Wagoner Didn't Deserve It

GM's ex-CEO is a scapegoat. The problems with the auto industry aren't one man's fault. Why should he pay when so many Wall Street CEOs remain?

By Ed Wallace

"How did you go bankrupt?."…"First gradually, then suddenly."

— The Sun Also Rises, by Ernest Hemingway

It would be easy but incorrect to say that Sunday night's announcement, that Washington had forced Rick Wagoner to resign his position as head of General Motors (GM), came as a shock. After all, the American public needed to see some form of justice exacted for the meltdown of the world's financial system. Someone needed to pay for the excess that led to another unsustainable bubble that has since burst and thrown the world's economies into turmoil.

In case you need to update your scorecard, once again the executives that actually were behind our problems are either still sitting in their offices, drawing huge salaries and bonuses, or have safely moved into retirement with obscene riches. Never in American corporate history have we rewarded failure as we do now. Yet GM's Rick Wagoner has been sacrificed, forced to fall on his sword to satisfy the demands that "someone has to pay."

In reality, Detroit is actually one of the victims of the financial mess. Terminating Wagoner with extreme prejudice makes exactly as much sense as shooting the witness to a murder and saying the crime has been avenged.

Detroit's Fall Mirrored the Economy's

For Detroit, this day has been coming for a long time. Yet for virtually the entire decade, at least until the bubbles finally burst, hardly anyone seemed to appreciate that something was seriously wrong with the American economy. But the signs were there, had anyone had bothered to look at and understand what was really happening to the average American family.

In a nutshell, had the real economy—as opposed to what we were told was real—been doing well over the past eight years, we would not have seen such serious downward pressure on automobile prices, marked by suicidal incentives to move the product. And it was that downward price pressure that cost Detroit billions of dollars each year to sell their products. I asked Wagoner this question last summer: "If GM were paying the same level of incentives today that they paid in the late '90s, wouldn't the company have just had the most profitable years in its history?" Wagoner answered with one word, "Yes."

Because we don't keep important information in the forebrain for more than 90 days, this would be a good time to remind everyone that the past nine years have virtually wiped out a great deal of discretionary spending for much of the middle class. Their costs for food, energy, and gasoline all rose to unbelievable heights— and they did so during a period when we were being told that inflation was well under control. Moreover, while all of this was happening the average family's income either fell or remained neutral, depending on which study you prefer. Not surprisingly, then, during the same period the average creditworthiness of many Americans continued a two-decade decline.

Crushing Price Pressures

So, with their customers' disposable income being diverted to day-to-day necessities, and, at one point, $4-a-gallon gasoline, Detroit had to reduce its automobiles' prices each and every year just to entice anyone into their showrooms. There's no better example than that of the Chevrolet Silverado Extended Cab truck, which recently was being offered with a V8 for less than $14,000. In 1995, that same truck listed for over $27,000 and was purchased for more than $25,000. Detroit's inability to realize the proper yields on their vehicles led to further downsizings, closings of more factories, and the two-tiered wage systems for their future employees.

Yet, while everyone in the financial media has cheered those moves, smart economists know that this is an unsustainable series of actions for the future health of our economy. Because once you start reducing incomes, you will only make the pressures on pricing of goods more severe and more widespread.

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