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Trump v. General Motors
If President Donald J. Trump is to be believed, General Motors CEO Mary Barra committed a high crime when she announced recently that GM will close up to seven plants in the United States and Canada. One of those plants will be its Lordstown, Ohio plant, which now employs about 1,600 workers, including 1,435 hourly workers, when it ceases production in 2019 of the slow-selling Chevrolet Cruze. In total, GM plans to lay off over 14,000 hourly and salaried workers worldwide, including 25% of the company’s salaried executives. Trump had no patience for Barra’s considered view that the rapid transformation in the automotive market requires, as she put it, “a highly agile, resilient and profitable GM to stay in front of changing market conditions and customer preferences to position our company for long-term success.”
Elsewhere, the responses to Barra’s announcement were more or less as expected. The stock market was pleased, as the price of GM shares soared by as much as 7.9 percent. Market judgments are a solid reflection of the worth of such long-term corporate planning. In contrast, Terry Dittes of the United Auto Worker denounced “this callous decision,” which put “profits before the working families of this country,” a stock union refrain in all collective bargaining negotiations. North of the border, Jerry Dias, the head of the Canadian union, Unifor, promised “one hell of a fight here in Canada” without any clear knowledge of what deal might emerge when GM’s Canadian labor contracts are renegotiated in 2020.
Worst of all, and true to form, President Trump bellowed that GM had “better put something else” in Ohio to replace the lost Lordstown plant. These were not idle words, for Trump made all too clear his intention to use the full power of the presidency to make GM pay for its supposed sins. His thunderous tweet announced that he was “very disappointed” with GM, which the United States had “saved” through an ill-designed 2009 bailout, and said that we “are now looking at cutting all GM subsidies.” In principle, of course, these subsidies should be eliminated for all manufacturers independently of GM’s announcement. Prominent Ohio officials of both parties, including Senators Sherrod Brown, Rob Portman, and Governor John Kasich, chimed in to echo Trump’s criticisms. Sure enough, the price of GM shares adjusted downward in response to this constellation of political threats, none of which should have been made in the first place.
At this point, the only question that is really worth asking is whether everyone in politics has lost their senses. At the most basic level, the president once again shows his utter lack of understanding as to how a market economy does and should work. The first principle is that the government has a restricted role, which is to define property rights and enforce contracts. But when it comes to corporate and social arrangements of private firms, it should not mandate, or even try to influence, those business decisions, especially for short-term political advantage. The first reason for this hands-off policy is that the president, notwithstanding his high political position, does not have a clue as to why and when GM makes its particular decisions. Five minutes of political reflex is not a substitute for thousands of hours of hard work and analysis.
GM is typical of many complex organizations that consist of many interlocking parts often moving in tension with one another. The president may think that it is easy for GM to just cut jobs in Mexico or China before daring to do the same in the United States. But it is highly unlikely that the tasks undertaken by GM are fungible across different plants. Shutting down profitable facilities is costly. Supply contracts and leases may have to be breached or renegotiated, straining business relationships overseas and creating reputational losses in foreign markets where, after all, many American-made cars are sold. There are likely to be parallel costs in adapting existing, and often aging, facilities in the United States or Canada for their new purposes. Nor do plants stand in splendid isolation. Instead, they are parts of supply chains, usually international in nature, whose work flow can easily be disrupted by relocating any of their constituent parts.
Politically, the multinational nature of modern business always suffers when today’s angry presidential threats can be turned into higher tariffs tomorrow. Sadly, with President Trump, these threats are always credible because he does not understand their huge threat to global prosperity. He falsely boasts that tariffs do much to fill the “coffers” of the American treasury, which makes it appear as if they are the goose that lays the golden egg. On this view, the more tariffs, the better. He then compounds error with the silly claim that companies can avoid tariffs by manufacturing objects in the United States, even if the same products can be built better and cheaper overseas. Thus, he never explains how we will “just make our Country richer than ever before!” even as domestic consumers and suppliers—including those for foreign markets—are forced to pay more for goods that are made more efficiently elsewhere.
