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Thursday, May 05, 2005


Olin Sibert

It seems hard to lay all the blame for GM at the government's (or the Keynesisns') feet. Surely GM's management deserve some credit themselves for having not had the nerve to stand up to the unions who demanded permanent benefits unrelated to economic productivity? It seems like government spending and government social programs have little to do with GM's problem--rather, it was the faith of those managers in unfettered capitalism and the unlimited exponential growth it implies that led them to believe future liablities could simply be assumed away. Now, of course, we all will pay, but it's not clear that GM (or the Bells, or Steel, etc.) needed to follow Keynes' advice to get us into this pickle. The looming catastrophe of unfunded private-sector benefits got that way without much government help.


The managers of GM (and Ford, which also went to junk status, and Chrysler ten years earlier) breathed the same Keynesian air and behaved accordingly. A loyal Yelnick reader sent me this about a professor he had had: "In 1962 Professor Paul R. Zifcovich at USC biz school, who was ex Senior VP at Chrysler, keep telling us -- 'someday the US auto makers will fail as they can't afford to pay the escalating benefit costs of labor, union labor rules, interference with the production process, and the inability to close plants, etc.' " It was their shared delusion with the political classes that the well at GM was unlimited in its financial depth that led to this point. The bottom is being reached of that well. This shared delusion cuts across our whole economic sector. We were so high, it is taking a long time to begin to see the bottom.

The weakness of Democracy comes when the political classes figure out they can take from the productive and give to the unproductive and still get elected. The Keynesian flim flam about government intervention magically lifting the whole economy has blinded the people whose pockets are being picked. Larger economic forces (ie. too much debt) appears to be lifting the veils from our eyes.

David Levy

Keynes' actual statement is worth quoting in full:

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood . . . Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."

- J.M. Keynes, General Theory, ch. 24.

Your general critique of government intervention in the economy is on target. But the blame for GM's current economic woes lies primarily with GM itself. Year after year, when business was booming, it failed to set aside enough money to fund the future pension and health care benefits it was promising its workers. Instead of properly funding these future obligations when it had adequate earnings to do so, it chose to kick the can down the road, the better to prettify its (cash method) financial statements in the short run. Now that the bills have come due, GM has lost the market power needed to pay them. Whose fault is that?

Perhaps one can blame the U.S. government for enacting the labor laws that gave GM's workers the artificial monopsony power that allowed them to extract such extravagant quasi-rents from their employer. But no one forced GM to underfund what it had agreed to pay, or to hide the resulting intergenerational cross-subsidies on its books. Furthermore, if GM had been more candid about the magnitude of the obligations it was assuming, it might have had more leverage to rein in the unions' demands.

Where your critique of unfunded obligations really has merit is Social Security, an intergenerational Ponzi scheme that dwarfs GM's. Is there a bigger fraud than the Social Security "trust fund"? Unlike his predecessors, President Bush has stepped up to the plate and tried to confront the problem. His efforts have produced little more than demagoguery from the Democrats and their camp followers in the press, and cowardice from the ranks of his own party. In the debate between the ants and the grasshoppers, the grasshoppers still have the upper hand.


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Read the full article at govgrantsguide.com

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