doom letter #11

If you have read this site before (hi mom), then this post might sound a little bit like the post I put up when Detroit went to DC to get on the government welfare on demand system. Back then I basically said that the big 3 should be left for dead. Not surprisingly, the injection of government funds didn’t save Chrysler or GM – although it does seem like the government’s car czar is at least partially behind pushing the two companies into bankruptcy, for reasons that are unbenounced to me. So now GM and Chrysler are going to become much smaller versions of their former selves. That is fine. Inevitably, they will disappear completely or morph into something unrecognizable.

I do not want to bitch about how the government is suddenly going to be left with a huge “investment” in a car company that will likely never turn a significant profit. The reason I believe this is because idiot finance gurus see some hope for a turnaround after GM finishes in court. I will not even pick up the torch for the poor workers who are about to get the pension they had been planning on receiving chopped up into tiny little bits along with their health care benefits. Instead, what I really want to talk about is an old saying:

As Goes GM, So Goes the Nation

50 years ago, there was this idea that developed (thanks to the early militancy and effectiveness of the labor movement) that went something like this… if a person spends the productive years of their life working for a company, that company should take care of that person once they are no longer productive. The result of this notion was the creation of the golden years of retirement for massive numbers of people. This model actually worked fine until two things changed.

First, the rest of the world realized they didn’t want to be our bitches and started doing for themselves. What I mean is that instead of buying American made cars (since we are talking about GM), they started building their own. The company that owned the plant where the car was made may have been an American company, but the labor was no longer American. There was the whole notion of a post-industrial economy based on consumer spending and technological development that was crafted around this time. The idea that wealth that ended up in the hands of the average worker in the post-industrial economy was tested and failed twice – the .com bubble and the housing bubble. That is why real wages in this country have stagnated while the cost of living has risen dramatically. To get back to my point, once we stopped exporting products and started exporting production, the relative affluence of Joe the autoworker vanished. Over the past few years what we have concluded is that an economy based on making next to nothing for the rest of the world while they make more and more for the American consumer is not a sound economic policy.

The second thing that changed is that the devotion to the idea of caring for retirees was actually put to the test. In 1950 – just to pick a year when the idea was still being developed and written into new labor contracts – the average life expectancy was just over 68 years. In 2008 it was just over 78 years. This means that not only did pensions have to be paid for an additional 10 years, but health care had to be covered for that much longer as well. Of course, this increased life expectancy doesn’t come cheap. Health care costs have more than doubled in the last 15 years alone. This put a huge stress on companies and even resulted in the creation of a buzz word – legacy costs. I am sure there is a lot of talk out there from the left that says that GM abandoned their workers and the result was that no one could afford to buy their cars anymore. That isn’t true. The problem isn’t domestic, it is global. In the early and mid 20th century, part of the reason America was becoming affluent is because we were selling things to the rest of the world. When we were doing so, it didn’t seem like much of a burden on companies like GM to enter into agreements which provided retirement benefits to employees. What GM found out is that they could not afford it any more.

Now that I have outlined the problems that led to the bankrupcty of GM, let me again refer to the quote:

As Goes GM, So Goes the Nation

If GM is bankrupt because they could no longer afford to operate under the burden of legacy costs, what does that mean for the nation? You may have guessed that I think the answer to that question is obvious – the nation is bankrupt as well. Not only because of the legacy costs of Medicare and Social Security, but also because of the huge cost of running a global empire the US government is broke and will spend more money next year on interest to bond holders than it will on national defense. It is only a matter of time before interest costs on the nation debt dwarf all other government spending programs. You may say to yourself, that is just the government, not the nation. Well, there is only really one way for the government to escape from their debt burden, and that is buy printing more money and dramatically increasing the rate of inflation. Paying the interest on trillions of dollars is expensive with the current value of the dollar, but once the value is one-tenth or one-one hundreth the debt becomes much more manageable. This will mean that any savings that the nation has will be cut down in size at the same rate while prices for goods and services will rise dramatically.

So goes the nation, and so long GM…

Mike