Tuesday, February 24, 2009

Is "What's good for General Motors is good for the country" still true?

Charles Erwin Wilson was once asked if he could make a decision adverse to the interests of General Motors (when he was serving as Secretary of Defense while he was President of GM). Wilson answered affirmatively but added that he could not conceive of such a situation "because for years I thought what was good for the country was good for General Motors and vice versa".

While that ideology has held up in the past, that is clearly not the case today. And while people will point fingers as to what *exactly* went wrong (bad management, poor product development strategies, expensive union labour etc) the clear point here is that there isn't much right.

In this scenario, the capital markets are doing exactly what they are supposed to: weed out weak companies. When the demand for an industry's products decline (left shift in demand) the supply side must respond appropriately (supply shift left) in order for the industry to remain profitable. "Supply shift left" is a very fancy way of saying cutting capacity. This means closing factories and losing jobs in weaker companies.

Recently, GM has been looking for government assistance in various forms (loans etc). But I think this is incredibly unfair, especially to the car companies which are performing well producing products that people want.

The way that our economic model is supposed to work is that companies that can't survive on their own are supposed to die out. The only "stimulus" I think would be fair is one that isn't targeted to specific companies, but rather tax reduction stimulus for the industry in general (for instance, tax deductions for the R&D of fuel efficient cars - or with the drop in oil prices perhaps some other incentive program). That way, the industry is still bolstered, but not disadvantageously towards failing companies (and all companies including GM would benefit greatly and move towards products that people are more interested in buying - something good product development strategies would have taken care anyways of in a strong company).

If you want to approach this from a government spending side to generally soften the pain, I think the most appropriate avenue would be to spend on retraining for the jobs lost in the factories. It's not that I have an irrational dislike of factory workers or their unions, but if we can retrain them for jobs which society will benefit more from, then I wonder why we are not doing it?

Another spending option is improving municipal mass transit by purchasing more buses. Many of these companies have divisions which build larger class vehicles and would benefit from government spending in this area. Although this might erode your long term demand by creating a cheaper substitute for individual commuting, it is certainly in line with the overall tone of environmental sustainability and the goal of less reliance on foreign oil.


Anonymous said...

As an employee of a bus manufacturing company I obviously am in favour of government spending towards improved municipal mass transit.

As a division of a larger company which manufactures trucks and automobiles in addition to mass transit products our corporation as a whole is obviously adversely affected by the current economic situation. We (the mass transit branch) is currently in a place where we can at least try to support our other product lines and businesses while they are not doing as well.

Although you are correct that the increase in mass transit options have the possibility of lowering demand in the car market in the future I believe that car companies can come up with smarter solutions to win back buyers (more economical and fuel saving vehicles, etc).

As a citizen I am definitely for government spending for mass transit and find it lacking. BUT I do feel that the governments needs to take some care that the benefitting transit systems use these resources wisely and have feasible and plans that benefit their ridership in the future.

Joshua Wong said...

That's a good point. As a "general idea", the idea of government spending is attractive, especially for such "green" areas, but there is obviously a need (as with any government program) for a degree of oversight (think of the original bailout package and the seemingly careless allocation of bank bonuses).

I think a great example of the benefits of urban planning projects are similar to the Toronto Transit Commission's Transit City project which aims to bring more light rail into developing areas in Toronto.