by Dr. Roy Cordato
Senior Economist, Emeritas
For the last several days, news of General Motor’s (GM) plans to close plants and eliminate nearly 15,000 jobs in the U.S. and Canada have been blanketing the news. President Trump has been attempting to use not only the power of his bully pulpit but outright threats to eliminate government subsidies that GM receives if the company follows through on its plans. Furthermore, the Trump administration and others have been trying to make what, they believe, is a fairness case against GM. They argue that the company’s chickens have come home to roost. In other words, by accepting the massive government bailout to save the company from bankruptcy in 2008, GM set up a quid pro quo with the U.S. government. In exchange for the subsidies, closing plants and laying off workers would no longer be allowed, apparently for the indefinite future.
My first response to this was that GM is getting what it deserves. This is precisely what it means to play the crony capitalist game, and if you don’t like the outcome, you shouldn’t have played it in the first place.
But as I started thinking about this as an economist would, putting aside my gut reaction, I realized that this is something that probably should have happened years ago. GM’s decision will not only result in a more efficient American auto industry but also a more prosperous American economy. In attempting to get the company to change its mind, Trump is implicitly arguing that resources that are used inefficiently should be locked into those inefficient uses. Furthermore, they should be prevented from flowing to other areas of the economy where they will be used in more growth-enhancing ways.
When George W. Bush and Barack Obama started funneling taxpayer subsidies into an auto industry that desperately needed a market-driven reorganization, they locked in inefficiencies across the industry. Operations that could not otherwise be profitably sustained were given new life on the backs of taxpayers. It means that scarce resources like steel, labor, and land were prevented from flowing to more productive (and therefore growth-enhancing) uses and industries. What those industries would have been we will never know. But it is quite likely that anti-market policies like these, along with increased regulations and taxes, contributed to the anemic growth during the eight years of the Obama administration.
Fast forward a decade, and we are faced with a similar situation. General Motors is set to close plants and lay off workers. This time, President Trump wants to stop them by using a stick rather than a carrot. Instead of offering subsidies to keep these operations up and running, Trump is threatening to take them away, in particular subsidies for electric cars. Unfortunately, the president isn’t threatening to do this because he doesn’t like corporate subsidies. In fact, he does not oppose crony capitalism in principle. Trump has no interest in removing all federal subsidies for the auto industry. He simply wants to remove them as a punitive measure against GM. But, like Obama and Bush before him, if President Trump is successful in stopping GM from going forward with these closings, he will be making the economy weaker, not stronger, by locking in the inefficient use of resources.
In 2018, unlike in 2008, we are in a full employment economy. As a result of this, the resources that will be released into the economy by GM’s decision will likely get reabsorbed very quickly. One of the biggest economic stories of the last year is that, with a 3.7 percent unemployment rate, it has become very difficult for employers to find good workers. In this setting, to keep this labor from GM locked up in what has become unprofitable, and therefore inefficient, uses is bad economic policy. And this is not only true for labor but for all the other resources—steel, plastic, concrete, land, etc.—that are going into these unprofitable operations. In attempting to do this, Trump is actually holding the economy back.
The fact is that if President Trump is truly concerned about an “America first” policy, then he should be doing all that he can to stay out of the way of General Motors and other companies’ attempts to dissolve and reorganize unprofitable aspects of their business. It is important that economic losses be allowed to do their job. Losses signal that mistakes were made and that companies that experience them need to be placed on an efficient operational footing. This typically means reorganizing those aspects of their businesses that are suffering the losses. The beauty of this is that there are unintended consequences. Not only will a company that is suffering losses become more profitable, but the economy at-large will benefit, as once inefficiently used resources will flow to uses that will be more highly valued by consumers and other market participants.