GM bankrupcy and US government role in car industry

After a long drama of almost 6 months, General Motors (GM) has finally filed for chapter 11 (bankruptcy) protection in the court. Detroit sees thousands of bankruptcy every year and Chrysler did file its protection last month but did not made such a big news. There is something more fundamental that makes GM different from any other company in the US car industry. It was symbol of American success and capitalism. It was and still linked to the people psyche in the US. No one would have ever thought that GM will go bankrupt and now they are shocked and still optimistic that it will emerge stronger and better in three months. But it raises many questions on the American dream and American way of development.

The whole argument to save GM is revolving around the assumption that the Car industry is vital for the US economy and the people. I will divide my arguments in two separate streams (Either car industry is important or not) from here and discuss why the role US government is playing is not the right way to deal with the circumstances.

First, lets discuss why the Car industry in the current form is important? Car industry started over hundreds years back. It has seen boom and bust cycles many times in last century but no one ever raised the question about the concept of car in itself. There has not been any revolutionary innovation in the Car industry or I should say 'mode of transportation'. I believe car is not important in itself rather people look for mode of transportation. There have been many scientific innovation in every field and after serving its purpose when a new and better technology that might be completely different from the earlier one comes earlier innovations become irrelevant. When the television came, radio became less important. Internet has entered many domains (e.g. entertainment, news, retail, etc) and the earlier versions have become less important or have learned to live with new realities. Digital camera has made analog camera extinct. By the same logic, why the car industry should exist for ever. It has lived for over a century not because it had competency to do so but the government protection and support have made this possible. Governments have made highways, ignoring public transport system, using tax payers money so that people can travel long distance in car. Government charged very low taxes on the oil imports so that people can get it for cheap and consume more. Emphasis has always been to consume more at lower price so that the oil exporting countries get constant revenue. Last year when the oil prices went up and touched $150, in a free economy it should not be of much worry because people should have decreased the consumption and the oil exporting countries should get the same revenue. But the oil importing countries, USA and Europe, have developed their economy around the Car industry. If the people will use less car and buy less cars then what they will do? it will break the fictional cycle of development and GDP growth. So the Western governments need to keep this cycle alive. Even if using more fuel and cars is dangerous for our environment.

There is a hard reality otherwise. We like it or not, Car industry can not work in current for. If we continue to use oil at the same rate as we using now then the oil reserves will dry in a few decades time. So ultimately we have to let the current car industry die its natural death sooner or later. So by protecting a company, this industry can not be saved forever. This is what the government is not ready to accept and can not think beyond 4 years or 20 years.

For the sake of argument, if we assume that the car industry is important and we need to save this at any cost even then the approach take by the US government is not correct. Washington is giving argument that they need to save this company or industry to save millions of jobs in the country. If the jobs are important then why they need to save a particular company that is inefficient and have failed. It is not cheap to save this company even if they succeed as they are claiming. It will cost US $50 billion to the US tax payers and there is no guarantee that more money will not be pumped into it in future. If the Japanese companies are more efficient and can produce car for less in US then why they should not be let expand their operation? Yes, government needs to see national interests and jobs. but the government can design and implement regulatory framework that force the foreign owned companies to move jobs to US for Car industry. These efficient companies can be given financial incentives. These incentives would have not cost whopping US $50 billions. US workers are worried about jobs as anyone but they are worried to work for only for GM. They will be happy to work in Toyota plant as well.

Effectively, US has nationalised GM. Though the politicians are saying that they will interfere in day-to-day business of the company but they will not let the company make decision purely based on economics either. Is this is beginning of socialist US? only time will tell us but chances are it will be proved wrong step by the US government.