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Government Motors Is Dead. Long Live Government Motors

Justice Litle, Editorial Director, Taipan Publishing Group

The once-official mouthpiece of the former Soviet Union says America has gone Marxist. The General Motors saga makes for a good case in point. Does the charge hold up? You decide...

It must be said, that like the breaking of a great dam, the American decent [sic] into Marxism is happening with breath taking speed...

– Pravda Online, “American capitalism gone with a whimper”

Pravda is the Russian word for “truth.” It is also the name of Russia’s most famous daily newspaper, with roots dating back to 1908.

Boris Yeltsin shut down the original Pravda in 1991. It perhaps seemed fitting that, after 79 years as the official organ of the Central Committee of the Communist Party, the voice of the Soviet Union would die with the Soviet Union.

But by the end of the ‘90s, the paper had resurrected itself in multiple new forms – including a tabloid version and an online version – thanks to the tenacity of former Pravda employees.

The irony is exquisite, don’t you think? At a time when the American free press is unabashedly fawning in its coverage of the White House and the overall handling of the financial crisis, a former Soviet-era broadsheet sees fit to lecture the United States on its embrace of Marxism.

“Americans know more about their favorite TV dramas then [sic] the drama in DC that directly affects their lives,” thunders Pravda Online. “They care more for their ‘right’ to choke down a McDonalds burger or a BurgerKing burger than for their constitutional rights.” Oh, ouch...

But does the “Marxist” charge (see opening quote) really have merit? Or is it just a combination of sour grapes and hot air?

In answering that question, the General Motors saga – for all intensive purposes now Government Motors – seems a fair focal point.

The Origin of Government Motors

GM was once seen as a bastion of pride... a standard bearer of quality (if you can believe it), and even a hotbed of innovation... a shining example of all that was good and noble in the U.S. free market system. For a very long time, what was good for General Motors was, indeed, good for America.

The Beach Boys once sang songs about GM cars. Can you imagine the songs that would be sung now?

For nearly eight decades, GM was the largest carmaker in America (and thus the world). But for the last three of those decades at least, GM was on a trudging death march... a long, slow, denial-fueled slide into stagnation and decay.

So what happened?

The way to think about this, in your humble editor’s opinion, is to recognize that the transformation from “General Motors” into “Government Motors” actually began a long time ago. It has been a long, long road. This whirlwind of cram downs and rule changes and bailout billions is merely the coup de grâce.

In many ways, General Motors wound up hostage to its own good fortune. At the height of its power, the iconic company was so dominant and so profitable that everyone in America imagined GM to be an unstoppable juggernaut.

But the bigger and bulkier GM got, the more the company was viewed as a cash cow... no longer so much a lean, mean free market enterprise as a sprawling American institution, rich enough to hand out freebies to everyone – or at least anyone smart enough to get their hand in the till.

It was this vision of never-ending profits and unchallenged dominance that cost General Motors dearly. The GM executives who made disastrous long-term deals with the unions in the ‘50s and ‘60s no doubt imagined the company would be just fine. Near the peak of its power, it was all but impossible to imagine a time when times would not be so flush.

A One-Way Participation...

Is the story starting to sound familiar yet?

The more profitable and dominant GM became, the more pressure the company faced (from union members and politicians alike) to “share the wealth.” The union members ultimately made it all but impossible to shut down production or close factories (other than at enormous cost). Politicians did the same thing at the state and local level, making it all but impossible to close down dealerships.

The trouble with all this wealth-sharing is that the whole thing was a one-way street.

In a more functional, two-way relationship, there is a recognition of the difference between good times and bad times. Like in a business partnership, for example. When times are good, the partners in the business do well. But when times are hard, the partners in the business do poorly. They share the pain of hardship.

General Motors had no ability to share the pain of hardship with its “partners” – the unions, dealers, politicians and the like who all lined up for a piece of the juggernaut. In this GM was like a car that had no reverse gear. The political costs of doing business could be ratcheted up, but they could not be ratcheted down again.

And so “General Motors” really started becoming “Government Motors” long before the handouts came, because this is exactly how governments work too. When times are prosperous, people want their government to be generous. When times are hard, people want their governments to be even more generous. There is no reverse gear.

Of course, someone has to pay for all that largesse. But as long as the check writers are in the minority, the majority can have its merry way. (Perhaps this is why Thomas Jefferson is reputed to have said, “A democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine.”)

...And a Long-Time Transformation

So the first step in the transformation of GM was the cultural entrenchment of largesse – treating the company as if it were an ever-expanding arm of government, rather than a free market enterprise that needed to retain the ability to bend and flex with the times.

The second step came when GM lost its way, and the official government (Uncle Sam) found increasing need to step in and help.

Longtime car buffs argue that GM’s precipitous decline really began in the 1980s, with CEO Roger Smith. A reorganization gone badly wrong, combined with tough new competition from the Japanese, led to utter disaster. Quality went into freefall even as car plants began to idle. “By 1989,” BusinessWeek reports, “GM was losing more than $2,000 on every car it built...”

Internally, GM’s bureaucratic corporate culture was another disaster. In an internal 1988 memo, one insider complained that “our culture discourages open, frank debate... there exists a clear perception among the rank and file of GM personnel that management does not receive bad news well… our most serious problem pertains to organization and culture."

