I just wanted elaborate a little more on my post yesterday about why GM should probably NOT be bailed out. Yes, they’d like a huge infusion of taxpayer funded cash so they are going to tell everyone that millions of lives are going to be ruined if it does not happen – but what would it really mean if GM DOES receive this bailout?

Nothing really.

We’re talking about a company that has expenses that far outweigh its revenues – it doesn’t take a business major to determine this company just will not work. Just what will this bailout do for the company? GM’s chairman, Rick Wagoner, has announced that healthcare coverage for their workers costs almost $5 billion a year (which would already be 20% of the proposed bailout package). Giving them this cash is only extended the time it will take for this organization to collapse.

So… what would would it mean if GM doesn’t receive the bailout? No more new Camaros? No more support for your older GTO?

Nah! It certainly doesn’t imply that they will close their doors and start liquidating. For companies of this magnitude, it really means that a majority of people in management will be shown the door, and decision making will be in the hands of GM’s major creditors. This will also mean the nullification of all previous contracts and give them an opportunity to renegotiate (wait a second…)

So why are the UAW and GM workers concerned if the company will not go anywhere? Besides the contract renegotiation, there is an economic reason for this. For sake of simplicity, you will just have to look this up on your own, but in a economic model that accommodates union contracts, the wage level of a group of workers under union contract is FIXED for BOTH the short term and the long term. This is unusual – the two schools of thought in economics (Keynesian and Classical) both agree that eventually wages will be matched to the equilibrium, where it will be a function of the current price level (which USUALLY go down during times of economic slowdown). Union bound wages cannot be adjusted to compensate for prices – therefore their wages will be higher than their worth, even moreso in times of slowdown.

So the reason (that I believe) why they are lobbying so hard for a bailout package is to avoid renegotiation of wages, which poses a good chance of bringing union wages down to their “real” level. This is alike the situation with housing prices – everyone assumed that the inflated price was the actually the norm, when the bubble busted everyone panicked. A collapse is really what GM needs right about now, out with the old contracts & management and in with the new.  Clearly the best policy for the general public is to NOT give the bailout package – but since policymakers do not always move in the best interest of the public, I am definitely anxious to see what will be the result of this as Obama takes up his position in office.

Keep the engineers responsible for the Cobalt, Corvette, and Solstice/Sky – I think they have their heads on straight