Is GM’s Failure a Forerunner of America’s Problems?

June 4, 2009 at 11:08 am · 2 Comments · Political Science & Economics

“I think it is important to recognize that General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy. Their mistakes have resembled this nation’s mistakes; their problems will be our future problems. If the U.S. and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the un-competitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities. Perhaps the most significant comparison between GM and the U.S. economy lies in the recognition of enormous unfunded liabilities in healthcare and pensions. Reportedly $1,500 of every GM car sold in the dealer showrooms goes to pay for current and future health benefits of existing and retired workers, a sum totaling nearly $60 billion. The total future healthcare liability for all U.S. citizens can be measured in the tens of trillions.” - Bill Gross, PIMCO

Bill Gross is the manager of PIMCO, the world’s largest bond fund, and made a bunch of money predicting the collapse of US housing. This means that when he speaks, lots of people pay attention. In a recent interview with Bloomberg , he predicts, among other things, that the dollar is in trouble and that Americans’ standard of living is probably going to fall, much like I did in a previous post, but the quote above really caught my attention.

Gross’ comparison of GM’s problems to the problem’s facing the US is spot on. GM’s business plan called for new workers to pay for the retirement and health care of old workers. This plan worked while GM was producing quality cars and growing, but once GM began to lose market share, it became impossible for the company to sustain itself without major changes. GM did not change fast enough, leading to its bankruptcy.

Social Security and Medicare work the exact same way, but on a much larger scale. Current workers pay in to support workers who have retired. It worked when both the population and economy were growing, but it will stop working sometime in our lifetime.

If this comparison is correct, can we learn from GM’s unwillingness to change, which ultimately led to its bankruptcy? I think we can. There is still time to fix Social Security and Medicare, but our government has not done much to solve these problems lately. It seems to me that the US is burying its head in the sand, just like GM did. We cannot afford to continue down this path. It will take huge change to fix these problems, but we must act now before its too late and the US government goes bankrupt, just like GM did, because nobody will step up to bail out the USA.