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The Globe and Mail

Apocalyptic rhetoric aside, GM bailout is a bad idea

Gwyn Morgan is the retired founding CEO of Encana Corp.


In December, 2008, the Canadian share of the taxpayer tab for bailing out GM and Chrysler was announced as $3.3-billion. Fast forward to June, 2009, and the number has now mushroomed to $14.4-billion. GM Canada gets the lion's share at $10.6-billion. The company estimates its work force will shrink by 4,400 over the next five years, which works out to $2.4-million per "saved" job.

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Ironically, it seems that Chrysler's $3.8-billion bailout will keep more jobs in Canada than GM's $10.6-billion, and its prospects are better. While GM is burdened by a $7-billion funding shortfall in its pension plan that supports more than six times the number of retirees as there are active employees, there are fewer than two retirees per active worker in Chrysler's pension plan.

Chrysler's marriage to Fiat is an opportunity to revolutionize its product line to smaller, more technically advanced fuel-efficient cars. By contrast, GM continues to hang its future on the Chevrolet Volt, a supposedly "green" car that needs to be plugged in to America's already overstretched and mainly coal-fuelled electricity grid.

What's more, GM can't say if or when it can actually produce the Volt at a profit. No wonder Toyota has decided that its hybrid strategy makes more sense, and bailout-shunning Ford has just come out with the highly efficient Fusion hybrid that's gaining kudos from industry watchers.

Speaking of Ford, it seems politicians have forgotten all about the moral hazard of transferring billions of dollars of GM and Chrysler debt to public balance sheets, leaving better-run Ford with a much higher debt load than its subsidized competitors.

Even if one is persuaded by the apocalyptic rhetoric to overlook this patently unfair and dangerous precedent, GM is a very bad bailout choice.

The likelihood of its survival without even more bailout money is extremely low, and the chance of its ultimate demise is high. It's not surprising that Finance Minister Jim Flaherty has decided to write off auto sector "loans" as part of the budget deficit. Caught in the swirling vortex that has already seen the auto bailout tab rise by over $11-billion in five months, taxpayers wonder when and how it will end.

But auto bailouts might only be the beginning. B.C. Premier Gordon Campbell has called for "comparable support" for the hard-hit forest products sector, and last week forestry workers marched on the Prime Minister's office demanding the same. Atlantic Canada's lobster fisherman are pleading for government support because lower consumer demand has driven down lobster prices. Is it any wonder that all manner of groups across the country are joining in the "I'm hurting too, where is my bailout?" chorus.

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As if this weren't enough, a senior minister of the Ontario government last month called for his debt-laden province to "jump in and jump-start the economy, to allow, on a company by company, industry by industry basis, them to jump ahead." The now-former economic development minister Michael Bryant went on to add: "This is government choosing winners and losers ..." Had these words come from the socialist NDP, it wouldn't have been surprising. But it's astounding that they reflect cabinet discussions in a Liberal government of Canada's largest province. (Mr. Bryant has since moved on, leaving cabinet and resigning his seat to head up a new economic development agency at the City of Toronto.) The well-proven axiom "Governments are terrible at picking winners but losers are great at picking governments," comes to mind. Even scarier is the thought of government actually playing a part in running any of their chosen winners - a sure recipe for turning them into losers.

In a period of less than a year, decades of bitter lessons proving the folly of government propping up chronically ill businesses have been forgotten. In his seminal work Capitalism, Socialism and Democracy, Joseph Schumpeter stated: "The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production and transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates ... the process of industrial mutation ... incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism."

The corollary to Mr. Schumpeter's analysis is that propping up businesses whose time has past is not only doomed to failure, but also contaminates and disrupts the process of "industrial mutation" that creates the new enterprises upon which we need to build our economic future.

Then there is the problem that losers don't pay back their debts. If the lender is a private investor, failure to be repaid is part of capitalism's normal risk-taking process. By contrast, when the risk-taker is government, those making the decision and those footing the cost of failure are not one and the same. The billions and billions of taxpayer money that governments are committing to bailouts with no practical prospect of recovery becomes a shared debt that, sooner or later, will have to be repaid through higher taxes and major cuts to public services.

The sad reality for Canadians struggling to weather the economic downturn, put away some savings, and somehow rebuild battered retirement nest eggs, is that governments are investing their money where they would never dream of putting it themselves.

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About the Author
Gwyn Morgan

Gwyn Morgan rose from his modest roots on an Alberta farm to become one of Canada’s foremost business leaders and ardent champion of the importance of Canadian-headquartered international enterprises. Gwyn has served on the board of directors of five global corporations. More

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