How Socialism Works in America: Remembering Obama’s GM Boondoggle

In 2009, the Obama administration bailed out General Motors (GM) with American taxpayer dollars, prompting Venezuela's socialist dictator Hugo Chavez to quip, “Obama has just nationalized nothing more and nothing less than General Motors.  Comrade Obama! Fidel [Castro], careful or we are going to end up to his right.”

The mainstream media buried this unflattering story to the best of their ability. 

What they did report breathlessly, however, was Obama’s assurance that he had “no interest” in nationalizing or “running GM.”

This was an example of media gaslighting the public before we began calling it that.  Many Americans knew what we were witnessing back then as well as Hugo Chavez, and that it was thinly-veiled socialism in action.

Obama was unquestionably lying about his government not having an interest in the production and sales directives of GM, and more on this in a moment.  But he was certainly uninterested in any of the company’s previous shareholders’ financial interest in GM.  

Unfortunately for those shareholders who owned millions of outstanding shares of GM before this government takeov… er, “restructuring,” all the nearly-worthless common and preferred stock was made immediately and totally worthless, and new GM stock was issued and largely purchased by the government with taxpayer dollars.

It was known as the “New GM,” or as critics called it, “Government Motors.”  Washington would own roughly 60-percent of this new government-funded automobile startup, Canada would own another 11 percent, and, adding insult to injury for stockholders, the United Auto Workers (UAW) union would own nearly 20 percent of the new company.  

This would be the same UAW that was arguably the greatest driver of the conditions leading to GM’s bankruptcy, which, in conjunction with the corrupt Democrat party machine in Detroit and Washington, negotiated insanely impractical wage, benefit, and pension contracts that crushed GM’s ability to be competitive against its non-unionized competition. 

According to Elon Musk, who knows a thing or two about the auto industry, the UAW “drove GM and Chrysler into bankruptcy and lost 200,000 jobs for people they were supposed to protect … UAW destroyed the once-great US auto industry & everyone knows it.” [sic]

One of the most notorious of the UAW’s requirements for employers like GM was the necessity of a “jobs bank,” where the company is required to pay laid-off workers nearly full wages to do nothing at all.

One would be hard pressed to find a better analogy to portray the relationship between the professed ideas of socialist central planners and the real-world outcomes of those ideas.  

The idea was that the government requiring a company to pay former workers nearly full pay for doing nothing at all would reduce the number of layoffs.  In reality, such price controls and government regulation reduced efficiency and created an unquestionable loss of integrity in a free-market-driven business model that necessitates – you guessed it – increased government intervention to “save” it.

That’s how then-Vice President Joe Biden often characterized what happened to GM in the 2012 presidential campaign, anyway.  Crediting his boss, he routinely said, “bin Laden is dead and General Motors is alive.”

But what did the government actually do with the GM bailout, besides make a multi-billion-dollar terrible investment on taxpayers’ behalf to get a political win and a campaign slogan for Democrats?

Obama may not have ever run Government Motors by crunching the numbers or helping to drive productivity.  But he did hire Brian Deese, an almost-grad from Yale Law who had “never set foot in an automotive assembly plant until he took on his nearly unseen role in remaking the auto industry,” says the New York Times.  

Most would recognize that putting an almost-lawyer in charge of a car manufacturing company is an idea so stupid that it could only be the result of government involvement.  I’m reminded of the scene in the HBO series Chernobyl, where a nuclear physicist investigating the cause of the reactor explosion reminds a skeptical Soviet apparatchik that before he was the Deputy Secretary of Belarus, his real-world experience lay in working at a shoe factory.

“To the workers of the world,” he mirthfully says as he raises a small glass of vodka, after reminding her that everything’s fine, and that he’s the one in charge.

But Obama also assured the American people that the federal government wouldn’t be asserting its majority shareholder rights over the “New GM,” except in “the most fundamental of corporate decisions.”  He certainly seemed to have interests about the types of products that GM would make in the future, though.

