Read the following and answer the questions.

    By mid-December 2008 GM the worlds second largest
    auto manufacturer was losing $2 billion a month. Rick
    Wagoner CEO since 2000 knew that GM did not have
    enough money to survive much longer. The year 2008
    GMs 100th anniversary was turning out to be its worse
    ever. 1 Wagoner already knew GM would end the year
    with losses of about $31 billion. But that was an improvement
    from 2007 when the company lost $38.7 billion the
    fourth-biggest corporate loss in history. Those losses and
    losses of $1 billion in 2006 and $10 billion in 2005 meant
    that the company Wagoner led lost an astonishing $80 billion
    in four years.
    Wagoner was a dedicated affable and likable man.
    In high school he had excelled in all sports but his height
    of six feet four made him a star in basketball and upon
    graduation he was secretly hoping to be a professional
    basketball player. But as a freshman basketball player at
    Duke University it became clear to Wagoner that he did
    not have the talent and drive to be a professional athlete.
    Instead he majored in economics and also began dating
    Kathleen Kaylor whom he eventually married. After graduating
    from Duke University and getting an MBA from
    Harvard University Wagoner went to work for GM. He
    rapidly worked his way up through the companys ranks
    and in 2000 he was named CEO the youngest person to
    ever hold that position in the companys history.
    Wagoner blamed GMs misfortune on a number of
    factors. One of the most significant factors he felt was the
    Great Recession of 2008 that had hurt the sales of all
    the auto companies particularly when the troubled banks
    stopped lending money so customers could no longer
    get car loans. Unfortunately GM did not anticipate the
    credit crunch and by 2006 it had sold off a controlling
    interest in GMAC the previously wholly-owned finance
    company that had provided cheap loans to its car buyers.
    After GM sold 51 percent of GMAC to Cerberus for $7.4
    billion Cerberus refused to let GMAC continue providing
    the same easy credit to GMs customers which turned out
    to be a significant blow to GMs sales.
    Yet another problem was GMs labor costs. In 2008
    GM was paying an average of about $70 per hour for
    labor. That $70 included $30 that the worker actually
    received in wages and $40 that went to fund other labor
    costs including the workers benefits and pension plus
    the cost of providing health care and pensions to about
    432000 GM retirees. Because GM had been operating for
    100 years the number of its retirees was much larger than
    those of new car companies. Toyota for example was paying
    about $53 per hour for labor in its U.S. manufacturing
    plants of which $30 went to the worker as wages and $23
    went to pay for the workers benefits and pension but very
    little for retirees since the number was relatively low. In
    some of its plants a Toyota spokesman said it was paying
    as little as $48 per hour for labor.
    But perhaps the major cause of GMs difficulties was
    its self-inflicted dependence on large SUVs (sport utility
    vehicles). Japanese car makers could make small and midsized
    cars for less than it cost GM to make comparable
    cars. To compete GM had to lower its prices until the
    profit margins on its small and mid-sized cars were vanishingly
    thin. But during the 1980s when gas was cheap
    GM discovered that large SUVs were big hits with male
    customers and with couples with growing families. Moreover
    unlike its smaller car models profit margins on its
    large SUVs were hefty as much as $10000 to $15000
    per vehicle. As its SUV sales boomed during the 1990s
    GM expanded its line and eagerly converted many of its
    plants over to the production of the lucrative big vehicles.
    By 2003 the bulk of its profits were coming from SUV
    sales. But when the price of gasoline gradually crept upward
    the costs of owning an SUV also increased causing
    the SUV market to slow and then to decline. In 2004
    unsold SUVs started piling up at car dealerships. When
    Hurricane Katrina made gasoline prices soar in 2005
    sales of SUVs eventually collapsed. Thus GM ended
    2005 with a loss of $10.4 billion. Things improved somewhat
    in 2006 but then losses climbed to record levels:
    $38.7 billion in 2007 and $30.9 billion in 2008. Unfortunately
    by now GMs plants strategic plans research and
    development programs and its mindset were all locked
    into the production of SUVs and it would take years to
    change them.
