To Bail or Not to Bail?

Posted on Dec 21, 2012 | 11 Comments

Of all our institutions, business is the only one that society will let disappear,” Peter Drucker wrote in 1968 in The Age of Discontinuity. You might say that was then.

Today, many of our biggest corporations, including banks and automakers, survive thanks only to government intervention.

This week, in a milestone of recovery at one of these automakers, General Motors said it plans to buy back $5.5 billion worth of stock currently held by the U.S. Treasury, which has indicated that it will completely unwind its position in the company over the next year or so. This first step puts GM on a path to regain its full independence and shed the “Government Motors” label.

Still, critics complain of the estimated loss sustained by taxpayers: about $5 billion. Supporters tout the number of jobs supposedly saved: more than a million.

Image credit: General Motors Corporation

Image credit: General Motors Corporation

In short, some Americans support all the bailouts; some Americans oppose all the bailouts; some Americans oppose the bailouts of the automakers but not the banks; and some Americans oppose the bailouts of the banks but not the automakers.

Into which camp would Drucker have fallen?

Notably, he lived during a time of increasing state involvement in the economy (not just in the United States but around the world), and he well knew that when any major business is in trouble, outside forces might intervene to save it. One notable case was that of steelmaker Krupps in Germany, where generous worker benefits put in place by Alfried Krupp had eventually crippled the company.

Krupp provided his workers with housing, schooling, health care, training, small loans at low interest and so on,” Drucker recounted in Management: Tasks, Responsibilities, Practices.  But it was unsustainable: “The family was ousted from management by the German government and the banks as their price of rescuing the business.”

Drucker also saw Alfred Sloan of GM lend rival Ford a helping hand in the 1940s precisely because a government-led bailout was otherwise inevitable. “When Henry Ford II took control and began to turn around his company by raiding GM for managers, Sloan went all out to support him,” Drucker recalled in Adventures of a Bystander. “The country could not let Ford go under; and the alternative to Ford’s recovery as a private business was a government takeover that could only harm GM. Helping Ford’s rescue was thus ‘professional’ responsibility.” And, of course, Drucker also witnessed the bailout of Chrysler in the U.S. in the late 1970s.

However resigned Drucker may have been to bailouts in practice, though, there is no doubt that he fiercely opposed them in principle. Indeed, Drucker thought it a virtue that private business could vanish if it was ineffective—unlike government, which just keeps going and going no matter what. “We want privately owned business precisely because we want institutions that can go bankrupt and can disappear,” Drucker declared. “If we want a really strong an effective government, therefore, we should want businesses that are not owned by government.”

Do you consider the bailout of GM to have been a policy success? Why or why not?


11 Comments

  1. Richard B. Mann, PhD
    December 21, 2012

    The GM bailout was a mistake, IMHO, because the problems were not solved (excessive union benefits and retirement plans). If GM had gone through the normal bankrupt system, GM would have recovered on more sustainable basis.

    Some jobs had to be lost, especially “dead-head” jobs protected by union contracts. GM would have been a leaner company that could survive, and efficient suppliers would also cave been better off. When waste builds up, the best solution is to get rid of it. Business IS NOT a sheltered workshop!

    Reply
  2. Maverick18
    December 21, 2012

    The Government is about to “write off” a substantial loss on GM stock. GM has survived, but is certainly not as robust or competitive as it should be. Nevertheless, the policy success is apparent; the Administration bailed out the auto industry to an extent, and the financial industry to a greater extent, and got itself reelected.

    Reply
  3. Raj Shankar
    December 21, 2012

    I am a big Drucker Fan! Agree with him on the intent behind the statement. We should allow firms to experiment, create value and fail if they cannot do it in a sustainable manner. The trouble begins when there is a social challenge because of the closing – Ex: jobs. Many times we find companies that live on help of governments continue the higher than average salaries, bonuses, etc without the slightest concern that it is tax payers money that is being doled out. This is because many of them are ignorant that they have been given a lease of life to ensure the many 1000′s who work for them don’t lose their jobs. To implement such bailouts, leaders in organizations that receive them require much greater principles and conscience. The world needs more leaders who live for the greater good than for their own! Though governments need to continue to protect the interests of their citizens, there needs to be more responsibility and accountability on behalf of the leaders / individuals. This is more for the larger stability and sustainability of the society at large.

