Tuesday, June 02, 2009

Brooks on GM

David Brooks devotes his column to the GM bankruptcy, and... serves up a blog post. What do I mean by that? Blog posts have a tendency to focus on faults without offering solutions. There's nothing wrong with that, as such, but it's a type of analysis that in my opinion doesn't justify a six figure salary. (From a corporation that, to put it mildly, is struggling, yet still pays such large salaries for such tiny amounts of work....)

I'll note up front that I find the plan for GM to be highly problematic. I have sympathy for the argument that we need to "save" GM during the present financial crisis, as this is a really bad time to be losing a major employer, and potentially bankrupting tens of thousands of its employees, suppliers, and distributors. But I would much rather see GM somehow coming through this as an independent company. But with decades of bad management followed by a refusal to be honest, perhaps even with itself, about what it would take to get back to profitability, that may not have been possible even in better times.
First, the Obama plan will reduce the influence of commercial outsiders. The best place for fresh thinking could come from outside private investors. But the Obama plan rides roughshod over the current private investors and so discourages future investors.
That claim is silly on two levels. First, it's inevitable that when a company fails and has to be bailed out by the government, the influence of commercial outsiders is reduced - if commercial outsiders had their way, we would be looking at a Chapter 7 liquidation, not a Chapter 11 reorganization. What Brooks is in fact advocating is another round of lemon socialism - the taxpayer still dumps in tens of billions of dollars, but the benefit goes to the speculators who hoped that GM would not in fact go bankrupt, and the bondholders who (like Chrysler's) held out for far more money than any market force would justify.

Second, how is it Obama's fault that a investors shy away from a bankrupt company? Where was Brooks when other former titans went bankrupt, and shareholders were wiped out? That wasn't a problem? I suspect that Brooks doesn't care about the stockholders - that he perceives the "real" investors as bondholders (and possibly secured lenders) who are supposed to be better protected in bankruptcy even as shareholders are wiped out. Obama's condition for government funding to keep Chrysler and GM alive has been that shareholders accept more of the pain, so that the taxpayer (ideally) won't have to put even more billions into bailing out GM and Chrysler pensions. For people and organizations like Brooks, the Washington Post, and the AEI. Fierce champions of lemon socialism.

Brooks' lament, "Say farewell to a potentially powerful source of external commercial pressure"? How comical. GM's been publicly traded for how many decades? During that time, have its managers been punished or rewarded for their abysmal decisions? Have their salaries gone up or down? The fact is, the government intervention is necessary both because of a failure of investors to bring about change in GM, and because no private investor wants to take it on. The abysmal failure of the Cerberus plan to flip Chrysler, more than anything else, highlights the risks investors face. Fiat was willing to take Chrysler for $0, and nobody else even put in a bid. How much would the government have had to pay "private" investors to take over GM?
Second, the Obama plan entrenches the ancien rĂ©gime. The old C.E.O. is gone, but he’s been replaced by a veteran insider and similar executive coterie. Meanwhile, the U.A.W. has been given a bigger leadership role.
Here, it's not clear what Brooks wants. Obama should bring in managers who have no knowledge or experience with the auto industry? Is Brooks joining Friedman and Romney in their quest for a "magic man" CEO?

As for the unions, Brooks sputters that they did their job really well, negotiating great pay and retirement packages for their members. Sorry, David, that's not a fault of the union - it's another example of incompetence by GM management, and when Brooks laments that the union is "not an organization that represents fundamental cultural change", when was that ever the job of a union? Brooks conveniently elides the fact that the union's stake represents funding for future retiree benefits, and the conveyance of stock falls a great deal short of the cash they were originally supposed to get for that purpose.

But in his knee-jerk contempt for unions, Brooks also forgets that the nature of the union-employer relationship in this country comes in no small part from a management-driven legislative agenda that has weakened unions, and an associated management and media culture where it's easier (and fashionable) to blame unions for the failures of management. (Hello, Mr. Brooks.) Don't get me wrong - the union culture played a big role in the failure of the Big 3 to create a culture of quality and increased their cost of operation. But going back to Mitt Romney's anecdote:
The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, “Getting more and more pay for less and less work is a dead-end street.”
In other words, the UAW came to the Big 3 and said, "Our current path is a dead-end - let's find a way to work together," and Big 3 management replied, "No." And management still speaks in the hypothetical about forming an effective union-management relationship. Go figure. And when GM and the unions tried to form a new kind of partnership for Saturn, it wasn't long before GM management decided that the road was too difficult and to put Saturn on the slow road to failure.
Third, the Obama approach reduces the fear that impels change.
That's a platitude. Further, what type of "fear" does Brooks imagine is required? If losing your job, your stock options, your stock investments, etc., doesn't inspire enough "fear" to bring about change, what will? Remembering also that the alternative to the bail-out is dissolution, is it Brooks' contention that by not allowing GM to completely fail other companies will say, "That didn't look so bad - maybe we should go bankrupt!" Because a dead GM would be... dead, not something that would change in response to fear.

