The bigger they are, the harder they fall?The US Economy (part 1)
- Ian Sigalow is an op-ed economics writer for The Chief Source. With a bachelor's in economics from MIT, he lives in NYC where he is working on his MBA at Columbia. He's back home for Thanksgiving and I (Kyle) will try to plant him in the snow during our annual turkey bowl football game.
“General Motors stock collapses to its lowest point in 18 years.” That was the headline last Wednesday. It seems almost impossible that a company that was once the largest in the world, and the first American company to make over $1bn in a year, is on the verge of bankruptcy.For almost 100 years, General Motors was a cornerstone of American Industry. The oldest unit of GM, Olds Motor Corp., was founded in 1897, and through acquisition GM became the world’s largest automobile manufacturer with offices and manufacturing plants on 6 continents. During World War 2, GM was the industrial backbone of the US war effort, delivering over $12bn worth of planes, tanks, trucks, guns, and shells to the Allies. At its peak in the 1960’s, GM employed 600,000 Americans and had over 60% market share. GM also founded well known companies such as Frigidaire, Electronic Data Systems, and DirecTV, eventually selling off these businesses for billions of dollars.
Today, GM is still the world’s largest auto manufacturer, but its market share is only 15% percent. GM is a conglomeration of 12 brands and employs approximately 80,000 Americans, and has over $55bn of cash and short term investments (that is more than Microsoft). All of this information is available on GM’s website and on their financial statements. But here is what the casual observer doesn’t understand – GM is bankrupt... (continued in comments)
By Kyle - 11/22/2005
8 Comments:
Ian continues...
Back in the 1940’s GM was a pioneer in a pension scheme called a “defined benefit retirement plan.” The idea behind a defined benefit plan is that a company makes promises to its employees that it will pay for healthcare and pension income after they retire. In the near term the company estimates the future costs and puts away cash to match. For GM, this is where the train derailed. Over the last 50 years GM didn’t anticipate rising foreign competition, decreasing profit margins, increasing healthcare costs for retirees, and increasing in life expectancy. Today, General Motors has an off-balance sheet pension liability of $170B with an unfunded balance of over $60B! This liability exceeds GM’s cash balance, and since GM doesn’t generate adequate cash flow to cover the expense they are technically bankrupt.
What does this mean for us? General Motors is the second largest healthcare provider in the United States, behind the federal government. When GM files Chapter 11 (which I believe will happen in the next 3 years), approximately a million people in the Midwest will suddenly be without health insurance and retirement income. The poverty in Detroit will be staggering as billions of dollars are pulled from the local economy. Then there will be an aftershock throughout the country as companies that provide parts and services to GM see their business erode. When Charles Wilson coined the phrase, “What’s good for General Motors is good for the country” he probably didn’t consider the converse to that statement.
What can be done to save GM? The answer is illusive, but GM has already started re-negotiating their pension promises. Right now it is a race against time, and it is up to the unions to decide their own fate.
UNIVERSAL HEALTHCARE IS THE ANSWER!!!!!
2 things will happen if we join the other advanced nations in the country with Universal coverage:
1) GM removes the MAJOR burden that you accurately portray, regarding their balance sheet.
2) GM (ford, etc) remove the MAJOR BURDEN that you don't acknowledge, that the cost of health care causes a built-in cost of American cars of about $1400 per car. American companies would be much more competive if they could sell their cars at (an average) of $1400 cheaper.
2 other comments:
1) much of corporate america is finally getting with this idea.....I guarantee that Detroit and the Airlines are with it.....its just companies like Walmart that make the Feds pay for their health insurance (via medicare, medicaid, etc)
2) I am not an economic guy, but i did listen to some analysts say they could pull out of this with the current plan of scaling back production.
Chuck, you are so funny.
Ian correctly points out that GM put itself into a position where it was unable to remain flexible when other more nimble auto makers began to encroach on its market share. Corporate minds at GM were unable to construct a feasible long-term health care plan, but somehow you trust the government to do this?
Of course the difference between the government and GM is that the government can always raise taxes and avoid going "bankrupt," so no manner how terribly they mismanage the nation's healthcare, we are stuck with them. Meanwhile, GM will continue to make inferior cars, and pay for it when everyone decides to buy a honda.
I have no faith in any government health care programs, and neither should anybody else. T he problem with liberals is that they see conservatives as the sole roadblocks preventing the adoption of successful progressive schemes, while ignoring the properties of bearocracies.
One way to pay for healthcare would be to use the original blue cross plan where a community was assessed an average cost of care. This works because the large cost is spread around a larger group. This failed because for profit insurers (Blue was a non-profit)were able to segment the community and assign lower costs to smaller, lower risk groups, leaving the larger risk group with higher rates and less people paying in. This is certainly not a politically expedient method but the cost of care is only going to continue to rise and by covering as many people as possible <&> have as many paying in seems to be the best option
By the way, I heard that GM pays $1500 of each car sold to employee benefits while Toyota's cost is only $300-
You have no faith in government run health care.
Ask people on Medicare what they think. It is as good as any insurance plan. Bring that to everyone.
Administrative fees are about 5% of the cost of medicare.
Administrative fees are about 30-40% of the cost of private plans.
So who does a better job?
Also, in those nations that have Universal care, they spend 30% LESS THEN THE US ON HEALTH CARE!!!
Also, maybe a government run program is not the way to go. Maybe a voucher program, where we still use private insurers, but the Feds foot the bill.
I don't try to claim I hold the answer of how we do it.
I do try to claim that not doing it is retarded.
Making our government responsible for anything more than it is currently responsible for is retarded.
In fact, not making the government responsible for less things than it is currently responsible for is retarded.
Another fantastic post, by the way. I love these guest writers! :-)
Steve, read those facts again about the success of Universal Care. If you just want to say it is retarded, because it is government, then fine. I think that is beneath you.
I don't get this government-is-always-bad mentality. I just don't.
Post a Comment
<< Home