Right Thinking From The Left Coast
Chance favors the prepared mind - Louis Pasteur

Thursday, November 18, 2010

The GM IPO

Various idiots are jumping for joy because GM had their public offering and it was a success.  They are even claiming—falsely as it happens—that we won’t lose any money on the deal.  They are more wrong than they can imagine.

First off, of course the IPO was a success.  Would you buy a stock in a company that was subsidized, given billions in tax incentives, had been allowed to have a politically-controlled bankruptcy that discharged many of their debts and had the implicit backing of the US government?  Most people would think that was a decent risk.

But second, the profitability of this exercise was never the real problem.  Cato talks about what is seen and what is unseen:

For what is seen, Rattner admirably admits of a cost.  And that cost is not insignificant.  It is anywhere from $65 billion to $82 billion (the range of the cost of the bailout) minus what is being paid back and what investors are willing to pay for GM shares—in the “single-digit billion range,” as Rattner says.  But Rattner is willing to stand by that trade-off, claiming his efforts and the billions in “government exposure” were a small price to pay for saving the U.S. auto industry, as it were.  It’s merely a difference in philosophy or compassion that animates bailout critics, according to this position.

No.  Not so fast.  All along (quite contemptuously in this op-ed, which I criticized here) Rattner has been unwilling to acknowledge the costs that are unseen.  Those unseen costs include:

the added uncertainty that pervades the private sector and assigns higher risks and thus higher costs to investing and hiring (whom might government favor or punish next?);

the diversion of resources from productive to political purposes in the business community (instead of buying that machinery to churn out better or more lawn mower engines, better to hire lobbyists to keep Washington apprised of how important we are or how this or that policy might be beneficial to the national employment picture!);

excessive risk-taking and other uneconomic behavior that falls under the rubric of moral hazard from entities that might consider themselves too-big-to-fail (perhaps, even, the New GM!);

growing aversion to—and rising cost of—corporate debt (don’t forget what happened to Chrysler’s “preferred” bondholders in the bankruptcy process!);

the sales and market share that should have gone to Ford or Honda or VW as part of the evolutionary market process;

the fruitful R&D expenditures of those more disciplined companies;

the expansion of job opportunities at those companies and their suppliers;

productivity gains passed on to workers in the form of higher wages or to consumers as lower prices;

the diminution of the credibility needed to discourage foreign governments from meddling in markets, often to the detriment of U.S. enterprises.

The list goes on.

Indeed it does.  The fools cheering this event see GM selling shares and think that’s wonderful.  They don’t see the far more dynamic and far less costly automotive sector we might have had if we had let GM do what every company without such massive political clout has to do.  This lack of vision extends to new levels of absurdity when they claim this didn’t just save GMs 200,000 employees (who would, of course, never have found work with another auto company) but the jobs of GMs suppliers (who would, of course, never have sold supplies to another auto company).

Having GM back is not a bad thing and maybe the company can build on this.  I would love to see their plants cranking out good profitable vehicles in the future (i.e., not the Volt).  But it could have done this anyway without stiffing GMs investors in favor of the unions, without all kinds of federal interference and without creating a moral hazard visible from space.

That’s the point: it didn’t have to be this way.  And we may never grasp the full impact of this bailout on our economy because such effects tend to be subtle.  Unfortunately, our politicians aren’t focused on “create the best system and let it run”.  They’re focused on things that get headlines from an economically ignorant media and commentariat.

Posted by Hal_10000 on 11/18/10 at 04:55 PM in Politics   Law, & Economics  • (0) TrackbacksPermalink
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