Long-term, Romney's GM plan would have been better

By Michael Busler

Vice President Biden has proudly proclaimed that "Bin Laden is dead and General Motors is alive." That may be true for now, but GM's life remains in plenty of danger.

GM was on the verge of bankruptcy in 2009. President Obama noted that if GM went out of business, hundreds of thousands of jobs would be lost. GM employs about 200,000 people. And since companies that supply parts to GM would also either close or dramatically reduce production, the ripple effect would cause another few hundred thousand jobs to be lost.

So Obama committed about $80 billion of taxpayers' money to save GM. Although much has been repaid, the final price tag for taxpayers will be about $25 billion. But if it keeps GM in business, the president has said, it was a worthwhile investment for taxpayers.

Was it?

Republican candidate Mitt Romney says he would have allowed GM to file for bankruptcy protection without any taxpayer assistance. He has been ridiculed for this position, and indeed it is likely to result in Obama's winning the key battleground states of Ohio and Michigan. But the reality is that Romney's position was more likely to result in long-term health for GM and the saving of more jobs here in the United States.

GM was a bankrupt firm because its cash flow was not sufficient to cover expenses. The reasons for this were that (1) the great recession reduced demand for cars, so GM sold far fewer; and (2) expenses were far too high, primarily because GM's labor costs were about $80 per hour, while other auto companies had labor costs of about $40 per hour.

As a condition for the funding that the president provided, GM had to reduce labor costs to the $60-per-hour range and protect the retirement packages of its employees. It did this through a prenegotiated bankruptcy filing approved by Obama and eventually the bankruptcy court. While this temporarily saved GM, it probably won't work in the long term.

The reason will be that GM's labor costs are still too high, and the company makes cars that consumers do not really want. We see today that, even with an occasionally good rate of monthly sales, the long-term prospects remain dim, as the company's market share has dropped from a high of 48 percent to less than 18 percent today. Within the next year or so, GM will likely face another crisis that could threaten its existence.

Ironically, had Obama not intervened, GM would have a greater chance of future success. Romney, an experienced businessman who has successfully dealt with situations like GM's in the past, had a better plan. By allowing GM to seek bankruptcy protection free of taxpayer intervention, he would have forced the company to reorganize in a manner that would increase its chances of future success, in contrast to Obama's approach, which limited their options.

Romney's plan would have had the labor contracts renegotiated and approved solely by the bankruptcy court based on economic rather than political considerations. The GM that emerged from bankruptcy would have raised capital in the private sector, where stockholders (owners) would have insisted that GM use its resources to build cars that consumers want, rather than cars the government wants and that few people actually purchased. The Chevy Volt, for instance, is an electric car approved for production and subsidized by the Obama administration. Unfortunately, consumers aren't buying it, and production has been halted.

While Obama's actions appear to have saved GM, the reality is that he simply kicked the real bankruptcy down the road. The jobs that Obama claims to have saved are mostly overseas, as about 140,000 of the 200,000 GM employees work outside of the United States. And it is likely that the taxpayers will lose about $25 billion from this failed bailout.

Romney would have saved the taxpayers $25 billion by allowing GM to go through the same bankruptcy that any other firm faces when it is mismanaged and the economy is weak. The result would have been a leaner GM, with more reasonable labor costs and a line of products that consumers actually want to buy. And there would be a brighter future.