Worse still, tariffs induce all too many collateral responses in addition to their dutiful payment. When we impose tariffs on the Chinese, they do the same for our agricultural products, so the lost sales from rotten potatoes have a negative effect on the cash balances payable the United States treasury: money that comes in at one end of the trough spills out at the other. Trade wars are, moreover, difficult to confine to isolated products and limited responses. Merely the interim uncertainty as to whether the United States and China will come together at the last second negates a good deal of the success that comes from making comprehensive trade deals in the first place. Worse still, as matters evolve, other nations will avoid doing business with the United States, which will further reduce those revenues. It is in any case difficult to make a balanced assessment of any policy in angry tweets. Subliminally, Trump has gotten the message, given his welcome recent decision to shelve for ninety days his threat to raise tariffs on Chinese goods to 25 percent.
Nor is the impact of tweets and tariffs confined to the manufacturing of existing products by existing facilities. As Barra noted, the automobile industry is in the midst of a major technological revolution with the advent of driverless cars. Perhaps artificial intelligence in this area is overhyped. But no central authority should decide that question for all firms, when each uses distinctive technologies and business plans. Within a firm, it is often imperative to diversify research approaches in a given area before choosing which line or lines of businesses ultimately to pursue. All of this effort takes nimble management, excess cash, and solid lines of credit. One reason for GM to extricate itself from its failing lines is to free up the resources and flexibility to try multiple new strategies, some of which are bound to fail. And the last thing that we need is a loudmouth president seeking to sink billions of dollars of capital investment into obsolete technologies.
Worse still, presidential bullying is not limited by product line. Today it is GM cars. In August, Trump was for boycotting Harley Davidson motorcycles, whose own business woes were ironically attributable to Trump’s tariff wars. He has already attacked the pharmaceutical industry on drug prices. Oil and gas could be next. The genius of a market system is that it uses decentralized knowledge to make key decisions on all matters that pertain to product selection and production. In this age of incipient socialism, it is worth recalling that our populist president could find that his successors in office use similar tactics, some of which dovetail with the president’s economic populism, for socialist ends.
Most dangerous in this regard is the endless call for good jobs for all American workers, which from the progressive left could translate guaranteed employment, high minimum wages, compulsory unionization, early retirement, and much more. Such calls from any quarter are always misconceived. The ideal social objective should never be to create jobs as such. It should be to let businesses create jobs that produce more in social value than the cost of the labor that goes into the job. As the old adage in the garment industry had it, “you don’t make up in volume what you lose on each piece.” Putting government subsidies into the political hopper reduces the likelihood of achieving that objective. Make-work and featherbedding are dangerous first steps down the wrong path. But if one president is allowed to disrupt markets in the international sphere, why can’t the next president do so domestically as well? Sadly, the harmful effects of subsidies and restraints on trade only compound one other. To keep the economy humming, remember that these are the twin evils in labor markets, no matter which president is at the helm.
© 2018 by the Board of Trustees of Leland Stanford Junior University
Published in Economics, Law
I’m just going to take a moment to enjoy that phrase.
When car companies close facilities, I like to take a look at how old they are compared to the rest of the company’s facilities. It seems to me that if a facility is really old it suggests that it’s a good candidate for replacement by a network of smaller, more easily retooled facilities.
The Oshawa plant, for example, is currently GM’s oldest. It first opened way back in 1907 and just grew and grew and grew over the years. Making changes to that sort of monster-sized facility surely ain’t easy.
Lordstown opened in 1966. That means it’s far from being one of the oldest, but at the same time it ain’t one of the newest either.
GM put itself in this spot by accepting the government bailout during the twilight of George W’s administration, instead of restructuring via bankruptcy. My heart does not bleed for them, now that their Faustian bargain has come back to bite them.
Speaking as a taxpayer who contributed to GM having multiple opportunities to thrive, I have nothing good to say about “too big to fail.” GM continues to meet my lowest expectations.
Taxpayer and mildly chingered vulture bond holder* of the old GM speaking. The company seems to be doing something reasonable here. The old GM would have tried to make up their losses with volume**. “Just because no one wants to buy these things is no reason not to make them” was a motto or something. Or it would have crumpled at the first harsh word, which they so far haven’t. As someone said at the time, “GM has been trying their best to go bankrupt for 40 years. It’s just that they aren’t any good at that either.” I’d say the new company isn’t your father’s Oldsmobile if it weren’t so damned ironic.
