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In GM's bankruptcy, lessons for whole US economy

Is the automaker, an icon of brawny American capitalism, among the first to confront an 'era of diminishing expectations'?

By Staff writer / June 1, 2009

GM customers check new cars in the showroom of Grossinger City Autoplex, Saturday, May 30.

Nam Y. Huh/AP


The bankruptcy filing by General Motors on Monday marks a historic reversal for an iconic American corporation – and a cautionary tale for the whole US economy.

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In its heyday in the 1950s and '60s, no company symbolized the brawn of American capitalism like GM. The company opened the door for legions of blue-collar workers to enjoy middle-class lifestyles, set the benchmark for modern management practices, and with its tailfins and V-8 engines defined automotive style.

Now, instead of symbolizing America’s success, GM has become an emblem of some of the central challenges the nation faces in a new century. The factors paving its road to bankruptcy include rising healthcare costs, intensifying global competition, and making promises it couldn’t afford to keep.

These are all problems that go beyond GM, affecting corporations and America’s government balance sheet as well.

America is not necessarily in a period of permanent economic decline. But the financial climate has become tougher for corporations, the US Treasury, and households in ways that will last beyond the current recession. Some economists wonder aloud if the federal government is headed toward bankruptcy.

“At one point there was concern that GM’s market power was so great that it was a virtual monopoly,” says Jeremy Anwyl, chief executive of automotive information provider Now “the car companies are maybe the canary in the coalmine…. As a society we could be having to deal with an era of diminishing expectations.”

An expensive rescue effort

GM filed for bankruptcy Monday morning in New York, the largest US manufacturer ever to enter the Chapter 11 process. (Two nonmanufacturing corporations ranked larger in asset value when they entered bankruptcy: Lehman Brothers and telecommunications firm WorldCom.)

In a bid to preserve jobs and avoid a devastating collapse of the auto industry, the US Treasury agreed to pump an additional $30 billion into GM, on top of about $20 billion already committed.

An Obama administration task force pushed for concessions from various stakeholders in GM, from the auto workers union to debt holders, so that GM could bring its costs down to a level competitive with foreign rivals.

“This will … allow GM to become profitable at a much lower level of car sales than has been the case before,” a senior Obama administration official told reporters in a Sunday briefing.

With the government helping to orchestrate the company’s overhaul, the automaker hopes to speed its way through bankruptcy in 60 to 90 days, with a “new GM” emerging while portions of the company remain in court to be sorted out on a slower track.

Another Detroit automaker, Chrysler, has already paved the way. It’s on track for an even faster exit from bankruptcy, with its own cash infusion from the government. On Monday, a bankruptcy judge in New York approved the overall plan for America’s No. 3 automaker to sell its key assets into a new company, which will be partly owned by the Italian automaker Fiat.

Problems of Detroit's own making