Just prior to nationaliz… I mean, “restructuring” GM, he told the press at the signing of a Presidential Memorandum on Fuel Efficiency Standards, that “over the next five years, we expect fuel efficiency standards in cars and light trucks to reach an average of 35.5 miles per gallon.”  He would use the government to “have a single standard in place,” which would create a “clear incentive to develop more efficient vehicles.”

Only 11 cars manufactured at that time met that standard, and yet on that day, he signed a memorandum directing the EPA’s Lisa Jackson to invent new fuel efficiency standards for medium- and heavy-duty trucks along with the previously-prescribed government standards for cars and light trucks.

That certainly doesn’t sound like someone who was only interested in the “most fundamental of corporate decisions” to make GM a profitable company.  It sounds very much like someone with a political agenda to force production and distribution of a very specific product that the American public didn’t want, and who was interested in using the power of the federal government as a cudgel to force a desired political outcome, absent the consent of either producers or consumers.

In the end, shareholders of an estimated 556 million outstanding shares of GM stock lost all their investment in an iconic American company that, in 2007, had a share price of above $40 and a market capitalization of over $22 billion.  Bad for shareholders of GM.

Then, after Democratic politicians at both the federal and local levels, in conjunction with corrupt union leadership, had thoroughly gutted the company by making it as inefficient and uncompetitive as possible via price controls and various other protectionist schemes, the United States Treasury swooped in and cancelled all shares held by previous investors, and swiftly invested roughly $50 billion in taxpayer money (previously allocated TARP money, along with substantial debt) to fundamentally transform the industry into what the Obama and his apparatchiks imagined the automobile company of the future should be.

The end result?  Officially, the Treasury reports that the investment was a $11.2 billion loss for American taxpayers. Bad for all of us, I guess.

But it worked out well for GM workers, right?  

Not exactly.  The number of GM factory workers was reduced from 90K to roughly 69K, and production facilities reduced from 47 to 31. In addition, the labor union signed new employment contracts, lowering management wages by nearly half, from $78 to $45 (those are hourly wages, 15 years ago, mind you), bringing these labor costs into alignment with other U.S. based, non-union auto manufacturing plants, like Toyota, Edwin Feulner at the Heritage Foundation writes.

This brings us to the most vital point of all.  Toyota exists as free-market competition to GM, and its priority is to be competitive in the marketplace.  Toyota manufactures and distributes much of its product in the United States, and it should be noted that it did not require a federal bailout of $50B in taxpayer capital to remain on life support as it downsized its workforce and production as GM did.  And taxpayers didn’t suffer an $11.2B loss as a result of Toyota’s business practices, either.  

In 1975, market capitalization for Toyota was $5.1 billion.  GM’s market capitalization was more than twice that amount.  

By 1985, Toyota had overtaken GM by roughly $3 billion, with nearly $15.5 billion in market capitalization.

On May 29, 2009, GM was trading at $0.75.  This was the final day of trading before declaring bankruptcy and being appropria… ahem, “restructured” by the federal government.  Toyota, on that same day, was trading at over $45 a share with a market capitalization of over $70 billion.

Today, Toyota directly employs 136K Americans.  It is in our country’s best interest that business-minded people at Toyota have more power in the auto industry than Barack Obama and the corrupt UAW.

To be clear, this is not about Toyota, and this is certainly not a criticism of GM’s current management or its current employees.  This is simply a matter of history and practical observation about appropriate incentives in a free market.  

We should be creating incentives to make it attractive for domestic and foreign investors companies to produce and sell products in America, and to employ Americans as our collective success is cultivated.  And while I’m not crazy about Trump’s insistence that tariffs are some sort of magical economic panacea, Donald Trump does, at least, seem to understand this instinctively and conveys the message well.  

“My message to every business in the world is very simple,” he says.  “Come make your product in America and we will give you among the lowest taxes of any nation on Earth.”  

That, at least, is a very welcome signal for America’s future when compared to his predecessor, Comrade Obama.   
 

Image: Screen shot from Obama White House video, via YouTube

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