    Because of its reliance on SUVs GM had put off investing
    in the small fuel-efficient cars a gas-conscious public
    had turned to in 2005. In the 1990s GM had developed
    the technology for an all-electric car the EV1. The EV1
    Explore the Concept on
    mythinkinglab.com
    THE BUSINESS SYSTEM: GOVERNMENT MARKETS AND INTERNATIONAL TRADE 191
    was in fact the first mass-produced modern electric car
    made by a major car company. By 1999 GM had spent
    $500 million producing the EV1 and $400 million marketing
    it yet had leased only 800 vehicles. Convinced that
    the car would never match the profitability of its SUVs
    the company stopped making the cars and in 2002 it repossessed
    all the EV1s it had leased and phased out the
    project. At the same time both Toyota and Honda were
    introducing their small hybrid electric-gas engine cars into
    the United States. The hybrids turned out to be a commercial
    success and more importantly production of the
    cars allowed both Toyota and Honda to gain almost a decade
    of experience in hybrid technology while GM continued
    focusing on its gas-guzzling SUVs. In a June 2006
    interview published in Motor Trend Rick Wagoner confessed
    that his worst decision during his tenure at GM was
    axing the EV1 electric-car program and not putting the
    right resources into hybrids.
    All of these problems had culminated in the $80 billion
    loss that placed GM in the difficult situation Wagoner
    knew he had to deal with in the closing weeks of 2008.
    With many analysts predicting that GM would go bankrupt
    bankswhich themselves were barely surviving the
    worse financial crisis in decadesrefused to loan the company
    more money. At the rate it was running through its
    cash reserves Wagoner knew the risk of bankruptcy was
    growing daily. Given the companys dire straits he decided
    that only a government bailout could save it.
    Government bailouts were not popular. In September
    2008 the George W. Bush administration asked the
    U.S. Congress to pass legislation creating a $700 billion
    fund called the Troubled Asset Relief Program (TARP).
    A reluctant U.S. Congress approved the TARP bill which
    authorized the U.S. Treasury Department to use the funds
    to purchase . . . troubled assets from any financial institution.
    The troubled assets were millions of mortgage
    loans that banks had extended to home buyers who were
    now unable to make their monthly mortgage payments
    and whose homes were worth less than their mortgages
    because home prices had collapsed in early 2007. Since
    the homes were worth less than their mortgage loans the
    mortgages could not be repaid in full when delinquent
    homeowners sold their homes or when banks confiscated
    them. Suffering huge losses many U.S. banks were on the
    verge of failing as were European banks that earlier had
    taken over thousands of the now troubled U.S mortgages.
    Many economists predicted that these widespread
    bank failures would turn the deepening recession into a
    global depression worse than the worldwide Great Depression
    of the 1930s.
    In spite of the looming financial crisis many had
    opposed the plan to bail out the banks. A hundred leading
    economists signed a letter to the U.S. Congress that
    said lack of fairness was a fatal pitfall of the plan
    because it was a subsidy to investors at taxpayers expense.
    Investors who took risks to earn profits must also
    bear the losses. 2 Calling the bank bailouts socialism
    for the rich the Nobel prize-winning economist Joseph
    Stiglitz wrote this new form of ersatz capitalism in
    which losses are socialized and profits privatized is
    doomed to failure. Incentives are distorted [and] there
    is no market discipline. 3
    Nevertheless if U.S. banks were able to get bailout
    money from Washington perhaps GM could do the same.
    So Rick Wagoner and two GM board members flew to
    Washington on October 13 2008 to meet with officials of
    President George W. Bushs administration. During the
    meeting Wagoner summarized the precarious position of
    the company and asked for a loan from the TARP fund.
    Bushs people balked at the request saying the legislation
    explicitly said TARP funds were for financial institutions
    so they could not be used to provide loans to car manufacturers.
    Turned down by the administration a desperate
    Wagoner turned to the U.S. Congress. On November
    18 and 19 he and the CEOs of Chrysler and Fordthe
    two other U.S. auto companies were also going through
    difficult timescame before Congressional committees
    and asked for legislation authorizing government funds to
    aid the auto industry. Committee members however became
    angry particularly when the auto executives admitted
    they had not prepared plans detailing how they would
    use the funds nor what changes they intended to make to
    ensure they could return to profitability. In the end the
    three CEOs were told to come back in December with
    detailed financial plans for their companies. In early December
    the CEOs dutifully returned to the U.S. Congress
    with plans in hand and repeated their requests for financial
    assistance. A few days later both the U.S. House and
    the Senate proposed legislation to aid the auto companies.
