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A public policy blog from AEI
During the 2012 election season, one of Joe Biden’s campaign applause lines was a version of this one he told a Labor Day crowd in downtown Detroit: “You want to know whether we’re better off? I’ve got a little bumper sticker for you: Osama bin Laden is dead and General Motors is alive.” And the crowd roared. They also loved it at the Democratic National Convention. The vice president can really deliver a line with gusto. He surely can.
But that “General Motors is alive” claim is looking like less of a major achievement these days. New GM CEO Mary Barra is testifying in Washington today about GM’s recall of 2.5 million small cars for faulty switches linked to 13 deaths. Bailing out a failing company is a lot easier than turning around a troubled company so it once again makes a quality product. Maybe President Obama knew this. I guarantee Mitt Romney knew this. As he wrote back in 2008: “With a bailout, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.”
Washington didn’t save GM, if by “GM” you mean an innovating, value-adding, self-sustaining automaker. That’s just not something government really knows how to do. Check out this analysis from a 2014 Harvard Business School working paper:
General Motors was once regarded as one of the best managed and most successful firms in the world, but between 1980 and 2009 its share of the U.S. market fell from 62.6% to 19.8%, and in 2009 the firm went bankrupt. In this paper we argue that the conventional explanation for this decline-namely high legacy labor and health care costs-is seriously incomplete, and that GM’s share collapsed for many of the same reasons that many of the other highly successful American firms of the 50s, 60s, and 70s were forced from the market, including a failure to understand the nature of the competition they faced and an inability to respond effectively once they did.
For decades, GM was a company in denial. And once management woke up, it had trouble changing. Incumbents firms are commonly unable to respond effectively to disruptive innovation from new competitors. Here is another version of the decline of Detroit from MIT:
Disruptive innovation has been credited as the strategy that led to Japan’s dramatic economic development after World War II. Japanese companies such as Nippon Steel, Toyota, Sony and Canon began by offering inexpensive products that were initially inferior in quality to those of their Western competitors. This allowed the Japanese companies to capture the low-end segment of the market. As the performance of their products improved, they began to move upmarket, into segments that allowed them more profitability. Eventually, they captured most of these segments and pushed their Western competitors to the very top of the market or completely out of it.
Last December, the Treasury Department sold the last bit of its GM stake. Government Motors, no more. GM was back. But not really. The Guardian’s Heidi Moore in a must-read piece:
Less than four months later, it seems foolish that any of GM’s fairy tale was believable to anyone. After the recalls and the estimates of driver deaths, all of that talk – of the reborn American automaker, of bets paid and dollars won – seems like a hollow spectacle. And it has to make us wonder: how much were US taxpayers and the government complicit in sustaining a company that researchers had already suggested was unable to compete in the modern automotive industry?
“It’s no ‘new GM’ if they’re doing this,” Dartmouth Tuck School of Business professor Paul A Argenti tells me. “If this has been hidden for 10 years, there’s nothing new about the company. It’s old-school GM. It’s stuff you can’t even imagine a company could do in the 21st century.”
Failure like this doesn’t come out of nowhere. It’s buried in a company’s corporate culture.
And there is not much a $50 billion government check can do about a dysfunctional corporate culture except temporarily paper over it. Look, a dynamic economy promotes free entry of new firms and easy exit of uncompetitive incumbents. Government is there to provide a safety net for workers, not for corporate entities. Being pro-business is not the same as being pro-market, pro-consumer, or pro-worker. Bailouts and barriers to entry — crony capitalism — saps an economy of its vigor. What’s good for Big Business is sometimes really bad for America.
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