7 Nov 2012

General Motors is alive, as is Obama’s presidency

A US presidential election has been won on the basis of a $50bn plus bailout of General Motors. GM is no ordinary company. It, under Alfred Sloan, in the 1950s pioneered and defined modern capitalism with the concept of “residual income”. GE and Jack Welch evolved that into the mantra of “shareholder value”, although Welch too has questioned the value of that mantra.

GM is 30 per cent owned by the US Treasury. The American government is at the moment sitting on a massive loss on the shares. But the bailout undoubtedly saved jobs in the critical swing state Ohio and Michigan. Romney’s editorials attacking the Obama auto-bailout came back to haunt him. A man, who in his business career was close to the auto industry, managed to alienate its home states and workers.

But today American presidents can win elections by deploying massive vats of borrowed state money to intervene in a company that defined US style capitalism. I think this is an amazing development. What happens when GM/Chevrolet mount a bailout-fuelled export push around the world?

What chance of spreading the free trade mantra around the world? I was in the White House in 2009 when Obama disappointed his core supporters by facing down calls for post-bailout Wall Street pay regulation. “This is America,” he said then. The same mentality was displayed by the Americans, preferring Fords to the products of bailed-out GM and Chrysler. But winning an entire election on a slogan about the federal government keeping a bankrupt business alive? I guess “this is new America”.

It could be argued that the GM bailout money ultimately was borrowed, effectively, from the Federal Reserve under QE policies. One telling impact of this morning’s election result is that Ben Bernanke keeps his job. Mitt Romney had given some clear hints that the Fed Chairman would have been fired. Other Republicans had gone as far as suggesting Bernanke’s money printing was “treasonous”.

Bernanke’s monetary policy also underpinned another underrated factor in the US: a recovery in house prices. Even in Phoenix, Arizona, one of the worst hit cities for the housing crisis, prices are up 16.6 per cent over the past year.

What has not changed at all in the President’s second term: a fiscal nightmare. The “fiscal cliff” is a violent prearranged change in US fiscal policy that will see $600bn raised over 2013 . So 4 per cent of GDP in cuts and tax rises in an economy only growing by 2 per cent, and all because the US political system’s ungovernable dysfunction.

As one US economist suggests, “it’s suicidal and unique to us…”, and would plunge the US and world economies back into recession. As things stand, America looks likely to walk off it on 1 January.  It involves an instant 10 per cent cut in all government spending (including defence) and tax rises. At the recent IMF meeting the “fiscal cliff”, not the euro crisis, was troubling everyone the most.

We’re heading for gridlock again. There is now a lame duck session of Congress that will not see a compromise. In DC the perceived wisdom is that it’s not a cliff but a nice gentle slope that could be reversed by the end of January. There is a clear path to a compromise. The ball really is in the court of the House of Representatives’ Republicans.

Follow @faisalislam on Twitter.

3 reader comments

  1. Philip Edwards says:

    Faisal,

    Oh the irony.

    Once upon a time the loony mantra was, “What’s good for General Motors is good for the USA.”

    Apparently this is now not the case. You have to larf – after all, GM had a free run and STILL ran itself into bankruptcy.

    Maybe it is time for crackpot neocons to exhume the corpse of Ayn Rand and pray to it for inspiration.

    Clearly, capitalism needs an even deeper crisis – like yet another war. If it doesn’t get it, it is likely to resort to outright suppression.

    Any bets we get a search for “a man on horse back”…..a strong man….an iron man…… a duce…..a fuhrer?

  2. Andrew Dundas says:

    Another story:
    ‘Profits’ aren’t made directly. They’re what’s available after ALL other costs are provided for. Neither tax collectors nor stock markets allow that simple explanation. They say that resources allocated to buildings, machinery and inventories are separate costs they call ‘capital’. Only a some of those costs are included in the ‘residual’ that’s taxed. Stock markets chase the same delusion. Which exaggerates the income that’s taxed.
    Exaggerating ‘profit’ is fine & dandy until sales fall. At that point, there’s often an insufficient surplus to pay for all liabilities: a loss.
    GM racked up losses because bank crises caused by the Bush government spooked car-buyers. That pitched GM and others into liabilities they couldn’t pay right away.
    By investing in the motor industry, the Obama Government saved the USA’s largest tax-payer and collector. Which is why that Government now enjoys growing revenues.
    Maybe that’s why the Tea Party didn’t like it. US electors DID like it. They needed the GM gravy-train too, & voted for common-sense. Maybe we should’ve done the same?

  3. anon says:

    Capitalism is entering a new faze. Government bailouts and massive advertising drives, will GM make massive inroads in the world wide market. Or will the savvy consumer choose better models? I say better because GM went bankrupt presumably because of their inferior product, Even in the USA market where GM is a symbol of all that is American imports took over. Perhaps America will start to buy American again. If so then the bailout will have worked and proven its worth. But the shares are very low.

    The free market and world wide free trade is a dicy playing field.

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