Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.

Big Savings for Ending Prevailing WageMy statistical models show that repealing state prevailing wage laws save taxpayers money.

Re-Thinking Economic Development A large share of the most mobile families—perhaps half—no longer need to live near where they work.

Money Illusion and InflationPrice fluctuation could cause inflation to last longer, but it didn’t cause the inflation, it simply extends the pain.

View archives

Top Tags

jobs and employment 231
economics 178
education 149
economic development 146
state and local government 129
taxes 123
finance 109
indiana 106
migration and population change 104
budget and spending 104
Browse all tags
Reporter / Admin Login

June 8, 2009

GM Pushed to Bankruptcy

General Motor's bankruptcy this week marked the second largest commercial failure in modern history. It is an opportunity for deep reflection.

Over 170 years ago Alexis de Tocqueville traveled our then toddler nation to describe to his fellow Europeans this new phenomenon of America. Among other things, he noted the capacity of Americans to try again after failing at commercial ventures. Our modern bankruptcy laws have codified what de Tocqueville felt was a cultural trait. Many famous firms have undergone bankruptcy to emerge, like the phoenix, stronger than before. From this perspective at least, there is hope for GM's survival. It would be both unwise and ungenerous to bet too heavily against the re-birth of GM. That said, there is more at issue here than a short string of poor business decisions.

Among all the observations about GM, one stands clear. GM failed simply because it could not sell cars. No doubt a part of GM's woes are based in this recession, but it bears remembering that in the heyday of US auto sales, GM lost money. The cause for this failure is much deeper.

GM's management argues its cars have finally met the quality standards of the foreign imports. This may be true, but their warranty terms reveal a less flattering story. As late as this summer, the best GM warranties were for half the time of Honda’s at the same price. Warranties provide a market revelation regarding quality. Rather soon, perhaps by 2012, GM will have to match the import car company quality and support it through warranties. That will be no mean feat in an industry where the product cycle is 3 to 5 years.

Poor auto quality is not the sole factor. Even bad cars will sell if the price is right. But GM, like Chrysler, has simply been unable to match price and quality and sustain a profit. Ford has not yet either, but is more hopeful. Toyota, Honda, BMW, Subaru and VW all do  -- at American factories – with willing workers.

The hard, unspoken truth is that United Auto Worker contracts have beggared these companies. The UAW leadership has spent four decades carefully masking the truth from their members. In order to keep a job you must be able to be competitive – both in wages and productivity. GM and its workers have failed this acid test.

The complicity of management with the UAW is what everyone means when they speak of a failed corporate culture. The accommodation of unsustainable labor agreements may have prevented short term labor strife, but it also caused the company to fail.

General Motors may well emerge from bankruptcy. The UAW will not. The failure of the big three spells the effective end of manufacturing based unions in the United States. The UAW offers no wage premium, no job security, just weekly dues. The union did much good in the last century, but few Americans will lament their passing. The interesting question now is what will replace them?

Link to this commentary: https://commentaries.cberdata.org/60/gm-pushed-to-bankruptcy

Tags: auto industry


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Hicks earned doctoral and master’s degrees in economics from the University of Tennessee and a bachelor’s degree in economics from Virginia Military Institute. He has authored two books and more than 60 scholarly works focusing on state and local public policy, including tax and expenditure policy and the impact of Wal-Mart on local economies.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close