*I have no sympathy for myself. Fed twisting of the bankruptcy to take money out of the pockets of the moms and pops who bought the retail bonds at par and held on to the bitter end is another story. And an unreported one AFAIK. “Chingered” is border slang for exactly what you think it is.
**As understand it, they are actually realizing the folly of low-margin items in a cyclical business with the labor contracts they have. Ahead of time for once.
Michael above is absolutely right. GM made a deal with the managed economy socialist Devil with it’s mangled politically driven billion dollar bailout and payoff to the Auto Unions, so now it’s kinda tough to ask for sympathy and cry about how the President is abusing the “free market”. I know it may be foolish to think this way in our established overwhelmingly Crony Capitalist/Socialist way of doing things now but the President, as is his way, is just asking for a realistic return on our government’s investment.We put in billions so now Trump expects a return over and above the normal free market operating rates to justify that investment.
Somehow, Toyota and Honda manage to make a profit on low margin items.
Epstein as usual is dead right. And he’s right we’ve lost our minds, but we lost them some time ago with GM. It should have gone bankrupt, some company would have bought it and, maybe, run it better. Before that they should have dumped their unions and their incompetent dishonest management. It was just too hard for them to come back from half a century of near monopoly power. The government should end all subsidies then shut up and let management and stockholders figure it out.
Preach it, man! End corporate welfare.
One difference is that Honda and Toyota’s US facilities are all less than 40 years old. Honda’s oldest, a motorcycle factory in Ohio, opened in 1979. Toyota’s oldest, in Kentucky, opened in 1986. We’ll have to wait and see if they keep those facilities running once they start hitting the half-century mark.
(About 33% of GM factories are over 50 years old. About 15% are over 75 years old.)
https://en.wikipedia.org/wiki/List_of_Honda_facilities#United_States
https://en.wikipedia.org/wiki/List_of_Toyota_manufacturing_facilities#United_States
https://en.wikipedia.org/wiki/List_of_General_Motors_factories
It’s a difference, but how important? My own thought is it’s down about 9 on a list of top 10 problems GM needs to address.
This is a discussion already had on Ricochet. I’ll sum up my feelings quickly. GM sucks. They make a crappy product with a few exceptions and they are crony blood suckers…with few exceptions as well. President Trump is busting his butt to rebuild the strongest manufacturing economy in the world. He is being hugely successful, with few exceptions. GM is one of those exceptions and he is understandably pissed. As is his wont, Trump let GM know what he thinks. I do not blame him.
Here’s an interesting take (emphasis mine):
https://www.macdonaldlaurier.ca/shutting-oshawa-gm-inevitable-cross-toronto-star
Trump promised the “forgotten masses” that they’d be forgotten no longer. And he was elected. His response to GM boils down to this: he’s keeping his promises.
I don’t know much about the complexities of multinational economics, but I know that if the elites know what’s good for them they will pay more attention to the American middle class and working class and make them a bigger priority than they have up to now.
Ockham’s Razor: people buy their low margin items. A lot of them.
And actually bankrupt their companies trying to do it. If people won’t buy what they’re selling, then making more of it to placate union wages and whining isn’t the solution.
Can’t speak for anyone else, but I would never expect GM to continue manufacturing products that aren’t selling. I find it strange that the only plants, from all that I have heard, that manufacture this doofus Obama loving electric non selling car, are in the USA midwest. But nonetheless, those plants could be re directed to produce trucks and SUV’s. Would it be the cheapest way for GM? I doubt it. Would it be a smarter thing for GM to do? Hell yes!
Retooling costs for those plants would be terrible and unnecessary since they already have other US plants producing the vehicles people will buy. They have to shrink to profitability before they can expand again. Sucks to be those workers who were laboring away in the buggy whip factories, but that’s the reality of it.
They do. And we don’t really know their margins.
Other plants have been redirected. It isn’t unheard of. It may not be doable with these plants. If that is the case, it would have been smart to let the public know they at least studied the possibility–that they at least tried. GM is a muti national that has drawn the public trust to a very thin, tight line. There is nothing wrong with letting them know how close to the edge they are. That is what Trump was doing and I still applaud him for it, no matter how many words the OP uses to disagree.
If President Donald J. Trump is to be believed, General Motors CEO Mary Barra committed a high crime when she announced recently that GM will close up to seven plants in the United States and Canada.
“high crime” is not what Trump said, and is a creation of Epstein.
