The usual canards thrown at GM include (1) GM did not build cars consumers wanted, (2) the quality of GM cars was lower than the quality of competitive brands, (3) GM’s management was not responsive to consumers, and (4) GM concentrated on building “gas-guzzling” SUV’s instead of building smaller cars that did not use as much gasoline.  All are true, in one sense, but they did not originate with GM or its management as much as they came about because of government policies.

Mises understood that in a free market, no business would bureaucratize itself, as such a move would generate costs upon costs for which there would be no market for the end result.  Businesses exist only because of the decisions made by consumers to purchase their goods, and for no other reason.  They do not exist to provide employment for workers; employment opportunities exist only as long as consumers are willing to purchase those goods made by the employees.

As long as consumers have choices, they will use them, especially if a particular business is unresponsive to them.  In the case of GM, the real story is not with any deliberate intransigence on behalf of the GM management, but why it chose to be intransigent in the first place.  This certainly was not the case with GM during the Great Depression, when the company still managed to eke out a profit.

Government moved against GM on many fronts.  First, the government made it clear it stood behind the United Auto Workers union when it organized GM and whenever the union went out on strike.  Second, the unions were able to take what once had been a mark of efficiency – GM’s vertical integration – and turn it into a liability by holding the company hostage at various stages of production.

Second, government employment mandates created the requirement for GM to create a bureaucracy to deal with the huge amounts of forms and regulations that were levied by various departments of the state and federal governments.  Furthermore, because labor unions are primarily political creatures, the politics of organized labor forced GM and other firms to adopt bureaucratic methods to please their government “superiors.”

Third, the UAW made it extremely difficult for GM to be flexible and to adopt production methods that would have enabled it to be competitive.  (Indeed, we have seen the same problems at Ford and Chrysler, and Chrysler essentially is bankrupt like GM.  Ford barely hangs on.)

The government and union-created inflexibility that became institutionalized at GM magnified both successes and failures.  Furthermore, because GM’s comparative advantage was in trucks and sport utility vehicles, the company also became hostage to spikes in gasoline prices.

It is true that GM did not make many small, fuel-efficient cars, but it was due to the hard fact that GM’s labor contracts were so costly and so inflexible that the company could not step out and take any chances and make those cars.  Unfortunately, because the Obama administration is pretty much a wholly-owned subsidiary of the UAW, the new “Government Motors” will be just as inflexible, which means that even though GM will be building new “small” cars, nonetheless the company still will lose money (like Amtrak and the Postal Service) as the modern-day “Trabants” move along the assembly lines.  And when we stop buying these lousy products?  Well, the hard truth is that the government, in an attempt to prop up the UAW, will hamstring GM’s foreign competitors.  That means shoddy products and “service with a snarl.”

For all the tough talk about responsibility, the Barack Obama administration should not go into the automobile business (or the banking business, or the insurance business, or the mortgage business). We can be assured that the automobile industry in this country will be thoroughly politicized, the last thing the American economy needs now.

Beyond the consternation about the “loss of jobs,” we need to understand why GM and Chrysler are in their present fixes and why permitting them to experience bankruptcy – real bankruptcy – actually will save jobs. Second, we have to point out why saving these companies through government directives actually will damage the U.S. economy and make things worse, and potentially much worse.

While GM and Chrysler are at death’s door, we cannot say that for every automaker. Honda, Nissan, Toyota, and other companies with operations in the USA are doing fine, and while times are hard everywhere, they are not candidates for the undertaker.

Government critics of GM and Chrysler claim that they did not build the right kinds of cars: the small, fuel-efficient vehicles that people on the left want to force us to buy (when they are not trying to force us to take public transportation). The reason GM did not build those cars was that they could not make them profitably thanks to their labor contracts, which guarantee the highest industrial wages paid anywhere. (And that includes pay given to people who don’t work at all, per the United Autoworkers contracts.)

Unfortunately, GM and Chrysler (and Ford to a lesser extent) could not compete with other auto manufacturers when gasoline prices skyrocketed, which were brought about in large part because of concern about the strength of the rapidly inflating U.S. dollar. Furthermore, because of their bloated labor contracts, the Little Three (formerly the Big Three) had fewer profits squeezed out of automobile sales, which is a nice way of saying they were paying more for production than their foreign competitors. Start multiplying this times the numbers of cars sold and a definite pattern arises: Domestic companies were uncompetitive because they and their unions chose a higher cost structure.

One of the enduring myths in economics is that the higher the cost, the greater the wealth created. People still insist that Henry Ford “created the American middle class” when he doubled the pay of his autoworkers from $2.50 to $5 a day. That is nonsense. Higher costs do not create more wealth. Increased productivity does. On the other hand, higher costs imposed through government or coercive union contracts destroy wealth. The infamous UAW contracts required that the Little Three use more resources than were necessary to build cars and trucks, which meant those resources couldn’t be employed at their highest-valued uses, making everyone else poorer.

Even though the government is talking responsibility and even bankruptcy, nonetheless the market already has spoken on GM and Chrysler. At present the sum of the parts is greater than the value of the whole, which means these companies would be worth more by having their physical assets sold in a bankruptcy proceeding than kept together by government fiat.

By artificially keeping GM and Chrysler alive, the government not only is wasting scarce resources and forcing lower-income Americans to create “make-work” for higher-income people, it is also placing a hardship on those U.S. subsidiaries of foreign auto companies. Given the realities of American politics, I can imagine that sooner or later the government will take aim at those subsidiaries in hopes it can damage them in order to protect its “investment” in GM and Chrysler. Stay tuned.