As BusinessWeek further reports, former GM board member Ross Perot complained that same year that “At GM the stress is not on getting results – on winning – but on bureaucracy, on conforming to the GM System. You get to the top of General Motors not by doing something but by not making a mistake."

More than 20 years ago, General Motors already looked, felt and acted like a de facto Detroit wing of the U.S. government in all the ways that mattered – the shoddy quality of its products, the epic scale of its largesse, and the ham-fisted way it was run.

Maybe it was inevitable, then, that “Government Motors” would finally be made official... and thus sadly fitting for Uncle Sam to take an outright 60% stake (with the unions getting a fair chunk of the rest).

If so, perhaps we should think of this event not as a death, but a birth. Maybe GM is like some horrible moth, breaking out of its multi-decade chrysalis stage at long last. Government Motors is dead... long live Government Motors.

More of the Same

Back in December 2008, the not-yet-defenestrated Rick Wagoner predicted a GM bankruptcy could cost taxpayers as much as $100 billion. As it turns out, Wagoner is on track to be right. Unless, of course, that number turns out to be conservative – which it most likely will, when all the hidden costs are factored in.

In total, Washington will be lending a cool $49.5 billion to the reorganized GM – a fresh $30.1B on top of the $19.4B already doled out. Those sums will then convert into the fore mentioned 60% stake. The governments of Canada and Ontario are also pitching in another $9.5 billion or so.

In its bankruptcy filing, GM listed $172.8 billion worth of debts (makes you whistle through your teeth, don’t it?) and more than 100,000 creditors. The fallen icon will be kicked out of the Dow next week.

So will the new Government Motors be a success – a leaner, meaner, more responsive car company as Washington hopes? Will the new GM be able to move with “pure, unadulterated speed” as interim CEO Fritz Henderson suggests?

Don’t hold your breath.

As Einstein more or less opined, one cannot solve a problem with the same consciousness that created it. Unfortunately, since GM has been sprawled face down in the bureaucratic ditch for decades now, changing the company’s political ownership status from “unofficial” to “official” is not likely to have much effect.

Real, honest-to-God businesses are beholden to profit-seeking ownership interests, not largesse-seeking ownership interests. That’s why it is such a bad deal letting the government own much of anything. As soon as an asset or a resource becomes public property, it instantly becomes fair game for all manner of special interests and beady-eyed schemers to exploit.

In that light, the “new” GM is going to be “owned” by a bewildering array of special interests – from union members, to environmentalists, to protectionists, to countless local interests at the state and federal level in multiple jurisdictions (and not just in the U.S., but Canada to boot). How many of those new owners can we expect to be worried about actual profits, versus carving out the biggest slice of the pie they can get? Hmm...

Oh, and About That Marxism Charge...

So, are the Pravda cynics right? Is America descending into Marxism at breathtaking speed, with General Motors serving as “Exhibit A” for the prosecution’s case?

As with all our most entertaining discussions, I’ll let you be the jury on this one. But before you answer, quick – what’s the most famous thing Karl Marx ever said?

For most of us, one of two phrases immediately comes to mind. First: “Workers of the world, unite!” And second: “From each according to his abilities, to each according to his needs.”

The first of those statements – on workers uniting – is noble in its own way. Despite appearances to the contrary, your humble editor is not 100% anti-union. The drive for union representation certainly made sense in the early days of the industrial revolution, when children were put to work as labor slaves and workers were generally exploited within an inch of their lives.

The real trouble came later, when the tables turned so thoroughly that the exploited became the exploiters. Union power overstepping its bounds, i.e. “Workers Unite!” taken too far, is one of the main threads of the GM story for the second half of the 20th century. Do some unions exist for good reason and advance their causes justly, even today? Of course. At the same time, have the unions – particularly the auto unions – covered themselves in glory these past fifty years? I don’t think so.

The second statement – “from each according to his abilities, to each according to his needs” – is far more frightening than noble. You can’t have a system that allocates the “from” and the “to” without putting a small circle of men (or women) in power... and to really do it right they need absolute power. Via Washington’s Byzantine labyrinth of smoke and mirrors, where much of the real power is wielded out of sight and behind closed doors, some would argue we are headed in that direction already.

Others would argue that Marxism is the “harder” form of socialism, in which participation goes from small-scale and voluntary to large-scale and coerced – and further protest that we are nowhere near that, as both the media and the public at large are in favor of Washington’s latest moves. While distasteful in the extreme, these devil’s advocates might say, the GM saga is necessary for America’s healing.

What say ye? Is such talk overblown, or is there real reason to fear the direction in which General Motors (and America) is headed?

http://www.taipanpublishinggroup.com/taipan-daily-060309.html

About the Author

Justice Litle is Editorial Director for Taipan Publishing Group. He is also a regular contributor to Taipan Daily, a free investing and trading e-letter, editor of Taipan's Safe Haven Investor and Justice Litle’s Macro Trader.

If his name sounds familiar, it's because Justice is regarded as one of the top trading experts in the world. While pursuing a Ph.D. at Oxford University in England, Justice began his financial adventure that includes researching and investing in trading and commodities.

Because of his trading expertise, Justice has been quoted in The Wall Street Journal... written multiple articles for Futures Magazine... given regular market commentary to the likes of Reuters and Dow Jones and contributed to the book Trend Following. In fact, under his guidance, Outstanding Investments, a world-class natural resource newsletter delivered top-rated performance two years in a row.

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