Sunday, February 26, 2012

History for Amnesiacs: The Auto Bailout

The president tells us that without his intervention things in Detroit would be worse. I believe that without his intervention things there would be better. -- Mitt Romney
Romney's assertion that the government shouldn't have bailed out GM and Chrysler has received a lot of press due to the Michigan primary this week. It deserves some attention, not because this is a policy that Romney would follow as president, but in the catalog of "Dumb things that pandering candidates say."

I won't refute this at length because it doesn't deserve it. Romney suggests that the governments didn't need to provide bailout money, that other (unnamed) investors would have stepped, but that the Democrats made a sweetheart deal with the UAW (auto workers union), which is a big union contributor for the Democrats.

This story contains plausible elements. Maybe there were potential investors. Maybe the Democrats were happy to cut a favorable deal for the union--that part sounds very plausible.

But the truth is quite different, and Romney conveniently manages to ignore it in favor of Republican talking points that have practically become dogma. The most important point is that there were no other investors. If the government hadn't stepped in, GM and Chrysler would have been liquidated, along with possibly a million jobs.

History of Republican Talking Points about the Bailout

The GOP's first position on the bailout was claiming that Obama was going to nationalize GM and Chrysler and put government bureaucrats in charge. When business leaders were hired, the story morphed: Obama was going to trample on bondholders' rights. Bondholders conceivably had the right to liquidate the companies and try to get as much money as possible by selling off the parts.

This story contained some truth. If jobs were saved, Obama would happily see the bondholders take less. The story also hides something that the GOP hoped for--a greatly weakened UAW. One problem with this viewpoint is that it's clearly unfriendly to regular workers, so the GOP has softened it. It's not just the bondholders that were abused, but also regular people who had settlements from GM or Chrysler for injuries caused by autos.

The latest conservative story jettisons the concerns of bondholders. The government should have butted out, let the bankruptcy process work, and the industry would have survived in good shape. Instead, Obama thrust the government into the bankruptcy to deliver the goods to his union cronies.

It's true that the union ended up with the better deal in the bankruptcy. The UAW now has a major stake in Chrysler and responsibility for retiree health benefits. Perhaps it now has sufficient incentive to be careful with money, since it isn't all "other people's money."

Which Side Are You On?

It's hard for me to be as angry with UAW as their severest critics are. The press is incredibly split on the auto bailout. You won't hear this kind of rhetoric in the MSM:
[The] legal rep of Chrsyler investor Perella Weinberg, reminds that then-Auto Czar Rattner warned that unless they accepted Obama's UAW Bailout they would come "under threat that the full force of the White House press corps would destroy its reputation if it continued to fight." -- Henry Payne, Detroit News
This split makes it hard for me to feel sure I can decipher the truth, but here goes my best guess:
  • GM and Chrysler would have been liquidated without the government bailouts that permitted them to keep operating. This would have resulted in even larger job losses at a time when the economy was hemorraghing jobs.
  • Bondholders, some of whom speculated on distressed bonds, were going to take a big hit one way or another. It wouldn't have been for the greater good for them to have a richer settlement at the price of so many jobs.
  • The UAW got a better deal due to the friendly Democratic administration than it would have otherwise.
  • The conservative press complains that the government edged out private capital, but doesn't say who. They also say it was a give-away to the UAW, but they don't point to which provisions of the deal were egregious. I smell some weakness to their argument.
What really drove the GOP to oppose the auto bailout? Did they really want all those jobs to disappear? No, they probably didn't. But they hate the UAW so much that they would have added an extra million people to the unemployment rolls to cripple a major union backer of the Democratic party. And it's clear that the Democrats were willing to risk a great deal of taxpayer money to back a deal that kept the UAW in place. But on the whole, it was a deal that saved jobs and forced enough reform that Chrysler and GM have a promising future. It was worth it.

Update 6/8/15. The GOP still can't admit they were wrong. Here's a good summary--shorter than mine, but from a professional source.

