What GM Needs

My old friend and one-time squash partner Paul Ingrassia, formerly a senior executive of Dow Jones and the Wall Street Journal, wrote a very clearly-reasoned piece in Thursday's Wall Street Journal arguing for a "culture war" within GM.

Paul knows the cultures of the US auto makers well, having covered them for years as the Journal's Detroit bureau chief, and writing a Pulitzer prize-winning book about their comeback from near-ruin over a decade ago.

In this case, though, I respectfully disagree with Paul's conclusions. To me, it no longer matters what happens to GM, because it's no longer a viable private enterprise. Instead, like some captured human in the movie Alien, it's being kept alive to feed union employment and pension funds. But it no longer has a real life on its own.

Joseph Schumpeter's theory of "creative destruction" had in mind precisely companies like GM. Badly managed for decades, its equity price prior to the government takeover having fallen below that of the late 1950s, it was the sort of firm that had to be allowed to fail. If not, its inept management would be propped up, given more societal resources to waste, and, by simple mathematics, reduce the productivity of the nation by throwing valuable economic resources down a money-losing drain.

Were there parts of GM which could have made money on their own? Quite probably. And putting GM through orderly Chapter 11 bankruptcy would have allowed such business units to be either spun out individually, or bought by consenting bidders.

Paul is right, the old GM culture was flawed and needs to be extinguished. How better than to have put the old GM to death, allowing the valuable pieces to begin anew without the suffocating, clueless old managerial culture?

As I've contended in prior posts, simply cutting checks to each displaced blue-collar union worker would have cost less than shoveling billions into GM and GMAC. Assisting temporarily idled employees is a much different matter than subsidizing bad management in a shrinking, commoditized product sector.

It seems that nobody takes seriously the very real costs to our nation of ignoring Schumpeter's concepts. Economics is about allocating scarce resources to the best uses. When government intervenes to allocate taxpayers' money on political grounds, to failing firms, it is deliberately damaging economic productivity, rewarding failure and starving other, more deserving business projects of financing.

The truth is, virtually any more resources, including government expenses for administering and overseeing the walking-dead GM, devoted to this company are just a waste of capital.

GM doesn't really need a culture war. It needs to finally be put to corporate death.