Monday, June 1, 2009

Problems with economics policy

Currently the United States and Canada are funneling something like 60 billion dollars into General Motors (GM) and in exchange they are receiving 72.5% ownership of the company. The company has recently announced that it has over 170 billion dollars in debts. So the Canadian and US governments have just paid 60 billion dollars for the privilege of owing another 125 billion dollars (72.5% of 170 billion). GM will use $4-billion of the Canadian loans to address the shortfall in its pension plans. In addition, the company will inject $200-million into the pension plans over the next five years, making them fully solvent." So part of the plan that the government has funded is to provide GM with loans and GM will use 4 billion dollars of the Canadian loans to pay the pensions of former employees, and GM plans to 'fix' its pension problems by investing only 40 million dollars per year to make "them fully solvent" (ie. economically healthy). This is preposterous! How could 40 million per year fix a problem that needs 4 billion dollars right now?!

GM will forever have pension obligations to its many retired workers and is not going to be in a good position to compete with new auto companies that have a fraction of the labour costs and no obligations to retired workers (see Tata motors of India or Kia of Korea). This is a bad investment plain and simple - Canadians and Americans will be paying for it for some time. I can understand the politicians' position that letting GM fail could be catastrophic - but if GM collapses anyway then the owners (now the taxpayer) are on the hook. This 'investment' could easily turn into a never ending sinkhole for public funds. To make matters worse, Stephen Harper (the prime minister of Canada) just announced that the most recent 9.5 billion dollars the Canadian government is loaning (giving) to GM will not be paid back - what a return on investment!

Now GM has about 123,000 employees in North America. The bailout is costing about 60 billion dollars or almost 500,000 dollars per employee. Why not let the company collapse, give each GM employee job re-training and some welfare-like payments until they can get back on their feet? This would be WAY cheaper and with the present plan GM may collapse anyway.

Now what about the potential impact of a loss of 123,000 jobs (for arguments sake lets double it to 250,000 jobs in order to account for job losses at companies that supply GM with parts and other companies that rely on GM's employees for the main sources of their revenue). The United States and Canada have about 160 to 170 million workers between them. The loss of 250,000 jobs would amount to about 0.15% of the workforce - this is a drop in the bucket when cast in the scale of the North American economy. In other words why spend billions to prevent a rise of 0.15% in the unemplyment rate? If GM were to collapse, North America could surely continue on without it.

I myself have my own collection of debts that appear challenging to pay off. Now that I am getting to the end of my graduate degree I find myself looking for a job whereby I might be able to make a dent in my debts. On account of my academic background I have been looking for entry-level professor type positions, but recently I found this average salary cartoon which is seriously making me wonder if I took a wrong route and should have become a football coach!

Jacob Levman

P.S. This story was reported on in the Globe and Mail (June 1st, 2009)