Yet Another GM Bailout

It's time for another GM bailout. It appears that GM will require $MAXINT in order to return to profitability.

Like all large corporations, GM's executives receives massive State subsidies. GM's executives receive many indirect State subsidies, and GM's executives are about to receive another massive direct State subsidy.

I mention "GM's executives" and not GM itself. GM's shareholders will probably lose most/all of their investment, or receive a return that dramatically underperforms true inflation. The executives and employees, along with GM's creditors, are receiving the bailout. It makes as much sense to say "GM is receiving a bailout" as it is to say "Santa Claus is receiving a bailout." A corporation is a fictional character as much as Santa Claus.

Here, when I say "GM receives a bailout.", I mean "GM's executives, employees, and creditors receive a bailout." To avoid confusing people, I'll follow the common practice of referring to GM as if it were nonfictional.

Even when the economy was good, GM was receiving massive direct and indirect state subsidies.

1. Negative real interest rates are a subsidy to GM.

When GM had a good credit rating, it was able to borrow at only a slight premium to the Fed Funds Rate. For example, GM could borrow at 7%-8% while the Fed Funds Rate was 5% and inflation was 15%-20%. Suppose GM had $10B in debt and real interest rates are negative 10%. Then, GM is receiving a State subsidy of $1B per year.

A few decades ago, there were many smaller car manufacturers. GM borrowed from the financial industry (via the Federal Reserve) and bought out its smaller competitors. State restriction of the market then makes it very hard to start new competing car businesses.

2. The auto industry is heavily regulated.

Contrast this with the software industry. For only a small fee ($10+/month), you can buy hosting and have your own software company. Other than time invested, there are relatively few barriers to entry.

Just because a clever person occasionally starts a successful software company doesn't mean the economic system is fair. The economies of scale for good software are *HUGE*. Even if State restriction of the market is a tax of 5x-10x, a group of really productive software engineers can be 100x or more productive than those at a large corporation.

It's very common for a group of software engineers to quit and form a startup. Why don't you see disgruntled autoworkers quit GM and start a car manufacturing business? The answer is that the auto industry is heavily regulated. The problem is not the technical difficulty of manufacturing a car. In order to get a new car approved as "street legal", you must pass severe State regulations. You must perform crash tests, emissions tests, and various other tests. If regulation compliance costs $10M, and you make 100k cars, then the cost is only $100 per car. If you only make 10 cars, then you cannot afford the cost of regulation compliance.

"Consumer safety laws" work against customers. These regulations are merely restrictions of the market. If the safety requirement is stricter than "best practices", then the customers merely pay the higher cost. If the safety requirement is more lenient than "best practices", then executives can say "We obeyed the safety law. Therefore, we did nothing wrong."

Even though GM is incredibly inefficient, State regulations shield it from competition. State regulation of the auto industry makes it hard for someone to start a new business. If you're only making 10 cars in your first year, you can't afford the cost of regulation compliance. A small software company can successfully "bootstrap" and grow. You can't successfully bootstrap a small car manufacturing business.

If Microsoft mismanages the release of its next OS as badly as Vista, you'll see a lot of people switching to Linux or Mac. It isn't that hard for a group of people to write software that competes with Microsoft. Even when GM makes cars that nobody wants, it's very hard for a group of people to start a competing car manufacturing business.

When I was a graduate student studying Mathematics, I spoke with a high school Math teacher from Detroit. He was teaching in a low-income area. He was very concerned. He said "The really smart students, the best ones, have no greater ambition than to get a unionized UAW job. Their idea of success is being a wage slave in someone else's factory." If you talk to a skilled software engineer, a lot of them will say "I'll start my own software business!" Due to State restriction of the market, it's hard to start your own car manufacturing business. Those poor students didn't even consider "I'll start my own business!" A unionized UAW membership used to be a relatively low-risk way to earn a decent income.

Even though the UAW is a huge inefficiency, it's irrelevant because GM is shielded from competition. There are only 3 big automakers. If a GM employee loses his job, he is probably SOL for finding other employment. In software, even though I've had lots of bad experiences, it's still possible to find other employers.

3. GM receives periodic State grants and loans.

For example, there were loans and outright grants to car manufacturers to investigate "alternative energy cars". There are loans for research and development. With negative real interest rates, a loan is the same as an outright grant. If you lend me $1B at 5% interest, while inflation is 15%, that's a subsidy of $100M per year.

