Friday, July 30, 2010

The Trouble with Job Preservation

In a recent speech in Detroit, the President lauded the government's $60 billion bailout of GM and Chrysler, stating that inaction would have resulted in the loss of thousands of jobs.  This statement claims a proof for a negative. It cannot be done.

Bailouts are like bandaids on a gangreneous body part.  It may hide the rot but without fundamental surgery, the rot is still there, and spreading.  To capitalize on the White House's PR move, the CEO of GM announced an increase in the number of Volt electric cars (from 30,000 to 45,000) planned for the year's production.  The Volt is the product of a political sleight of hand to get the bailout money.  It was a concept that never generated market enthusiasm, which is why the project was more than ten years old and moth balled at the time of the bailout.  It was the best card GM had in its hand with which to cut a deal with the ATM called Congress.  'Give us the money and we'll give you something to wave in front of the environmentalists (wink wink, nod nod).' Why? Without the distribution infrastructure to fuel the car and without significant advances in battery storage, the Volt is an overpowered, overpriced golf cart.  No one, including GM, knows who will buy these cars but don't be surprise if you see a few in the government car pool.

In 2001, Bill Ford Jr. came charging back to rescue the business that bears his name.  His legacy at stake, Ford cut product lines, began tough negotiations with the unions, invested aggressively in new technologies (first U.S. automaker to introduce a hybrid), and cut deals with some of the most unlikely partners (Microsoft's SYNC). A decade later, it sat on the sidelines to watch GM and Chrysler go hat in hand to the government, both egged on by their union masters. 

Only in a real crisis are tough decisions that reveal true intentions made.

GM and Chrysler were never really in a 'crisis'. With no possibility of a bailout, they may have taken bolder action against the unions and made cars that consumers would buy. We will never know. Instead, we know that GM took the bailout money to buy market share with their 'friends and family' sales gimmick, effectively paying consumers to use their products.  The government was more than happy to jump in with 'cash for clunkers', which resulted in record sales of Toyotas.

The bottom line is that the government's focus on job preservation is simply wrong.  After more than a trillion dollars of 'stimulus' money and eighteen months, the latest GDP report still shows little hope of a robust recovery. The White House knows that government spending does not create jobs so instead it touts job preservation.

An honest government focuses on job creation. Job creation is tough. It requires a great deal of humility on the part of lawmakers and respect for the individual.  You can't buy job creation like you buy job preservation. Sustained job creation can only come from companies that make products people want to buy.  Job creation requires the public burden borne by individuals and companies to be light so resources can go to innovation, risk taking, and venture creation.

There's an old Indian saying that when the horse you are riding drops dead, you dismount. This government insists on flogging it harder to make it run faster.

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