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  4. RL Mitchell
    December 21, 2012

    Michigan and Wisconsin have been going through the pain that I believe would have been lessened, if GM had been allowed to go through the bankruptcy process. The conversations that would have been held, would have highlighted the issues, making more people more informed. GM’s management watched as Ford’s management made the tough decisions to downsize, making Ford ‘leaner’, and more able to survive. The government bailout of GM postponed and in some ways, covered up, what needed to happen… accountability is critical to organizational effectiveness.

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  5. Carl
    December 22, 2012

    Bailing out the banks in theory means more money available to buy cars.
    What I can’t get my head around is the fact that in todays real time Company/Bank dashboards how on earth can they run up so much debt without the warning light going off,is there no threshold of debt beyond which it becomes fatal ?
    Disappear ok, but because of poor management or head in the sand ,I hope not.

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  6. Jeffrey Tiberi
    December 22, 2012

    Look to nature to see how death replenishes what remains. Everything has an end. If you are not thoughtful, the end arrives sooner.

    Reply
  7. Jeffrey Tiberi
    December 22, 2012

    Look to nature to see how death replenishes what remains. Everything has an end. If you are not thoughtful, the end arrives sooner.

    Reply
  8. George L. Williams
    December 23, 2012

    Post-2008 Meltdown of our economy, and post-2012 election campaign, I am more convinced that the models for large business success, and for small business survival have been radically changed from the models that pertained prior to the election of Ronald Reagan. As the old model died for large businesses, preyed upon by the likes of Boesky to Romney, large corporations began assuming the role of government, and, ultimately has attempted to install one of its own as leader of the nation.

    Access to capital has virtually disappeared for small businesses. Large businesses (ncluding banks and private investors) are entangled with government, either in an attempt to take over (the Cheney/Bush years), or to escape any oversight from government while they run amuk breaking laws and regulations.

    I question whether this is the result of the collapse of Communism, the rise of Globalization, or both. Whether or not government should “bail” out business is rather moot if it is no longer possible to determine where the lines dividing government, business (and academia) are drawn.

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  9. Alba Patricia Valencia
    December 23, 2012

    It’s true that many of our biggest corporations, including banks and automakers, survive thanks only to government intervention, today. Also it’s true that the Neoliberal Model (Milton Friedman), where it is postulated that it is the market, and not the State, who should regulate the economy, where there is a competition on the backgrounds of their advantages, but not of the official support.

    At this stage, and following the trend of the perspective of economic development, the bailout of GM to has not been a policy success. Because, we are in a state of competition working above the basis of comparative advantage in a market with many suppliers, and we are working a lot, as is usually in the savage capitalism, work hard and low income.

    Es cierto que muchas de nuestras grandes corporaciones, incluyendo los bancos y fabricantes de automóviles, sobreviven hoy sólo gracias a la intervención del gobierno. También es cierto que el Modelo Neoliberal (Milton Friedman) en el que se postula que es el mercado y no el Estado quien debe regular la economía, en el cual se compite sobre la base de sus ventajas y no del apoyo oficial.

    En este punto y siguiendo la tendencia de la perspectiva de desarrollo económico, el plan de rescate de GM no ha sido un éxito de la política. Porque estamos en estado de competencia, trabajando sobre la base de ventajas comparativas dentro de un mercado con muchos oferentes, y trabajando muy rígido como usual en el capitalismo salvaje, trabajo duro y bajo ingreso.

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  10. Mike Grayson
    December 25, 2012

    If President Obama is going to take credit for “saving the auto industry” then he also needs to take the blame for terminating the pension plans of 20,000 non-union workers at Delphi, while protecting the pensions of unionized workers. Some workers say up to 70% of their pension vanish.

    The problem is that no attempt was made by the Federal Government to create a level playing field where all workers shared an equal burder. In a lawsuit, 62,000 pages of documents were reviewed that clearly constructed how the decision was made strictly to the benefit of the union workers, at the expense of the non-union workers.

    The Federal Government should never have the power to choose winners and losers in private business. Their power should be limited to establishing the rules that ALL parties must follow.

    Reply
  11. What Peter Drucker Would Be Reading | The Drucker Exchange | Daily Blog by The Drucker Institute
    December 26, 2012

    [...] Comment of the Week: Last week, one of our posts examined the government bailout of General Motors. Had it been, on the whole, a success?  Our readers had a variety of answers, most of them [...]

    Reply

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