A year after the bailouts that I, among others, opposed, General Motors has announced its first real profit: $1 billion in positive cash flow, and $865 million in net income. At this pace, GM may emerge from bankruptcy and go public by the end of the year, which will allow the government to recoup some of its investment.
This is great news for taxpayers, and for GM employees. The company didn't just achieve the profit by cutting costs, but also by improving the revenue side. However, there are still some dark spots on the record:
- GM achieved its profits at a time when the number one Japanese carmaker was taking a giant hit to its reputation for quality. Yet The Truth About Cars points out that it still slightly lost market share compared to Q1 2009--which, you will recall, was not exactly a stellar moment for the firm.
- The Truth About Cars also points out that percentage of fleet sales actually rose, to 31% of all vehicles, and 40% of cars. Fleet sales are often less profitable than retail sales, particularly to car rental firms, and they also depress the secondary market for your product--which in turn makes retail sales less profitable.
- GM is looking to move back into the auto financing business. It was a truism for years that automakers were actually financial firms with an auto business on the side, and this was one of the reasons that they were hit so hard by the financial crisis. I'd like to see GM develop its core competency as an auto manufacturer again before it dips its toes back into the banking industry.
- Europe is still struggling, while trucks are performing slightly better than the rest of the company. That means that GM is still having trouble in small cars, doing better on big ones . . . at a time when gas prices are probably headed upwards.
But still, it's good news! Everyone should want to see GM do well.
The obvious question for folks like me is: does this vindicate the bailout? I don't think so, for a bunch of reasons:
- Bailouts are, on principle, a bad idea--they murder economic dynamism, and breed really unhealthy relations between corporations, labor unions, and the state. (Yes, unhealthier than what we have now, on the relevant dimensions.) Doing this one will make it harder to avoid bailing out other struggling firms. Even if this one had been individually worthwhile, it would still be dangerous because of the precedent.
- That said, the cost-cutting that made this turnaround possible is an effect of bankruptcy, not of government bailouts. Arguably, the government interest in maximizing the number of UAW jobs has made things worse (though arguably, the financing terms have made things better).
- The taxpayer is still going to end up losing a giant amount of money on this thing.
- The notion that America could not have survived the collapse of GM is seriously overwrought. They basically relied on the assumption that if GM was liquidated, all of GM's manufacturing capacity would have disappeared, along with all of the buyers who bought GM cars. But of course, profitable lines would have been sold to other manufacturers, and those other manufacturers would have produced more cars to satisfy market demand, for which they would have purchased more stuff from suppliers. The dislocation would not have been zero, but it would not have rivaled, say, the construction industry.
- The civic cost of this was large. Rightly or wrongly, this was seen as a payoff to powerful Democratic interest groups in a large state. Not that this is exactly unheard of, but this was very public, and the price tag was very large. Though I think that government should do less stuff, I do not actually think it is a good thing when public trust in institutions erodes further; I want a government that is highly trusted to do the relatively few jobs for which it is uniquely suited.
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