    Unfortunately while the House approved the auto aid bill
    on December 10 the Senate voted it down. Without the
    support of both the House and the Senate the proposed
    legislation was dead.
    Wagoner was stunned and despaired for the future
    of the company he had served for over thirty years. But
    his despair turned to elation when he got a telephone
    call from the Bush administration. The administration
    had decided the U.S. Treasury could after all use
    the TARP funds to provide loans to GM as well as to
    Chrysler. (Ford had decided it could survive without government
    money.) On December 19 2008 President Bush
    announced that the U.S. Treasury would provide GM with
    a $13.4 billion loan from the TARP fund while Chrysler
    would get a $4 billion loan. In announcing the assistance
    to the auto companies the Bush administration said the
    direct costs of American automakers failing and laying
    off their workers . . . would result in a more than one percent
    reduction in real GDP growth and about 1.1 million
    192 THE MARKET AND BUSINESS
    workers losing their jobs. 4 To get the money Wagoner
    had to agree that by February 17 2009 GM would hand
    over a detailed plan specifying how it would achieve
    financial viability and the plan had to be acceptable to
    U.S. Treasury officials. With his back to the wall Wagoner
    agreed to the terms and on December 31 2008
    GM got a first installment of $4 billion from its allotted
    loan amount; it received another $5.4 billion on January
    16 2009 and a final installment of $4 billion on February
    17 2009.
    Many objected that bailouts violated the free market
    philosophy embraced by many Americans and replaced it
    with a kind of socialism. Republican Senator Bob Corker
    said the GM bailout should send a chill through all
    Americans who believe in free enterprise. 5 Several Republican
    members of Congress submitted a resolution on
    the bailouts that said they were moving our free-market
    based economy another dangerous step closer toward
    socialism. 6
    By February 17 2009 newly-elected President
    Barack Obama had taken office so his administration
    would end up finishing the auto bail-out that the previous
    administration had set in motion. As part of the
    viability plan that he had agreed to submit by February
    17 Wagoner was to renegotiate GMs union contracts to
    make its labor costs competitive with foreign car makers in
    the U.S. reduce the number and models of cars it made
    shrink its unsecured debt of $27.5 billion down to $9.2
    billion by getting creditors to cancel part of their debt in
    exchange for GM stock and invest in fuel-efficient hybrid
    and electric vehicles. 7
    Wagoner had quickly entered negotiations with
    the United Auto Workers (UAW) GMs major union
    and with creditors. But GMs creditors had stubbornly
    refused to reduce their debt by the amount the government
    wanted. In the end GM did not reach the debt reduction
    targets the U.S. Treasury wanted it to reach by
    February 17. Nevertheless in the final plan for viability
    it submitted to the U.S. Treasury on February 17
    GM said it would cut 37000 blue-collar jobs and 10000
    white-collar jobs close 14 plants over three years eliminate
    four of its eight car brands cut manager salaries by
    10 per cent and all other salaries by 3 to 7 percent and
    shift the costs of retiree health insurance to an independent
    trust funded in part with GM stock and in part with
    debt. However the plan added GM would need an additional
    $22.5 billion from the government to continue
    operating to 2011. 8
    The Auto Task Force Obama had put together to review
    GMs proposed plan was not happy with it. Steven
    Ratner who headed up the task force said:
    It was clear to us from the viability plans that
    the companies had submitted on Feb. 17 that
    GM and Chrysler were in a state of denial. Both
    companies needed gigantic reductions in their
    costs and liabilities. They had way too many
    plants and workers for expected car volumes.
    And their labor costs were out of line with those
    of their most direct competitors . . . I was shocked
    by the stunningly poor management that we
    found particularly at GM where we encountered
    among other things perhaps the weakest
    finance operation any of us had ever seen in a
    major company. 9
    Team Auto as the Obama task force called itself
    spent over a month studying the plan and concluded
    that GMs optimistic assumptions that its market share
    would grow in the future its costs would decline and in
    a few years it would have positive cash flows were out
    of touch with reality. On March 30 2009 the Obama
    administration told the company that its plan was not acceptable
    and did not warrant the substantial additional
    investments . . . requested. Nevertheless GM was given
    60 days until June 1 to try to extract deeper concessions
    from its creditors and was also given another loan
    of $6.36 billion to carry it through the next two months.
