Sunday, December 14, 2008

3 Million Lost Jobs. Not So Fast

General Motors employs 123,000 people. Every day I hear or read the claim that a "failure" of GM would result in the loss of over 3 million jobs.

The analysis that leads to this result relies critically on each of 2 assumptions:

1) Consumers are unwilling to purchase any American cars, at any price.

2) Those whose wages and salaries flow from revenue from car sales are incapable of providing valuable labor to any other economic sector.

The reality is that, through General Motors, our society transforms resources into a product that is less valuable than the raw resources. In other words, GM cannot sell its cars at prices that are greater than the average cost of production.

Raw resources (things like people's time, factories, steel, copper, land, energy, etc.) have value because they can be used to produce goods and services that people will pay to consume.

The fact that the inputs that GM uses command prices that exceed GM's ability to earn revenue means precisely that those resources can produce more value elsewhere. Yet we pretend that GM is vital and that those inputs would sit idle rather than be shifted to other pursuits.

It is time to recognize that, far from being a disaster for the economy, the downfall of the auto industry is a massive opportunity for growth. It will free up resources that have been stagnant or poor performers, and allow them to migrate elsewhere.

Can the automakers survive? Probably. But they likely need to make fewer cars, re-organize management, re-negotiate contracts, and make other changes.

There is absolutely no chance that the necessary changes can be managed well by Congressmen and other government officials. Neither I nor anybody else knows exactly how to fix the automakers. Certainly the people running the companies right now do not know the solution.

These businesses have already failed. The individuals who have managed them (at all levels) should be dismissed with no further compensation. The resources that the companies control should be auctioned to the highest bidders and those bidders should then be free to do with them what they will.

If they want to make cars, so be it. If not, we'll get our cars one way or another.

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