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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'?

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All three Detroit automakers (including No. 2 Ford, which is not in bankruptcy) have faced a similar set of challenges.

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Some of the problems involved failings made in Detroit. The firms were slow to address quality and reliability shortcomings, for example.

Critics also say that, since the oil-price shocks of the 1970s, US carmakers failed to take the lead in fuel efficiency – setting themselves up to lose market share when gasoline prices jumped again, as they did last year.

Other problems resonate beyond the auto industry. Rising healthcare costs have emerged as a major burden for the US economy, as the US spends a larger share of gross domestic product on medical care than other advanced nations. President Obama recently launched a push to control medical costs.

According to a 2006 survey by the National Association of Manufacturers, 87 percent of small and mid-sized manufacturing firms ranked escalating healthcare costs as their most pressing problem.

The Detroit automakers have been hit particularly hard, since foreign-based carmakers have lower health costs both in their home countries and in their US plants (due to having a younger US workforce than the Detroit Three).

Global competition, in general, has hit Detroit harder than many industries. Carmaking is a bedrock industry that many nations want to be in, and the rise of Japanese and Korean production has come at Detroit’s expense. As foreign rivals have risen, the Detroit Three have seen their domestic market share drop below 50 percent this year. Up next: imports from China.

But global pressures extend far beyond the auto industry, in a sharp reversal from the era right after World War II. When Presidents Eisenhower and Kennedy were in the White House, the US stood unrivaled as a global manufacturing powerhouse.

It’s not so much that America is declining. It’s that other nations have been moving forward faster, and industrialization has been spreading to new parts of the globe.

Americans adjust household economics

The competitive pressure is one reason many Americans feel it’s harder to keep moving ahead in their own household economics.

In a major survey released a year ago, the Pew Research Center found that Americans were less optimistic about their personal progress than at any time in a half century of polling. One-fourth of respondents said that in the past five years, they hadn’t moved forward in life, while 31 percent said they had fallen backward.

This isn’t to say that the American dream of growing prosperity has disappeared, but it is being tempered. The current recession is prompting millions of households to try to pare down on debt – which had soared to a record level in comparison with incomes.

That’s what GM is doing. For years, it made promises based on assumptions of market share and profits that haven’t panned out. Under bankruptcy, it is lightening its debt load (investors will swap bond holdings for an equity stake in the firm) and paying a retiree healthcare trust with an equity stake rather than cash.

The whole country will soon confront some tough choices like this, economists say. Even as households are individually realigning, the government faces a looming shortfall in covering the promises it has made regarding Social Security and Medicare. It’s not an insurmountable challenge, but in coming years, economists say, the status quo will be no more tenable for the federal government than it was for GM when the recession deepened last fall.

Material from wire services was used in this story.