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Ward of the State By: James Manzi
New York Post | Wednesday, June 03, 2009


In declaring bankruptcy, General Motors appears to have finally accepted reality: In terms of employment, America is no longer in the transition to a services economy from a manufacturing economy; it has arrived. And GM is just getting with the program.

The ongoing stay of execution for America's automakers represents an attempt to resist this inevitability.

So, despite its glorious past, the entire Detroit ecosystem (in addition to GM, that includes Ford, Chrysler and their suppliers and dealers) is either going to have to go through the functional equivalent of bankruptcy or become a ward of the state.

Such large economic transformations are always painful -- productivity gains are great for consumers, but not so wonderful for employees who have trouble moving or learning new skills -- and it's natural for industries, communities and individuals to attempt to use the political process to protect the status quo.

In the end, though, a healthy political process will work to prevent this dynamic from choking off economic progress.

One sign of health is that all the talk about how the auto industry is unique and that bankruptcy would either be impossible or cataclysmic has gone by the wayside.

In the meantime, though, American taxpayers have forked over tens of billions of dollars to keep the jalopy going for the past six months.

What have taxpayers gotten in return for all that money? Not a whole lot. In certain ways, we are actually far worse off than if we had simply let nature take its course in December.

The US government is now the majority owner of the nation's largest car company. The government has chosen GM's CEO, Fritz Henderson, and will directly select numerous board members. It will be all but impossible for Congress and various regulatory agencies to avoid meddling with detailed operating decisions.

There is already enormous pressure on GM to abandon the vehicles that make it money -- gas-guzzling SUVs and pick-ups -- in order to focus on fuel-efficient cars that lose money. I doubt we'll see many production facilities sent offshore, even if this would make economic sense for GM's shareholders.

This is a terrible harbinger for the US economy, especially when combined with the Obama administration's apparently heavy-handed negotiating tactics in favor of Chrysler's unionized employees at the expense of bondholders.

We appear to be headed for European-style industrial policy circa 1975, with a complicated set of favors being traded between elected officials, government bureaucrats and corporate bureaucrats in semi-private companies.

Thus, the government will offer below-market-rate loans, but companies won't be able to send production offshore. The United States will offer billions of dollars in special tax subsidies for clean-energy research, but it'll also pass laws preventing automakers from selling profitable cars. And on and on.

Defending deregulation and free markets is deeply contrarian right now, but it needs to be done. The current congressional and White House leadership is walking away from the corporate independence -- including unfettered decision-making by business leaders and relatively unrestricted flow of capital -- that has enabled American industry to remain competitive in the modern environment.

For GM, the right way forward is real bankruptcy that allows the company's assets to be redeployed in a truly free economy. That requires a change in ownership of assets from one set of private entities to another, plus relief from pre-existing contracts.

The open question is whether the federal government, now that it owns the asset, will ever really relinquish control.


James Manzi is a senior fellow at the Manhattan Institute.


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