and not just in the car business.

Here is a bit of history regarding Richard C. Gerstenberg’s accession to CEO of GM in 1971:

“His main rival for the position was GM President Ed Cole.  Cole was a ‘car guy’ with a background in engineering and production, and was seen as the logical heir from the traditionalist viewpoint.  However, Gerstenberg was chosen by the board because his strengths as a money manager and as an articulate defender of the increasingly criticized auto industry were viewed as necessary to handle the problems GM looked to face in the coming years.”

In other words, by 1971, GM’s Directors had concluded that building great cars was not as important to the company’s future as “money management”.

Except for Robert Stempel, who was forced out in 1992 after only two years in the job, all of GM’s CEOs since the 1960s have been financial men—“bean counters”.  GM’s current CEO, Dan Akerson, is a financial guy with no previous experience in the car business.

As noted above, the “oil shortage” of the 1970s was not real.  However, to deal with this mirage, which the government had created via monetary inflation and price controls, Congress passed the Corporate Average Fuel Economy (CAFE) law in 1975.

One effect of CAFE was to induce GM’s weak and confused management to invest billions of dollars in unprofitable U.S. production of small vehicles.  Over the following 30 years, GM’s efforts to produce vehicles that its customers didn’t want, and for which they were not willing to pay, bled the company dry.  GM filed for bankruptcy in early 2009.

But wait!  There was a law!  Wasn’t GM required to produce small cars?

No.  It could have, and should have, done what Mercedes, BMW, and even Volkswagen did during the 1980s, 1990s, and the 2000s: produce and sell the vehicles that its customers wanted, and pay the CAFE fines.  To date, automobile companies have paid more than $1.1 billion (in 2011 dollars) in CAFE fines rather than do economically stupid things.

The difference in profit margin between a big SUV and a subcompact car can easily amount to $5,000, while the CAFE fine owed for selling a vehicle that gets 15 MPG instead of one that gets 30 MPG, is only $825.  If GM had simply paid the CAFE fines all along, rather than try to build small cars in the U.S. with UAW labor, it might not have run out of money in early 2009.

Also, if GM’s management had, early on, taken a principled stand against a law whose only purpose was to force it to produce vehicles on which it was doomed to lose money, it might have been possible to get CAFE repealed.  Ronald Reagan was viscerally opposed to CAFE.  Unfortunately, one of the “suicide” aspects to GM’s demise was that its weak and confused CEOs simply went along with a regulatory regime that they should have known would eventually destroy the company.

As it turned out, the world was not running out of oil in the 1970s.  After President Reagan decontrolled oil prices and Fed Chairman Paul Volcker began restoring a semblance of monetary stability, gasoline prices began to fall.  By 1998, the price of gasoline in 2011 dollars was $1.40/gallon, 19% lower than it was in 1965.

Unfortunately, the massive devaluation of the dollar under both Bush 43 and Obama created another speculative bubble in commodities, including oil.  In 2011, gasoline prices averaged $3.53/gallon.  This was 52% higher than 1998, and the highest on record.

To have a reasonable chance of long-term survival, GM needs to enjoy very high profitability for a sustained period.  It needs the big profits to help it extricate itself from the deep financial, product, and management hole that it is in.  To produce earnings of this magnitude, GM needs a booming U.S. economy (with annual vehicle sales of 18.0 million or greater), low gasoline prices, and the freedom to specialize in large vehicles.

There is some chance that a Romney presidency could produce these conditions.  There is no chance that a second Obama term would.  Under Obama, the next four years would be like the last four years—or worse.  Here’s why.

Barack Obama is committed to a “weak dollar” policy.  He reappointed our failing, flailing Fed Chairman, Ben Bernanke, and is giving implicit support to Bernanke’s “To infinity and beyond!” quantitative easing program.

Obama is also determined to force the auto industry to do the impossible: produce cars and trucks that average 54.5 MPG, while persuading Americans to buy them in sufficient numbers, and at sufficiently high prices, that companies like GM can make money.

In August, the EPA published GM’s death warrant, in the form of 1,994 pages of regulations pertaining to the implementation of Obama’s 54.5 MPG CAFE requirement.  The new rules include bizarre provisions intended to force electric cars on an unwilling public.  For example, during the 2017, 2018, and 2019 model years (but not before or after), each electric vehicle produced will be counted as two for the purposes of CAFE.

The new rules also provide that, five years from now, the government could, “…decide that the new rules are too difficult or costly, and change the game again.” (Automotive News, October 14, 2012)  In other words, Obama’s EPA has brought to the car industry what Obamacare imposed upon the healthcare industry: “government by waiver”.

The ability to issue waivers from ruinous regulations gives unaccountable bureaucrats the power of life and death over private companies.  This is just what progressives like Obama believe that government “experts” in Washington should have.  After all, they are smarter than we are, and, “It’s for our own good”.

“Engine Charlie” Wilson, who was GM’s CEO from 1946 to 1953, once said, “What’s good for America is good for General Motors, and vice-versa.”  He was right.

The reelection of Barack Obama would be very bad for General Motors.  In fact, it would be fatal.  If you want GM to survive, vote for Mitt Romney on November 6.

*$49.5 billion in cash, plus the equivalent of another $18.0 billion by allowing GM to preserve its tax loss carry forwards through bankruptcy (which is highly unusual).

**$40.7 billion in total stockholders equity, less “Goodwill” of $28.4 billion and “Intangible Assets” of $9.2 billion (as of June 30, 2012).