What do you think would have happened if the US government had not decided to swoop in and bail out, rescue, takeover (pick the verb you like best) GM and Chrysler? I ask the question because I read a commentary about the current economy and the coming economy that sparked a feeling I have had since the initial bailout of the banks & AIG. The comment was essentially that we have not averted the coming economic chaos with massive government intervention and spending, but rather we have changed its shape, maybe delayed its arrival, but it is doubtful IMO that we have solved the problem.
The reason I mention this is the concept of equilibrium - a state of rest or balance due to the equal action of opposite forces. Markets, my golf game, the number of squirrels and rabbits that inhabit my yard and feast in my garden all have a point of equilibrium. When outside and unbalanced forces are introduced into the market, my golf game, or my yard...then equilibrium (balance) is broken and there are adjustments and changes until a new equilibrium is reached...one that might be radically different than the prior point of equilibrium.
By spending massive amounts of cash we don't have, the federal government over the past 2 years has been trying to artificially maintain an equilibrium in the economy that has long been out of balance. Someday, markets and the economy will get back in balance -governments will run out of prop-up cash, or there will be another oil shock...something will get us out of this expensive holding pattern trying to stop the creative destruction that free markets and economic growth requires.
Hence the question - what if we had let GM and Chrysler meet their natural fate without billions of prop-up cash from Washington? Well, we don't know but we can speculate. One outcome clearly in the solution set, is that they would have gone under. No more Chevy Tahoes, No more Jeep Wranglers. That would have been a massive economic shock, put hundreds of thousands out of work and created a depression in Michigan. But you know else? We would have cleansed the system. The bad practices, bad contracts, and bad products from GM and Chrysler would have gone away - as they should in any business cycle. Then, the assets that have value would have been bought by new investors, they would have been modified, optimized, and adapted to the new market of 2010. New jobs would have been created and either a new GM/Chrysler or totally new companies would have been formed out of the out-dated and mis-managed rubble of the originals. The tough times would have sucked, it would have been horrible for many families. However, the new companies that emerged from this creative destruction would have been best suited to produce cars for America and the rest of the world. Capital would have been reallocated to its highest use. Workers would have been hired at the new companies, investments would have delivered market returns and the new equilibrium would be etstablshed in the car market.
Instead however, we have a 1950's incarnation of US industry, propped up by billions of dollars in capital that could be put to far better uses in the economy elsewhere. This is why the efforts of the government to stop the march of market evolution by protecting outdated and inefficient businesses and industries is anathema to economic prosperity and it is why we have not solved the business challenges of the US auto industry, but rather changed their shape, time, and scope of their eventual impact.
The mess of GM and Chrysler being left on their own would have been enormous. It would have been the death of organized labor in America, which probably would have boosted GDP bu 1% alone. However, the real long term result would have been massively better than what we have now. We currently have GM and Chrysler still saddled with all of the same liabilities that put them on the market chopping block in the first place, spending capital that we gave them to continue their crummy business model.
It would have cost us a lot to let GM and Chrysler fail in 2008. It is going to cost us a lot more in the long run to have them around. Euilibrium is patient. It always wins given enough time. Given the massive debt of governments around the world, it is my opinion that equilibrium will not have to wait that much longer before it is restored. The question is how big will the tidal wave be?
