Why GM Is a Lousy Model for Economic Revival

 Let's give President Obama his due. The U.S. auto industry is, in fact, back.

The 2009 bailouts of General Motors and Chrysler kept two iconic companies, hundreds of suppliers and many thousands of workers from becoming additional victims of a brutal recession. It's possible that one or both of the companies might have survived in a normal bankruptcy process, without the $62 billion in cash infused by the U.S. Treasury. They might be in even better shape now, without the taint of a taxpayer bailout. But that was a highly risky proposition at a time when the economy seemed to be free-falling and it took extraordinary government action just to keep the banks open.

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Obama now brags about the auto bailouts in his re-election campaign, with the refrain likely to be particularly loud in Rust Belt states heavily dependent on blue-collar jobs. He certainly has something to crow about. GM and Chrysler are both profitable now, and they're both building competitive vehicles that consumers want to buy. Ford, which didn't seek a bailout or declare bankruptcy, benefited from the rescue of its crosstown rivals by, among other things, piggybacking on their labor renegotiations. Since bottoming out in 2009, the auto industry has added about 100,000 jobs, some of which might have migrated to Europe or Korea had Washington not stepped in.

But the auto bailouts were a desperate measure, and it's risky to use the resuscitation of the auto industry as a template for the revival of other parts of the economy. "What's happening in Detroit can happen in other industries," Obama said in his State of the Union speech. A lot of Americans better hope not, because Detroit's turnaround has had some unfortunate consequences, such as:

A lasting bill for taxpayers. Here's the net tally from the auto bailouts: The new Chrysler has paid back all of the money it got from the U.S. government, and is free of any ties to Washington. But Uncle Sam is more than $2 billion in the hole on the old Chrysler, which is still being liquidated. GM's unpaid debt to Washington is about $26.4 billion, with that debt converted to an ownership stake in the company that's only worth about $12.5 billion, at recent stock prices. So the government is still out about $14 billion on GM, and $16 billion on both companies. And that doesn't include Ally Financial, the old GMAC, which used to be part-owned by GM and still owes the government another $12 billion or so.

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The point is that the bailouts may have saved the auto industry—but at a high cost that can't possibly be replicated. The Center for Automotive Research, a Michigan-based nonprofit group, estimates that the bailouts were still a net gain for the government, because of all the people who remained employed and continued to pay taxes, instead of drawing unemployment benefits and other transfer payments. But that's not an argument any politician could plausibly make for propping up any other industry.

Falling pay. All three Detroit automakers have negotiated new deals with their auto workers that, in general, establish a two-tier pay scale, slash starting pay for new hires, put new limits on future earnings and give the companies more control over labor costs. Entry-level pay now starts at about $16 per hour, about half the pay for established workers. In exchange for concessions on pay, the three automakers pledged to keep more jobs in the United States and offer signing bonuses and profit-sharing, when there are profits to share. But some labor experts think it's unsustainable to have two pay levels for people who work side by side, with the higher-paid workers more likely to converge downward than the other way around.

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Downward pressure on pay is a problematic trend in many industries, of course. On one hand, companies can't stay in business for long if they pay wages that are considerably higher than competitors pay in other countries, while getting similar output from their workers. But falling incomes are also pushing people out of the middle class, with no obvious solutions for many. Obama surely didn't intend it, but by highlighting the automakers as an exemplary industry, he fingered one of nation's biggest economic dilemmas: figuring out a way to generate high-paying jobs that companies can actually afford.

Shrinking companies. Auto-industry employment is up from the low point in 2009, but the Detroit 3 have all shrunk substantially from the Goliaths they used to be. Research by Guggenheim Securities shows that the three automakers combined have closed 20 North American facilities since 2006 and mothballed 5.6 million units of production capacity. Despite the recent rebound, the motor vehicle industry, including parts manufacturers, employs about 375,000 fewer people than in 2006, and 600,000 fewer than in 2000.

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That shrinkage is one of the main reasons all three automakers are now getting healthy. GM sells nearly as many cars today with four brands as it did a few years ago with eight brands and far more overhead. It took years, but Ford finally axed its moribund Mercury division. This efficiency imperative is another dilemma for policymakers, because companies have to be lean to stay competitive. Again, Obama's auto industry reflects a problem that's decimating the middle class: Most companies just don't need all the workers who might be qualified to join the payroll.

An unfinished job. Despite the turnaround, GM and Ford still have large, underfunded pension obligations that aren't being helped by the Federal Reserve's super-low interest rate policies. Chrysler's vehicles are getting better, but its brands still rank far below average in quality surveys such as those conducted by J.D. Power, and its much-touted Fiat 500 has logged meager sales. While the Detroit 3 have regained some lost market share, that's partly because of the Japanese earthquake that hurt sales at Toyota, Honda and Nissan. The Japanese are now recovering, while Korean upstarts Hyundai and Kia are coming on strong, too.

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For the government to break even on GM, meanwhile, it would have to sell its shares at about $53 apiece. But GM's shares are trading at just $25 or so, and they've fallen by nearly 30 percent since GM re-emerged as a public company in 2010. The government can hold onto its shares as long as it wants, to raise the odds of getting all its money back. Some day, the government's investment might even look like a good deal. But for now, it's far too early for Obama to declare, "mission accomplished."

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Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success, to be published in May. Follow him on Twitter: @rickjnewman