In what has become part of his general re-election strategy, president Barack Obama is touting the government bailout of automakers GM and Chrysler as a great success. “The American auto industry was on the verge of collapse. And some politicians were willing to let it just die. We said no,” Obama told college students last week in Ann Arbor, Michigan. “We believe in the workers of this state.” Yet much like other pronouncements of “fact” that come from this president, the devil is in the details, many of which don’t remotely square with the reality. Much like the banks, the auto industry was “too big to fail,” and it was “saved” in exactly the same fashion: with a multi-billion dollar bailout, courtesy of the American taxpayer.
Let’s begin with the president’s central assertion, i.e. the American auto industry was on the verge of collapse. While there is no question that GM and Chrysler were in trouble, several other U.S. auto producers, such as Ford, Honda and Toyota, were in no danger of going under. The reason GM and Chrysler were in trouble was largely due to their own shortcomings, namely mismanagement, and labor costs that were out of control. Moreover as this article from 2005 reveals, GM was in trouble long before the current financial crisis exacerbated its problems. From 2000 to 2005, GM had already lost 74 percent of its market share, was saddled with more than $1600 per vehicle in “legacy costs” (read: “union pensions and health benefits”) and, because of its union agreements, the automaker couldn’t close plants or lay off workers without paying a stiff penalty, or run plants at less than 80% capacity–whether they made money or not.
Thus for GM and Chrysler as well, it wasn’t a matter of if, but when such profligacy would be their eventual undoing. As the financial crisis hit, both automakers were on the verge of collapse. Yet that reality didn’t sway Congress, which, at that time, was insufficiently attuned to the “never let a crisis go to waste” mentality that would eventually lead to multi-billion dollar bailouts of the banking sector and insurance giant AIG. Congress voted against emergency loans in late 2008.
At that point George W. Bush made the kind of end run around Congress that president Obama has raised to an art form: after being informed by Treasury Secretary Hank Paulson that he (Paulson) had no authority to use funds from the Troubled Assets Relief Program (TARP) for an auto bailout, the former president authorized $17.4 billion in loans with the proviso that both companies develop restructuring plans after Obama became president. Mr. Obama, as is his wont, then “doubled down” on his determination to use taxpayers funds to save both companies.
No doubt he was aided by a document produced by the Center for Automotive Research (CAR). Their worst case scenario, a 100 percent cessation of operations by the “Detroit Three” (Ford, which never took bailout money, was included in the scenario) “would be a loss of nearly 3.0 million jobs in the U.S. economy–comprised of 239,341 jobs at the Detroit Three, 973,969 indirect/supplier jobs and over 1.7 million spin-off (expenditure-induced) jobs.” Yet as it is pointed out here, “the report gave no consideration to the more realistic scenario that one or two of the Detroit automakers might turn to Chapter 11 reorganization.”
Why not Chapter 11 bankruptcy? Politics. The same unions that threw their support behind Barack Obama’s presidency wanted quid pro quo. A Chapter 11 bankruptcy proceeding was viewed as a lose-lose proposition for the United Auto Workers Union (UAW), whose contracts would have undoubtedly been re-worked to include major concessions, and a pro-union president eager to portray himself as a savior of a major American industry. That the administration made a complete mockery of bankruptcy laws in the process was of little consequence.