Update 3/12/16. I'm still arguing with people on the net about this. One, a real weirdo who has some interesting sources, pointed me to this article by a corporate restructuring consultant. My argument with the commenter was how much credit Romney deserves for the preservation of the car companies through bankruptcy. I don't give him a lot of credit because:

  • Restructuring was necessary, and everyone knew it.
  • Bankruptcy was one way to restructure. Many resisted, but it's not as though Romney was the only or main proponent.
  • Romney was vague on how to keep the car companies going during the restructuring, and that funding (the bailout) was absolutely necessary too.
This article shows some of the context of the discussions. The bailout money was filibustered, but Bush gave them some TARP money to keep going. I tried to find out if Romney supported a bailout. He clearly was against a 'blank check' which was never going to happen anyway. The best evidence I found showing support is this video clip. Romney was strong on bankruptcy, and vague on funding. It was the same in the other cases, such as his op-ed. It's quite a stretch for anyone to claim Romney saved the auto industry. 


Couves said...

Sometimes saving jobs is a bad thing when the laws of economics would otherwise dictate that those jobs go away. Whether the Republicans’ position is cynical or not, creative destruction is a necessary part of our economic system. And when every last job has the taxpayer as its backstop -- that’s when economic insecurity will have reached its height.

Anonymous said...

The American people's investment in American auto-companies, their workers, suppliers and dealers, turned out of be a good investment for us. That's the only important thing. Too bad it kills the GOP to have to suffer a lost argument on Obama's effective plan and management to save GM and Chrysler. They should just admit that the gamble paid off, risky as it was, and move on. Instead, their hatred of all things Obama has led them to write-off Michigan.

ModeratePoli said...

@Couves, You say "sometimes saving jobs is a bad thing," but I suspect your position is much closer to "saving jobs is always a bad thing."

There were some important considerations in the auto bailout--mainly the large number of jobs concentrated in one industry. I read, but can't immediately cite, that 20% of this country's manufacturing jobs were on the line. That's a huge number that we, as taxpayers, wouldn't want to be supporting for any length of time. But these jobs also had great potential for making sufficient profit, so it wouldn't be government supported for long.

"...when every last job has the taxpayer as its backstop..." This exaggeration isn't true, not with jobs. The job losses in the recession prove it. Now, if you had said 'banks' you might have a point...

Couves said...

MP - You misread my last line. My point was to try to provoke you to do a thought experiment. If, as you say, we should act to save 20% of our jobs, then why not, ultimately, 100%? The answer is obvious -- our economy would become weak, unproductive and dependent on regular infusions of federal dollars. Our collective standard of living would stagnate and possibly even decrease.

As you point out, there are certainly political incentives to shield entire industries from economic reality, but there’s no way these actions can be justified as serving the general welfare.

ModeratePoli said...

@Couves, I don't take the bait for an all-or-nothing argument. Most questions don't have all-or-nothing answers, and I won't be pressured into that false scenario. It is possible to apply reasonable criteria on when to bailout or not, (mostly not) and that is what I support.

If you want to be black or white, you'll have to do it without me. It's definitely not my style of thinking.

Couves said...

MP - I'm not baiting you, I'm pushing you to define your "reasonable criteria on when to bailout or not." In your previous comment you said it was necessary because a lot of jobs were at stake... that leads me to believe that if *more* jobs were at stake, you'd be even more likely to support the bailout (all other factors being equivalent, etc etc.).

And as for being a "black or white" thinker -- I actually don't think that anywhere close to 20% of US employment was saved by the bailout, that was your assertion. The bailout is just one more market intervention that adds up to the stunting of real economic growth for the foreseeable future.

I'm a liberal in the classical sense -- I will support market interventions, but only if they can be shown to serve the common good, which this bailout fails to do.

ModeratePoli said...

@Couves, I wrote "20% of manufacturing jobs" not all jobs. There were concerns that only Chrysler, GM, and their suppliers would be affected, but also Ford and Toyota, through shared suppliers or joint ventures.

For me a bigger consideration is whether the companies have a good chance of being profitable quite soon, and not needed continuing government infusions. When this is true, they can normally find outside investors, but 2008-2009 was anything but normal.

I still have the sense that you are against all bailouts all the time, so aren't open to considering if the auto bailout was a good idea.

erigena said...

couvre, you're missing the main point. when the car companies began to fall, the whole economy was collapsing. if on top of the millions of jobs we were already losing we had lost 20 or 30 million more, we wouldn't have a country left by now. we'd be forted up in our caves with our shotguns defending our last few sacks of rice.

Couves said...

MP, all of the bailouts were economically indefensible. When economic downturns happen, marginal businesses fail -- that's a necessary part of the free market. Thank you for the correction on the 20% number... I still don't believe it. IIRC, that was the number thrown around by the auto industry.

erigena... I'm not sure if you're trying to support or to ridicule MP.