An Ordinary General Motors Bankruptcy Would Have Been Too Risky for the American Economy

Howard Wial
Howard Wial Former Brookings Expert

June 3, 2009

Should the federal government have spent billions to prevent liquidation only to have GM eventually file for bankruptcy? In a three day Los Angeles Times ‘Dust Up’ series, Howard Wial, a Brookings scholar and Daniel J. Ikenson the associate director of the Cato Institute’s Center for Trade Policy Studies discuss the current state of General Motors. Read Daniel J. Ikenson’s prior comment An Earlier Bankruptcy Would have Saved Taxpayers Billions

Dan, I don’t share your faith that the national interest would have been better served if GM had gone through an ordinary bankruptcy process. Without government funding to keep GM in business during a bankruptcy, the automaker wouldn’t have been able to remain a going concern. GM would have been unable to obtain private loans to stay open during a long, drawn-out court proceeding. Its assets would eventually have been sold off piecemeal with auto suppliers throughout the nation forced to close as they lost GM business, and there most likely would not have been a “New GM” for a new owner to take over.

Although you paint a less devastating (but, I think, highly unrealistic) picture of what an ordinary bankruptcy could have looked like for GM, you seem to think its survival, or not, is a matter of national indifference. Here is where we disagree fundamentally. There are important national interests at stake in maintaining a healthy U.S. auto industry. It’s difficult to see how those interests could be as well served without GM.

We need a healthy U.S. auto industry to design and build the next generation of fuel-efficient cars. Additionally, auto suppliers are crucial to innovation in American manufacturing as a whole (not just in the auto industry), and U.S. auto production is a key part of our national defense infrastructure.

Destroying the productive capacity of our largest U.S. auto manufacturer and forcing thousands of suppliers out of business wouldn’t further these goals.

If GM had been liquidated, foreign-owned manufacturers in the U.S. might have picked up some of the slack. But they rely less heavily on U.S. suppliers than GM does, and they do most of their research and development in their home countries. Eventually, new U.S. car manufacturers might surface, but if we waited for that to happen without also keeping GM in business, the nation would have lost much of its auto production and design capacity and much of its manufacturing supply base.

I agree with you, Dan, that the government has chosen to travel down a risky path. I’ll address the political risks on Friday, but for now I want to point out that there is a risk in using the bankruptcy process to help resolve GM’s problems. Bankruptcy, even if prepackaged and managed by the federal government, is about cutting costs. But GM’s biggest problems aren’t costs — and certainly not labor costs, which for GM make up less than 10% of the cost of a car. GM’s big problems are quality and innovation. Bankruptcy courts aren’t set up to solve those problems.

Worse, overemphasizing costs may make it harder for a restructured GM to focus on quality and innovation. Will a cost-obsessed management close so many plants and lay off so many engineers, designers and production workers that the company loses its ability to make better and more innovative cars? I hope not, but I can’t be confident. Organizations that are good at cost-cutting usually aren’t good at innovating or getting better at what they do. Navigating between the poles of cost-cutting and innovation may be the biggest obstacle on GM’s road to recovery.