General Motors is making moves to sell some of its government-owned stock back to the private sector in what would be one of the largest initial public offerings (IPOs) in U.S. history. While this is certainly a positive sign, it should not be used as an example and an excuse for more government-sponsored bailouts. The truth is that restructuring an inefficient business model is turning around a company.
While the economic downturn and the credit crunch exacerbated GM’s problems, the automaker has been hampered by long-term problems such as high labor costs, legacy costs, and inefficient dealer networks. Restructuring these inefficient business operations was the critical part of GM’s turnaround.
Last year GM reduced its global labor force by over 10,000 and reduced domestic employers by 3,400—a 12 percent cut. By the end of this year, GM will cut its workforce by 21,000 hourly workers and reduce the number of production facilities from 47 to 34. Another agreement made in the government-financed bankruptcy was that GM would terminate its franchise contracts with hundreds of dealerships throughout the country.
Furthermore, in an effort to focus on more profitable brands, the automaker sold Saab to a Dutch sports car maker and Hummer to China’s Sichuan Tengzhong Heavy Industrial Machinery company. GM terminated the Saturn and Pontiac brands and will focus solely on Buick, Cadillac, Chevrolet, and GMC lines.
Working with the United Auto Workers (UAW) to curtail lavish benefits packages was, and still is, a difficult but essential process for GM. The company moved toward consumer-driven health care plans for both its salaried employees and retirees, which will help reduce some of the costs of a generous health care package. Part of the restructuring also changed the benefits available to laid-off workers. As part of the agreement for government support and to move toward bankruptcy, the UAW overwhelmingly (74 percent) approved other cost-saving concessions, including reductions in cost-of-living raises, bonuses, tuition assistance, and the amount of prescription drugs covered.
Discussing the GM IPO, The Washington Post’s Peter Whoriskey writes, “Now, whether the government can recoup its investment will be a test for some to see if the bailout was justified.”
But regardless of whether the taxpayers recover the handout or not, bailouts can set a disturbing precedent, resulting in even more private companies clamoring for government sponsorships. A number of companies today could make the case that their respective industry is vital for the economy and begin requesting billions of dollars in bailout subsidies. George Mason University economist Don Boudreaux further explains the trouble with bailouts:
The chief economic case against the bailout was not that huge infusions of taxpayer funds and special exemptions from bankruptcy rules could not make G.M. and Chrysler profitable. Of course they could. Instead, the heart of the case against the bailout is that it saps the life-blood of entrepreneurial capitalism. The bailout reinforces the debilitating precedent of protecting firms deemed “too big to fail.” Capital and other resources are thus kept glued by politics to familiar lines of production, thus impeding entrepreneurial initiative that would have otherwise redeployed these resources into newer, more-dynamic, and more productive industries.
The “success” of the bailout is all too easy to engineer and to see. The cost of the bailout—the industries, the jobs, and the outputs that are never created—is impossible to see, but nevertheless real.