Trump had no patience for Barra’s considered view that the rapid transformation in the automotive market requires, as she put it, “a highly agile, resilient and profitable GM to stay in front of changing market conditions and customer preferences to position our company for long-term success.”
I guess she must have said that. It’s not something I can imagine an actual human being coming up with, but I guess that’s why I’m not in front of changing market conditions and customer preferences, positioning a highly agile, resilient and profitable company.
If I were, though, I might not be so damn eager to position my company into another nation.
Elsewhere, the responses to Barra’s announcement were more or less as expected. The stock market was pleased, as the price of GM shares soared by as much as 7.9 percent. Market judgments are a solid reflection of the worth of such long-term corporate planning.
No, they are a solid reflection of how much value/money stock holders believe will be theirs if they buy up part of the company. Not that there’s anything wrong with that – it’s how we do business (well, it’s more meta-business, but close enough). Regardless, predicting corporate health by the sanguinity of its leeches sounds a little like a map = territory error.
In contrast, Terry Dittes of the United Auto Worker denounced “this callous decision,” which put “profits before the working families of this country,” a stock union refrain in all collective bargaining negotiations. North of the border, Jerry Dias, the head of the Canadian union, Unifor, promised “one hell of a fight here in Canada” without any clear knowledge of what deal might emerge when GM’s Canadian labor contracts are renegotiated in 2020.
See, I thought Barra’s comment was mealy-mouthed and reflexive – like she was reading the mission off of the company letterhead – but yeah, Dias’ statement is similarly dismissible.
(1 of some)
Worst of all, and true to form, President Trump bellowed that GM had “better put something else” in Ohio to replace the lost Lordstown plant. These were not idle words, for Trump made all too clear his intention to use the full power of the presidency to make GM pay for its supposed sins. His thunderous tweet announced that he was “very disappointed” with GM, which the United States had “saved” through an ill-designed 2009 bailout, and said that we “are now looking at cutting all GM subsidies.” In principle, of course, these subsidies should be eliminated for all manufacturers independently of GM’s announcement. Prominent Ohio officials of both parties, including Senators Sherrod Brown, Rob Portman, and Governor John Kasich, chimed in to echo Trump’s criticisms. Sure enough, the price of GM shares adjusted downward in response to this constellation of political threats, none of which should have been made in the first place.
“Bellowed?” “Thunderous tweet”? Was it in ALL CAPS? Did you suffer hearing loss?
The US has forked over millions (if not billions) of dollars to GM. That’s a fact.
At this point, the only question that is really worth asking is whether everyone in politics has lost their senses. At the most basic level, the president once again shows his utter lack of understanding as to how a market economy does and should work. The first principle is that the government has a restricted role, which is to define property rights and enforce contracts. But when it comes to corporate and social arrangements of private firms, it should not mandate, or even try to influence, those business decisions, especially for short-term political advantage. The first reason for this hands-off policy is that the president, notwithstanding his high political position, does not have a clue as to why and when GM makes its particular decisions. Five minutes of political reflex is not a substitute for thousands of hours of hard work and analysis.
So, we now know that Trump, a businessman, has an utter lack of understanding as to how a market economy works. Not, that he is confused on some aspects, but an utter lack of understanding. That is unsupportable.
[long paragraph reminding us that businesses are complex and the business landscape changes over time making some aspects less profitable.]
[Tariffs bad, Trump doesn’t understand this, believes instead that they make money for the US.]
Once again we are told what Trump understands or doesn’t understand.
Here’s what he understands, as far as I understand; he understands deals. He is trying to make some. He is trying to get China to clean up its act. He is trying to get GM to remain invested in the country that has invested in it since its inception.
(2 of some)
[Trade wars bad because spread to other products/other nations might jump in too.]
As has been pointed out by wiser men than me, China already has tariffs (and so do we). We want fewer – Trump wants fewer. Tariffs are one of two weapons available to end punishing trade practices. The other one is war, which is in Trump’s purview. I kinda prefer the risk of a trade war to the risk of a war war.
