The Red, White and Blue

By, Danoosh Kapadia

General Motors (GM stock price) was once the world's largest corporation and still holds its place in the top 10 largest corporations of the world according to the Fortune 500 list. What was once heralded as the symbol of American Capitalism has now been reduced to Rick Wagener (CEO) taking a begging bowl to Capitol Hill. In light of the current economic meltdown, it is time to re-visit the very concept on which America as we know it was built – Capitalism!

RED:

Whichever way you look at it, America is in the Red. One industry after another is not only taking a hit, but is virtually collapsing without government "bailouts." First we saw the mortgage industry collapse, then came the financial industry, and now, the auto makers. And now, the numbers don’t look very sanguine for the big players in retail and the print media industry.

The big question this year has been whether the government should continue bailing out businesses or let them fail? When the government injects money to save an industry giant from falling, it often comes with numerous regulations and strings attached. This goes fundamentally against the free market concept and in fact moves towards that of an over-regulated market. According to the free market theory, when the going was good, corporations prospered, and CEO's made millions in bonuses. By the same measure, when things go south, shouldn't the CEO's be accepting no salary and paying the price? And shouldn't the companies be forced to file for bankruptcy, regroup, break free of contracts and trim themselves into shape? If this fails and there's no hope of future profits, then shouldn't they be forced into liquidation and pay the price for poor decision making and inept management? The tragic part is that economics is theoretical, but reality is a different ballgame.

WHITE:

The white collar workers are coming under the gun day by day. They made millions when free markets reigned – even as the companies took a nose dive into the ground. Rick Wagner (CEO) made $15 million last year (a 65%increase from the previous year) as his company was consistently losing market share to Toyota. Merrill Lynch CEO, John Thain had the audacity to suggest he get a 2008 bonus of as much as $10 million even though his company lost $10 billion this year. Isn't this ludicrous? I believe in capitalism and agree with the fact that these CEO's have earned their right to a substantial pay. They went to the best schools, put their shoulder to the wheel and sacrificed their personal lives for their careers. But isn't $10-$15 million ridiculous amounts to ask for in troubled times? Its one thing to get an enormous bonus when the company is doing well, but in troubled times, shouldn't this be the first cost cutting factor before a single job is cut?

When the financial industry collapsed, the government scrambled, shored up the cash and threw it at Wall Street without a question. The financial industry is largely viewed as white collar, and in comparison the auto industry is largely viewed as blue collar. It has been deeply questioned as to why money was thrown at the white collar workers, but the blue collar workers were made to beg in Washington and every aspect of their plans had to be laid out in detail before they would get a penny in bailouts. The justification by Washington is that the companies that were bailed out had the potential to make profits in the future and sustain or even create jobs. The corporations were falling more because of unavailable credit, than poor performance. The automakers (A five year history of GM and Ford's stock price) on the other hand had poor management and foresight in consumer needs and have been consistently losing market share to foreign auto makers like Toyota. A bailout to them would essentially be a band aid, and the root of the problem would not be solved.

BLUE:

As we have historically seen, when things go bad, it seems that the blue collar workers end up paying the price. However, they also deserve some portion of the blame. If it weren't for the UAW (UAW homepage) making lofty demands and tying the big three into iron clad contracts at a time when business was good, this problem would have never come about.

GM was inclined to give the UAW what it wanted in 1976 because it was selling everything workers could make. Today, GM is staggering under a combined $114 billion in retiree health liabilities shouldered as workers hold the union and companies to the promise of a pension and lifetime health care. GM's share of the U.S. market has tumbled from 46.9 percent in 1976, when those contracts were negotiated, to 23.6 percent today. How is it possible to provide the same benefits when they have half the market share?

In the 70's these workers believed they could do anything since they owned the automobile industry. They indulged in drinking and drug abuse during work breaks, because they were protected by the Union and couldn't be let go easily. They became complacent and this showed as the quality of cars coming out of Detroit was steadily declining. In the mean time Toyota was perfecting its manufacturing technique and streamlining its process to minimize waste and maximize quality. Moreover each worker was trained to do only one task, so error was minimized. Bankruptcy is a terrible option for the UAW as it will nullify the union contracts. Unions have captured a significant portion of the Democratic Party and they rightly sense they can get a better deal from the Democrats in power than from a bankruptcy judge. Some people argue that it's management calling for the bailout, not the union. Well, the individual interests of management and the UAW seemed aligned perfectly. It may be management doing the lobbying, but its union muscle that's opening doors and gaining audiences.

Where has the spirit of capitalism gone in all this? Why did things reach this stage? The CEO's of the big three went to Washington with a tin cup saying if they weren't doled out cash, they would bleed to death at their doorstep taking millions of jobs, costing taxpayers over $100 billion, and plunging the economy into a depression with them. Where was the vision? The leadership that gets paid $15 million? Where was the American spirit of innovation? When they first came, they came with no plan, when they came a second time they came with a loose, ineffective plan basically telling congress it was now their problem to save the industry.

If the very platform and ideology that made this country what it is; is now failing? What hope is left? White collar and blue collar workers need to get together and re-structure. This is not the problem of the CEO's or the UAW or Congress; it's a problem of attitude, foresight and vision. Look at Toyota (Toyota's stock price) and Honda (Honda's stock price) – why are they not in the same boat? A 'Car Czar' looking over the big three bailout operations is free market sacrilege. It's time for the Red, White and Blue spirit to prevail, time to regain the capitalist spirit and that's the only way to get out of this mess and return these corporations to their former glory. Or has capitalism really failed, leaving us on the brink of another revolution?