In 1953, during confirmation hearings, President Eisenhower’s secretary of defense nominee, a former CEO of General Motors, said, “What was good for our country was good for General Motors, and vice versa.”
GM, at the time, was the world’s largest industrial company and its fortunes had a huge impact on the U.S. economy. Our economy was driven by the automotive and steel industries.
Today, GM is a shell of its former self. It is a high-cost provider in an industry with global overcapacity. During the Great Recession, the company filed for bankruptcy protection and needed a $49 billion bailout that ended up costing U.S. taxpayers $10 billion.
In order to survive, GM has to change its product line and ultimately replace human labor with artificial intelligence and robotics. So it is not surprising that GM has not spent the majority of its tax cuts on hiring people and increasing salaries.
On Nov. 26, GM announced it would stop production of six models, close five assembly plants and lay off 14,000 people.
Based on predictions by the Trump Administration, it wasn’t supposed to be like this. Unfortunately, what GM has to do in order to survive does not coincide with the talking points used by Republicans when they passed the Tax Cuts and Jobs Act last December.
They claimed that a huge proportion of the tax cuts would find their way into workers’ pockets. At one point, Treasury Secretary Steve Mnuchin declared that as much as 70 percent of the corporate tax savings would be spent on workers in the form of higher wages and benefits. His estimate was three to five times higher than previous estimates by the Bush and Obama administrations when similar tax cuts were proposed during their tenure.
Last January, I wrote a Signal column discussing the impact on unemployment and wages of similar tax cuts in several other industrialized nations. I compared the unemployment and real wage growth in those countries during the decade following the tax cuts with other industrialized countries that did not implement corporate tax cuts.
The only countries that saw increased wages and reduced unemployment after cutting corporate taxes were countries having relatively low wages to begin with. High-wage countries that did not cut their corporate tax rates, such as France and Germany, generally enjoyed higher wage growth and lower unemployment during the same period.
When my column was published, many either said I was wrong, or that it will be different in the U.S. this time. Do you remember Fox News displaying a huge banner behind its commentators showing all of the companies that paid bonuses at the end of 2017? This ostensibly was early proof that workers will be the primary beneficiaries of the tax cuts.
In the past year, I shared my column with several economists. They uniformly agreed with my conclusion that the corporate tax cuts would not result in long-term wage and employment growth. In fact, one of them has undertaken a similar but more comprehensive analysis and is planning to publish a white paper expressing comparable conclusions.
We are in the midst of an economic revolution that is every bit as transformative as the industrial revolution was 150 years ago. Human labor is being replaced with technology. As technology evolves, it becomes cheaper — making labor relatively more expensive. Businesses that do not effectively implement new technology will end up right next to the buggy whip manufacturers in the history books.
According to the Wall Street Journal, “Upon hearing the news about the cuts at GM, President Trump told GM CEO Mary Barra that she should stop making cars in China and open a new plant in Ohio to replace the one that is ending production.”
Mr. Trump clearly doesn’t understand the implications, or probably the existence, of the global economic transformation that is driven by technology. He does not understand that GM’s relatively high U.S. labor costs are unsustainable over the long term.
GM sells more cars in China than it does in the U.S. Most cars sold in China are made in China. That is because it is more economical to do so. Foreign car makers like Honda, Toyota and BMW operate U.S. factories to assemble most of the cars they sell in North America for the same reason.
GM is not accountable to President Trump — it is accountable to its shareholders. Like many other manufacturing companies, it needs to transform in order to survive.
Predictably, GM is using the corporate tax incentives to help finance its transformation, so don’t expect GM to be a U.S. job creator in the foreseeable future.
Jim de Bree is a semi-retired CPA who resides in Valencia. Gary Horton’s column will return next week.