    Although GM continued trying to work with its creditors
    the Obama task force soon realized that the only
    way GM would force its creditors to forgive GMs debt
    was by filing for bankruptcy. 10 This would give a federal
    judge the authority to cancel as much debt as was needed
    for the company to become a viable business again. On
    March 31 the U.S. Treasury informed the companys
    board of directors that if it filed for bankruptcy the government
    would provide the funding it would need to
    emerge as a viable company.
    By this time Rick Wagoners fate had been sealed.
    In mid-March Steven Ratner asked Wagoner about his
    plans and he replied Im not planning to stay until Im
    65 but I think Ive got at least a few years left in me . . . but
    I told the [Bush] administration that if my leaving would
    be helpful to saving General Motors Im prepared to do
    it. 11 On Friday March 27 Wagoner attended a meeting
    with the Auto Task Force to discuss GMs restructuring
    plans. Before the meeting Steven Ratner pulled him aside
    and said In our last meeting you very graciously offered
    to step aside if it would be helpful. Unfortunately our conclusion
    is that it would be best if you did that. Wagoner
    agreed to step down and on March 30 he submitted his
    resignation from GM.
    On June 1 2009 GM entered bankruptcy. The U.S.
    Treasury created a new company named General Motors
    Company and the now bankrupt Old GM sold
    its most profitable brands and most efficient manufacturing
    facilities to the new General Motors Company
    who used $30 billion of the governments money to buy
    THE BUSINESS SYSTEM: GOVERNMENT MARKETS AND INTERNATIONAL TRADE 193
    them. The creditors of Old GM received a 10 percent
    share of the new company plus proceeds from the sale of
    the assets of Old GM. A 17 percent share of the New
    GM was put into a trust to pay for union retiree health
    care benefits; the union trust also received a $2.5 billion
    note from New GM and $6.5 billion of its preferred
    stock. The government of Canada which had contributed
    $10 billion to bail out several GM plants in Ottawa and
    Ontario got 12 percent of the new company. The remaining
    61 percent share of the company became the property
    of the U.S. government in return for a total of $50 billion
    it pumped into GM. The U.S. government also retained
    the right to elect 10 of the 12 members of the board of
    directors of the New GM; it was now the major owner
    of a car company. 12
    GM was not the only firm that became a (partially)
    state-owned company during the financial crisis. On February
    27 2009 it was announced that in exchange for $25
    billion the U.S. Treasury was taking 36 percent ownership
    of Citigroup Inc. a large banking company driven to the
    brink of failure by the financial crisis. On September 16
    2008 American International Group an insurance company
    also brought to its knees by the financial crisis announced
    that the government through its Federal Reserve
    Bank was taking ownership of 80 percent of the company
    in exchange for $85 billion.
    Many observers claimed that government ownership
    of companies is the kind of government ownership
    of the means of production that Marx and other socialists
    advocate. For example Robert Higgs editor of The
    Independent Review wrote that the government is resorting
    to outright socialism by taking ownership positions
    in rescued firms. 13 And the Mackinac Center a conservative
    research institute focused on promoting the free
    market published an article by Michael Winther that
    stated:
    There are only two economic systems in the
    world . . . These two economic systems are generally
    described as the free market and socialism.
    . . . Socialism is characterized and defined
    by either of two qualities: Government ownership
    or control of capital or forced pooling and
    redistribution of wealth. . . . [T]he current bailout
    could be described as super-socialism because
    it involves every possible component of
    socialism: the forced redistribution of wealth
    increased government control of capital and
    even the extreme of socialism which is government
    ownership of capital. Our federal government
    is not content to just regulate the markets
    (capital) but is also taking the next step of purchasing
    ownership interest in previously private
    companies. 14
    Questions
    1. How would Locke Smith and Marx evaluate the various
    events in this case?
    2. Explain the ideologies implied by the statements of:
    the letter to the U.S. Congress signed by 100 leading
    economists Joseph Stiglitz Bob Corker the Republican
    resolution on the bailouts Robert Higgs and
    Michael Winther.
    3. In your view should the GM bailout have been done?
    Explain why or why not. Was the bailout ethical in
    terms of utilitarianism justice rights and caring?
    4. In your judgment was it good or bad for the government
    to take ownership of 61 percent of GM? Explain
    why or why not in terms of the theories of Lock
    Smith and Marx.

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