The jobs tour the President is taking across the nation underscores the fact that unemployment — more than health care or Afghanistan — is the most pressing issue facing the Obama administration. As Arianna Huffington perceptively put it last month, “Just as Katrina exposed critical weaknesses in the priorities and competence of the Bush administration, the unfolding unemployment disaster is threatening to do the same for the Obama White House.”
And what a disaster it is. The unemployed number is between 15 and 16 million — 50% more than the last time unemployment really ballooned, in the early 1980s. Nearly 10 million men are out of work, about the same number of men who were jobless at the very depth of the Great Depression in 1932.
What caused this terrible thing? We can to a degree absolve the Obama administration. For however feckless were the stimulus bill and cash-for-clunkers, the problem has causes that stretch back before 2009. Places like Detroit, where today one-third of African-American workers are unemployed, have seen jobs dry up for decades. Why has this been the case?
The first place to look, believe it or not, is to one of the nation’s great windbags: the filmmaker Michael Moore. The first movie Moore made, the one that made him a star documentarian, was “Roger & Me” (1989). The film alternated between shadowing General Motors CEO Roger B. Smith and showing people who had been laid off from GM plants in Flint, Mich. dealing with evictions. The publicity for GM was so painful that Smith had no choice but to resign in 1990.
Moore’s gripe in the movie was that GM was not reinvesting profits in its Michigan-area factories. This was far from true, and GM was paying the price. In 1993, Michael Jensen of Harvard Business School published a study showing that in the 1980s, GM had the worst investment-return record of any company in the Fortune 500. For despite some $10 billion in investments outside the company, it had still plowed about $50 billion back into its core competency, car-making. As Jensen wrote, all this “produced a firm with a total ending value…of $26.2 billion. Ironically, its expenditures were more than enough to pay for the entire equity value of Toyota and Honda….If it had done this…, GM would have owned two of the world’s low-cost, high-quality automobile producers.”
Smith’s signature innovation as CEO was to begin the process of getting GM out of the car business. He knew that, for whatever reason, the firm was hopelessly uncompetitive against its rivals. Therefore, Smith started to invest money outside the company, so that shareholders might see some return. Smith’s GM bought electronics firm EDS and Hughes aircraft, the latter to include a little arm called DirecTV. As it turned out, these investments paid off handsomely. When GM sold DirecTV for $6.6 billion in 2003, its subscriber base had gone from nil to 11 million in 10 years.
In the 1980s, Smith understood that if it kept committing to car-making, GM was throwing good money after bad; indeed, that it had to cede car-making to its betters and get into a line of work that suited its competencies. Otherwise, at some point, an Armageddon would occur where the money would run out and an outsized work force would have to be suddenly let go.
That Armageddon, of course, happened last year, with the federal government stepping in to re-capitalize GM’s car-making business, repeating the mistake identified in Jensen’s research. The question is why, circa 1990, GM stopped doing things like buying the next DirecTV and started pouring its profits into car-making again.
Well, “Roger & Me” had something to do with it. The release of the movie corresponded not only to Smith’s departure as CEO, but to the inflection point where GM decided to double-down on a future of car-making. The top brass at GM simply could not take the heat Moore was giving them.
Today, Flint employs 20,000 fewer workers than when Smith retired in 1990, and far from being a “mark of excellence,” GM represents the worst corporate failure in modern business history. In the wake of “Roger & Me,” had GM executives toughed out the Moore criticism and kept investing outside the company, GM today might be a big dog in some new-fangled area, in computers, media, medicine, who knows, with lots of employment in tow. But Moore won the day, and the industrial moonscape that now is Michigan is his testament.