The job cuts announced by GM and the shrinking of the industrial base are the bells tolling for the next crash.
“What’s good for General Motors…” once upon a time was “… good for the USA”.
That’s a reasonable paraphrase of what Charlie Wilson, the then CEO of General Motors (GM), said back in 1953. President Eisenhower had nominated him to be Secretary of Defense. During the confirmation hearings, he was asked if he could make a decision that goes against the interests of GM. Wilson said he would, but that he couldn’t conceive of such a situation “because for years I thought what was good for our country was good for General Motors, and vice versa”.
At the time, there was a great deal of truth in it. “About one in every 200 working people in America worked for GM, and the company’s revenues equalled about 3 percent of the country’s gross domestic product.”
Right now, however, what’s good for GM is bad for the US. It’s closing three car plants and will halt operations at two plants making transmissions. It will cut 14,700 jobs. That includes reducing its white-collar workforce by 15 percent, about 8,100 people.
The effect of closing a plant is more like tossing a boulder in a puddle than a mere pebble in a pond. Jon Gabrielsen, a market economist who advises carmakers and auto suppliers, points out, “It goes from an auto supplier all the way to the clerks at Kroger.”
“Anywhere there’s an assembly plant or an auto-related plant that’s going to close, it’ll wipe out the town. Anyone who loses a job will have to move to get a job.”
Earlier this year, Ford had announced that it was reorganising and that there would be significant job reductions, though the numbers were not specified. “Morgan Stanley has speculated that Ford may pare more than 20,000 jobs from its global workforce of 202,000″.
In May, Harley Davidson announced a US plant closure. It’s a much smaller company, with a much smaller impact, but it’s still a harbinger. Most headlines on Harley Davidson’s announcement were similar to the one chosen by NBC: “Harley-Davidson workers stunned by plant closure after tax cut.” All such headlines should have been followed by, “Well, gosh, duh!” Meaning that the workers – and the media and economists – should not have expected an increase in industrial jobs to follow tax cuts, they should have expected job cuts.
They should have expected job cuts for two reasons – one trivial and one significant.
The trivial reason is that almost anything that Donald Trump promises is likely not to materialise. The much more significant reason is that history tells us job cuts usually follows tax cuts.
The hollowing out of America’s industrial heartland followed the Reagan tax cuts and the hollowing out of Britain’s industrial heartland followed Thatcher’s programs. I dare not say that the relationship is causal as that would provoke heart attacks among economists, but there is an undeniable correlation. There have been various tax rises and cuts since. There is no instance in which tax cuts were followed by industrial growth. There are multiple instances in which tax cuts have been followed by job cuts. Among the most notable was the tax repatriation (bring back money from overseas at special low rates) under George W Bush, which was followed by massive layoffs by the companies that brought back the most money.
What has followed tax cuts is financialisation – shifts in the economy away from the production of goods and services to playing with money. This includes lots of mergers and acquisitions, lots of exciting and fun financial instruments, and vastly increased debt – personal, business and governmental. Once again, the new tax cuts have been followed by all three. Quite quickly.
The managements at GM and Ford both believe that they are correctly reshaping their companies to respond to both current conditions and ready them for a changing future. If they’re right, and they may well be, then when that future comes, they will be better prepared to meet it and profit from it.
While autoworkers were aghast, “investors welcomed the news, sending GM’s shares up 4.8 percent to their highest closing price in about three months”. To coin a phrase, “What’s bad for autoworkers and America, is good for Wall Street!” That’s the problem. What’s good for GM may not be good for the nation.
The growing bubble
Which is growing faster and more certainly, the revamped car companies or the bubble?
Bubbles can be recognised and even defined by the distance between various markets and the “real economy”. The Financial Times Lexicon defines “real economy” as “the part of the economy that is concerned with actually producing goods and services”. After tax cuts, finance does not merely get disproportionately bigger than the real economy. It sucks money and activity out of it.
That’s clearly what’s happening.
The greater the distance between finance – a combination of market prices and various forms of debt – and the real economy, the more unstable the bubble is. At the beginning of the year, the stock market had already reached two times the height of the 2008 bubble and four times the height of the trough after that one crashed.
These jobs cuts, and the wage cuts that are likely to follow when autoworkers negotiate their contracts in the coming year, make conditions worse by reducing the amount of money going to people in the real economy – workers and salaried employees – the consumer base that buys real goods and services.
Most accounts attribute at least some of the problems to Trump’s tariffs, which were supposed to bring industrial jobs back.
There’s a special negative magic to Trump’s thinking when applied to actual economic activities. His gigantic investment in casinos was going to dominate the East Coast gambling industry. They went bankrupt. His overpriced purchase of the Plaza Hotel was going to make that icon even more iconic. It went bankrupt.
His tariffs seem to be playing out the same way. They have probably speeded up the negatives that follow tax cuts and possibly set off the alarm signals sooner.
Best guess is that these job cuts and shrinking of the industrial base – again – are the bells tolling for the next crash.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.