On Monday, General Motors spooked the entire economics community, financial and academic, when it reported that it was hemorraging $2 billion a month and might be forced to declare bankruptcy. If their cash reserves dip below $10 billion, the company said it will be unable to pay its health care obligations or even finance its dealerships. Shares in General Motors (GM) plummeted to $2.92 the next day, their lowest price since 1946. As an employer of over one million people, a failure would have a horrendous domino effect on the economy. Not surprisingly, it’s bad when an American corporation with the word “General” in its name goes under.
Although General Motors already received a $25 billion bailout from the government in September, the reality of the situation is that only further state intervention will save the troubled giant. Democratic congressional leaders are pushing the Bush Administration to give additional funds to GM, but they have been unable to gain ground on the issue. Barack Obama also fought for the additional bailout and pressured President Bush to that effect during their White House rendezvous. Without altering course, the Bush Administration plans to let GM fail, much like Lehman Brothers. It does not yet appear as though Obama has enough of a bully pulpit to substantially influence Treasury policy. Congressional Republicans also refuse to support a bailout, on the grounds that bankruptcy arbitration will be positive for the flailing company.
The Bush Administration and Congressional Republicans are not likely to change their minds on the issue and General Motors will most likely declare bankruptcy in the next quarter or two. In my opinion, GM deserves to fail, as their painful lack of innovation and horrendous corporate management structure is a death-knell for any company. While Congressional Democrats are trying to get in good with Detroit, saving GM in its current incarnation would only stagnate American business culture. It is very unfortunate that GM’s poor business practice will result in many thousands of layoffs, but it would be better to tear the band-aid off now and spare taxpayers the bill of future bailouts. It should be noted that a large portion of GM’s fiscal instabilities have come from their extremely expensive health care plan. As Thomas Friedman already noted in his most recent opinion column in the New York Times, “spare me”. Universal health care probably would have saved them, but GM has previously denied support for any such measure. In other words, they asked for it.
While certainly dire economic news, this situation also presents a major opportunity for the incoming Obama Administration. If and when GM goes into bankruptcy, only then should the federal government present a bailout to them. This bailout, far from the unsupervised check-cutting of Treasury Secretary Henry Paulson, should come with strict and unconditional terms that require GM to manufacture environmentally friendly and energy efficient automobiles within a reasonable amount of time. Speaker of the House Nancy Pelosi, that damn San Francisco liberal, has already voiced her intentions to make those environmental reforms a stringest component to any automotive bailout. GM should be forced to cut its production of all fuel inefficient trucks and SUVs, whose sales have tanked anyway, in order to form the manufacturing base for Obama’s energy infrastructure revolution. GM would be highly subsidized by the government and would bear little risk in the structured venture.
John F. Kennedy gave NASA ten years to get to the moon, Mr. Obama should give GM five. The technology is already here, GM simply has to implement it within their production structure. Indeed, GM, through their Chevrolet line, already plans to introduce an electric car, the Volt, by 2010. If cars like the Volt and Prius-like hybrids were to fill GM’s production schedule in post-bankruptcy restructuring, an American car company could finally compete with the foreign operations like ‘recession-proof’ Honda, which just opened another fuel-efficient automobile manufacturing plant in Canada. Once the immediate effects of the recession have ceased and consumers start spending again, albeit at probably lower levels than before, GM will have access to a huge market share. It could revitalize Detroit and, if the other members of the Big Three followed suit and were equally successful, the entire Rust Belt. Ford Motors already produces the fuel-efficient hybrid Prius, but continues to engage in poor investments with trucks and SUVs.
Cass Sunstein, a Harvard Law professor and former colleague of Mr. Obama at the University of Chicago, recently published a book with behavioral economist Richard Thaler called Nudge. The book advocates that the government engage in a form of soft coercion with both the public and private spheres in order to gently shape behavior in a positive and progressive fashion. For instance, they recommend legislation that auto-enrolls employees in a retirement account with the option to drop out at any time. Because retirement accounts are unquestionably good investments, coercing people, by shifting the default option to the economically beneficial side, can have tremendously positive effects. As long as the option to drop out is ubiquitous, there is no real mark left on our freedom of choice. So, why do I bring this up?
Mr. Obama, already aware of the theories behind Nudge and the book itself, could use GM as a significant test case for soft coercion. By giving GM the option to either collapse or take loans from the government in bankruptcy court with serious fuel efficiency conditions, the US could softly coerce the first stage of a multi-pronged energy revolution in the United States. Consumers, instead of being given the default choice of gas guzzlers, would have the initial opportunity to purchase “green” automobiles. If we were able to cut our dependency on foreign oil through the measure, in conjunction with infrastructural innovations like wind, solar and geothermal technologies to produce carbon-free electricity, there would be a chain reaction in the global political economy. Indeed, there is a perfect storm brewing.
With the international economy is a tailspin, global demand for oil has drastically fallen off. China and the United States have driven down consumption and forced OPEC to reduce production by as many as 1 million barrels per day in each member country. Oil prices on commodities markets plummeted to a 22-month low yesterday, hitting $52 per barrel. OPEC states, many of which are hostile to the United States and its allies, have specific requirements for the price of oil in order to balance their national budgets. According to PF Consulting, a wholly owned subsidiary of Deutsche Bank, this fiscal year Venezuela needs oil to be priced at $97 per barrel in order to balance its budget. Iran requires a price of $58, Saudi Arabia $62, Kuwait $48 and United Arab Emirates $51. For the next fiscal year, Russia requires the price of oil to stay above $70 per barrel. With oil at $52, Hugo Chavez, Vladmir Putin and Mahmoud Ahmadinejad are freaking out. Each rely on massive social programs, financed with petro-dollars, to maintain their hold on power. Putin and fake-Russian President Medvedev are so worried that they told European Union member countries at an economic summit this week that Russia and Europe, together, “speak with one voice.” Russia and its stock market have been rocked by the financial crisis, occasionally suspending trading to keep volatility down. Ahmedinejad has already written Mr. Obama to express congratulatory sentiments. Every state with a large stake in oil prices has gotten quite friendly all of a sudden. Mr. Obama will never need preconditions for diplomatic meetings with any of these leaders, as long as he keeps the price of oil down. That price sanction, issued at the consumer level, would speak for itself.
Economic interconnectedness is a double-edged sword. OPEC may have sway over us when oil prices are high, but man do we have sway over them when oil prices are low. Oligarchies only work when you can fund them. Considering our immense opportunity to permanently diminish OPEC’s resource returns with a restructuring of Detroit, globalization is looking pretty good right now. In one fell swoop, the Obama Administration could improve environmental conditions by creating a profitable, competitive and job-producing green manufacturing base, while simultaneously draining the capital from our self-declared enemies and increasing our national security. That’s a win-win-win-win situation.
Let’s turn Detroit into Cape Canaveral. The Green Revolution might blow up on the launch pad a few times, but eventually, it’ll get us to the moon.