article

06.05.09

Is GM the New Amtrak?

Taxpayers are still sinking billions of dollars into Amtrak—almost 40 years after buying it. Economist James Langenfeld says the bailout of GM could be an even bigger disaster.

Both Congress and the Obama administration apparently believe a bailout is best for GM, and that “what’s good for General Motors” is still good for America. So we taxpayers appear to be on the brink of owning most of GM. Do we know what we are buying, how long we will own it, and what it will really cost? Perhaps we can learn some lessons from another government owned company, the National Rail Passenger Corporation—aka Amtrak.

What we are buying is a greatly slimmed-down GM. The plans call for GM to cut its most unprofitable cars and focus on a core set of products. The unions, which faced a bigger downside if GM had gone into private bankruptcy, made concessions and got a sizable stake in the company. Top management has been replaced, but it is unclear how much the management structure that led to GM’s freefall will change.

Amtrak is now 38 years old, and in middle age shows no sign of moving out of the taxpayer’s house.

What taxpayers bought with Amtrak is not exactly the same, but it raises many issues about the future of GM. In the 1960s, private railroads wanted to dump their unprofitable intercity passenger service and concentrate on their more-profitable freight service. So in 1971 the U.S. government obliged them by creating Amtrak. There was no existing management structure, so one needed to be invented. The new management team was populated by former rail employees, former airline executives, and bureaucrats from places such as the U.S. Post Office. Amtrak had a government-affairs department rather than a finance department, which proved to be an omen: Train service was provided to states with powerful senators, even if this involved huge losses and few passengers.

The talk then was all about becoming profitable, but the reality has been anything but. Amtrak is now 38 years old, and in middle age shows no sign of moving out of the taxpayer’s house. The government gives Amtrak about $1.5 billion per year, not including an additional $1.3 billion from the recently passed American Recovery and Reinvestment Act. These figures may seem small compared to the $50 billion recently plowed into GM, but Amtrak subsidies amount to $85,000 a year for each Amtrak employee, or about $35 every time Amtrak sells a ticket. Bottom line: It costs taxpayers about $1.40 for every $1 of revenue Amtrak takes in. And Amtrak is still mindful of the importance of its ties to Congress. Its Web site has an extensive "government affairs" section that conveniently lists Amtrak services by state, so senators can be sure to know what their state might lose if Amtrak is not fully funded.

President Obama and his administration seem to understand that creating another Amtrak is not promising. They speak in one voice about not wanting to run a car company, not planning on micromanaging the company, and selling the government's stake as soon as possible. All good thoughts, but these same officials cannot provide any timetable for getting out the car business. Moreover, there are early signs that GM may have many of the same problems that Amtrak has faced. Given the tone of some legislators in hearings this week, Congress appears ready to step in and prevent GM from rationalizing its dealer network. More political issues are likely to arise as more suppliers and workers are affected by the government-orchestrated GM bankruptcy. It seems unlikely that any congressional actions would help create a more competitive GM, and there is a real possibility that the $50 billion is only a down payment.

Can the administration avoid falling into a long-term commitment to GM? One real unknown is whether substantially the same management that put GM where it is today has the ability, imagination, and drive to return GM to its long-lost entrepreneurial roots. If so, and the government can avoid making political rather than economic decisions, then GM should survive and the Obama administration will get its wish to be out of the car business. If not, who will make the decisions to replace GM’s management? Congress? A new car czar? There is no good choice here, and we may very well end up with GMtrak.

Dr. James Langenfeld is a director at the economics consulting firm LECG and teaches at Loyola University Chicago. Previously he was a senior economist at General Motors and an analyst at Amtrak.