Nor is the impact of tweets and tariffs confined to the manufacturing of existing products by existing facilities. As Barra noted, the automobile industry is in the midst of a major technological revolution with the advent of driverless cars. Perhaps artificial intelligence in this area is overhyped. But no central authority should decide that question for all firms, when each uses distinctive technologies and business plans. Within a firm, it is often imperative to diversify research approaches in a given area before choosing which line or lines of businesses ultimately to pursue. All of this effort takes nimble management, excess cash, and solid lines of credit. One reason for GM to extricate itself from its failing lines is to free up the resources and flexibility to try multiple new strategies, some of which are bound to fail. And the last thing that we need is a loudmouth president seeking to sink billions of dollars of capital investment into obsolete technologies.
Did I miss something? Where is the part where Trump seeks “to sink billions of dollars of capital investment into obsolete technologies?” Where is the part where he is a central authority?
Worse still, presidential bullying is not limited by product line. Today it is GM cars. In August, Trump was for boycotting Harley Davidson motorcycles, whose own business woes were ironically attributable to Trump’s tariff wars. He has already attacked the pharmaceutical industry on drug prices. Oil and gas could be next. The genius of a market system is that it uses decentralized knowledge to make key decisions on all matters that pertain to product selection and production. In this age of incipient socialism, it is worth recalling that our populist president could find that his successors in office use similar tactics, some of which dovetail with the president’s economic populism, for socialist ends.
(3 of what looks like it’s gonna be 4)
Most dangerous in this regard is the endless call for good jobs for all American workers, which from the progressive left could translate guaranteed employment, high minimum wages, compulsory unionization, early retirement, and much more. Such calls from any quarter are always misconceived. The ideal social objective should never be to create jobs as such. It should be to let businesses create jobs that produce more in social value than the cost of the labor that goes into the job. As the old adage in the garment industry had it, “you don’t make up in volume what you lose on each piece.” Putting government subsidies into the political hopper reduces the likelihood of achieving that objective. Make-work and featherbedding are dangerous first steps down the wrong path. But if one president is allowed to disrupt markets in the international sphere, why can’t the next president do so domestically as well? Sadly, the harmful effects of subsidies and restraints on trade only compound one other. To keep the economy humming, remember that these are the twin evils in labor markets, no matter which president is at the helm.
And it’s slippery slalomy slopery as absolutist straw men in ski bibs race to the bottom. ‘most dangerous’, ‘left could translate’, ‘always misconceived, ‘ideal social objective’, ‘dangerous first steps down the wrong path’.
Most everyone knows the old joke about how in Heaven, cops are British, cooks are French, engineers German, admins Swiss and lovers Italian; but in Hell, cops are German, cooks are British, engineers Italian, admin French, and the lovers Swiss.
In Free Market Heaven the owners are American, the financiers are in ‘Cayman’, the tech support are from some sweet-spot country like India where people are technical but don’t get paid all that much, and the assembly line guys are in a third world hell hole with zero laws governing how hard or cheaply or deadly you can work a person. Bonus if the cops are willing to crack heads if people look like they might get union-y.
I believe that the market should be free; freer, in any case.
But it isn’t. Government and business are so in bed with each other they sometimes spawn babies.
So maybe after eighty years of marriage GM wants to follow her highly agile, resilient and profitable bliss to another country – or countries, well, we’re all adults here.
Except we gave her the best years of our lives, kept her in the lifestyle to which she was accustomed.
So if my elected official wants to point out that she is selfish and cheap…I’m ok with that.
(Last of rest)
My question is, why was GM making a never wanted electric car in the first place? I’d be willing to bet that poor decision had everything to do with cronyism–sucking up to the Obama regime. Apparently that kind of influence was OK–until Trump. Obama says make electric cars while I shut down electric plants and coal used to fuel those plants. Trump says make any car while I open up all our great energy resources to power them. Just keep our people working.
Which kind of tyrant do you want?
Since there were only two choices on offer, I pick number ‘B’.
GM did go bankrupt and they did restructure. If you owned stock in the old GM, it’s worthless. Dealerships were closed. Pontiac, Saturn and Oldsmobile we’re ended. The bondholders received pennies on the dollar. When the new GM was created they issued an IPO.
The problem was the restructuring was still too much a hostage to politics. The bondholders should have been first in line when deciding what to do with the financial disaster than GM had become. Instead the UAW’s equity stake was treated as superior to the bondholders. For tax purposes the new company was allowed to carry forward $45 billion in losses the old company had incurred. This arrangement was good for 20 years. The bailout thus never really ended.