Brooks suggests that GM's new management won't have to fear liquidation, because "Democrats" will continually bail them out. This supposition is premised upon... nothing. Well, that's not fair. It's premised upon Brooks' assumptions about Democrats... I might be charitable and assume that he would say "Republicans" if this were a Republican bail-out, subsidy, or bad economic choice, but it's safe to say from Brooks' history that in such a context he would instead refer to "government" and the philosophy would likely be "we can afford this".

In fairness, the future is not known and GM's probably a long way from stability, let alone profitability. But I fully expect the Obama Administration to get out of GM as quickly as it reasonably can. I don't know if that means that GM's management will succeed, allowing the government to sell its shares on the stock market, or if GM doesn't prove viable and will end up being sold off as a whole or in parts. But I don't share Brooks' assumption that the government is an owner for the long haul. I suspect Brooks doesn't either, but he's pandering to the "Obama the Socialist" faction of the Republican Party.
Fourth, the Obama plan dilutes the company’s focus. Instead of thinking obsessively about profitability and quality, G.M. will also have to meet the administration’s environmental goals.
I've long stated my opinion on this - the playing field should be level. To the extent that the administration wants to pursue policy goals that press auto makers to go in one direction or another, they should apply the same policies to all manufacturers. The lesson of the marketplace that should have been drawn from the collapse of GM and Chrysler is not the Brooks model that "if you alienate hedge fund investors, institutional banks and bondholders, you'll flounder." It's "If you alienate consumers by not offering vehicles that suit their wants and needs, you'll collapse." Brooks is correct that there will be a great deal of pressure on the "new" GM to "built the right cars" as opposed to those that are likely to sell well. You can quip that this wouldn't actually distinguish "new" GM from the "old" version that overspent on its development of the overpriced Chevy Volt - that it's a distinction without a difference. But really, to make GM viable the new company has to sell vehicles people want to buy.
Fifth, G.M.’s executives and unions now have an incentive to see Washington as a prime revenue center.... In the years ahead, G.M.’s management will have a strong incentive to spend time in Washington, urging the company’s owner, the federal government, to issue laws to help it against Ford and Honda.
This is a distinction without a difference. Big 3 lobbying coupled with Congressional complacency and acquiescence to their demands played a big role in why foreign automakers fared better when gas prices spiked. Suddenly, many of the successful lobbying efforts - tariffs on foreign trucks that encouraged foreign companies to produce cars, treating SUV's as trucks instead of passenger vehicles for CAFE compliance, preventing changes in CAFE standards that would have forced greater fuel efficiency, etc. - made the Big 3 less competitive in a world of $4+/gallon gas (a world to which we will return). When exactly does Brooks believe that domestic auto manufacturers stopped lobbying?
Sixth, the new plan will create an ever-thickening set of relationships between G.M.’s new owners — in government, management and unions. These thickening bonds between public and private bureaucrats will fundamentally alter the corporate culture, and not for the better.
Ah, yes. Because the only thing more destructive to a company than having management and a union with interests that diverge is to create a set of common interests in bringing about profitability and increasing stock value.

Further, what in the world is he talking about? Does he want to bring European or Japanese labor laws to this nation, under the belief that U.S. labor organization laws are too strong? Does he believe that the German government's bailout of Opel proves that the German government would never bail out a domestic auto manufacturer? Is he ignorant of the fact that, for example, the German state of Lower Saxony owns about 20% of VW?

Beyond that, and without questioning that some companies founded with significant public investment survive almost exclusively on continued public investment, and that others demonstrate better growth and profitability once partially or fully privatized, we're back to the earlier point. If market forces were so perfect, given the comparative weakness of U.S. unions, the comparative lack of regulation in the U.S., and the supposed primacy of the U.S. stock market and its financial institutions, why didn't market forces long ago force GM to become lean, mean and profitable? There's nothing wrong with taking note of the dangers of government ownership, but this is a context where it's absurd to be worshipping at the altar of the markets.

1 comment:

  1. GM has been the worst of the Big 3 on labor relations since I was a young thing taking classes on labor relations. You know it's scary when your labor-law seminar teacher (a former NLRB official who is far from pro-union) refers to GM's approach to labor relations as "infantile".