The State gives many loans to GM. These can be direct or indirect via the financial industry. As long as real interest rates are negative, GM may profitably refinance these loans for bigger and bigger amounts. If GM pays 10% while inflation is 30%, then the size of GM's debt decreases at a rate of 20% per year.

At some point, GM needs to turn a profit to pay off the loans. However, why bother running a profitable business when you can lobby the State for favors! If you can always refinance your loan for bigger and bigger amounts, what's the problem?

In the past 10-20 years, GM was paying a dividend while it was losing money and racking up bigger and bigger debts. Negative real interest rates combined with limited liability incorporation encourage management to load up on as much debt as possible.

The correct way to reorganize a business is via bankruptcy. The Federal government is probably going to give billions more dollars to GM management. If Congress wanted to perform the bailout honestly, they would say "Let GM declare bankruptcy, and the Federal government will provide 'debtor-in-possession' financing." In bankruptcy, the insolvent business usually borrows more money to process the bankruptcy. The 'debtor-in-possession' creditor takes higher priority over all the other creditors, because they were merely lending money to facilitate the bankruptcy.

GM's executives receive billions of dollars a year in direct and indirect State subsidies. In return, GM spends millions of dollars on lobbyists. As usual, lobbying the State for favors is more profitable than doing useful productive work. Even if people are outraged, there is nothing you can do to counter the millions of dollars GM spends lobbying.

Also, GM spends lots of money on advertising. I have no idea how much, but my guess is $500M+. If a mainstream media corporation receives $100M in advertising revenue from GM, then it becomes difficult for its employees to argue "GM should not be bailed out!" If a mainstream media personality is too critical of the bailout, then GM will threaten to pull its advertising from that network.

Money spent on advertising is just as effective (or more so) than money spent lobbying. If the mainstream media were not a captured regulator, they would be saying "WTF!?!? Another bailout? Why not just let GM declare bankruptcy, and then let the government provide bankruptcy financing, if necessary? Who cares about GM's creditors? **** them! If they were too stupid to lend GM money, then let them lose their investment! GM's problems were well-known for years!" The fact that the mainstream media is not saying this is obvious evidence of their bias.

Pro-State trolls say "What about GM's employees? They represent a valuable voting block that cannot be ignored."

Let's look at this seriously. GM has approximately 280k employees in the USA. The Libertarian party received 520k votes in the 2008 Presidential general election. Ron Paul got 1M+ votes in the 2008 Republican primaries (I couldn't find a good source for that.)

Suppose that GM's voting bloc of 280k is so powerful that GM cannot be allowed to go bankrupt. Then what about the interests of all the people who voted for the Libertarian party or Ron Paul?

Politicians from both parties say "The Federal Reserve is wonderful! The income tax is wonderful!" (They never even explicitly say that. It's an unstated hidden assumption.) If politicians from both parties said "**** GM! Let them go bankrupt and, if necessary, we'll provide financing to unwind the bankruptcy!", then GM employees will be SOL. Reform will not occur, because GM recevies massive State subsidies and then uses that money on lobbying (bribes to politicians) and advertising (bribes to mainstream media corporations).

If you're "too big to fail", that means you're receiving billions of dollars in direct and indirect State subsidies. In turn, this money can be profitably spent lobbying to prevent reform.

There's another pro-State troll point mentioned on the Communism Channel. "GM's creditors are negotiating with the Federal Government over reducing the amount owed. The Federal government will not bail out GM without concessions from creditors." In bankruptcy, GM's creditors may receive only 10%-20% of the face amount of their bonds. Suppose the creditors "settle" for 40% of the face amount of their bonds, but the debt is now backed by the Federal government. Instead of taking a huge loss, they are actually making a huge profit. The creditors are taking a concession relative to the face amount of the bonds, but they are receiving far more than they would in a bankruptcy.

The true beneficiaries of the bailout are GM's creditors, who are financial industry insiders. GM's executives also are receiving a massive bailout. GM's employees have already given up huge concessions, and their wage increases will probably not keep pace with true inflation. They still are getting a better deal than they would in bankruptcy court, where the judge can toss the union contract.

Also, the "sunk costs" fallacy keeps being applied, when bailing out GM. "We just spent a ton of money bailing out GM. Therefore, we should spend more bailing them out."

The current economic and political system is completely corrupt and should be discarded. If you disapprove of State bailouts and corporate welfare, agorism is your only viable means of protest. You're wasting your time petitioning the State for reform. The bad guys make a ton of money via the State, and can always use the proceeds of their theft to block reform.