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.


Sources:

• Left-leaning and administration: NY Times Feb. 19, 2012, Feb. 23, 2012.
• Right leaning: Romney Op-Ed, Wall Street Journal Feb. 25, 2012, Fox News, Auto News.
• Industry bloggers and newspapers: Yahoo! Autos, Michigan Auto News, Cleveland site, Detroit News Oct. 22, 2009, Jan. 12, 2010, Dec. 7, 2011.

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. 

Romney's economic plan - FAIL

It's time for me to accept that Romney may well be Republican nominee, despite the appearance that half the Repub base can't stand him. Since I live in Massachusetts, I've experienced Romney as a governor but I can barely remember it. That indicates that he wasn't a great governor or an awful one. That's the sum of my firsthand experience. For any other questions, I have to research just like anyone else. This comment from an Atlantic blog seconded my impression of him and prompted my flurry of Romney research:

"He's seeped himself in the republican orthodoxy with a wink wink and nod and a smile at the camera.  I think he can largely free himself from that come the general election." --Atlantic post

My impression of Romney as a campaigner: polished delivery, strong on the details, personable, moderate. I don't remember many policy proposals, but the entire field has been rather lean on policy (except 9-9-9), so that's par for the course. I had to look at the goods, so I skimmed Romney's 87-page economic plan.

The good news is that the plan is not a typical Republican conservative supply-side fairy tale. Of course there's Obama-bashing on every other page, but there's some promising stuff too. What I liked:

• Lower tax rate on cap gains, dividends, interest, but importantly, only for tax payers under $200,000.
• Cut corporate rate to 25% and end rules that discourage repatriation of overseas profits.
• An explicit shout-out to Simpson-Bowles' recommendations on tax reform - broader tax base, simpler, fewer deductions.
• A cap on regulation that measures compliance costs, and doesn't allow an overall rise in compliance costs.
• A bit of respect for Dodd-Frank disguised as criticism.
• Cut, cap, and balance but at 20% of GDP, not the 18% level that most conservatives quote.

What I didn't like:

• Eliminate estate tax (but this is such a Republican plank, I'm not too surprised).
• Mention of the illusory tax compliance cost of $400 billion a year. I don't believe we spend 2.7% of our GDP in tax compliance. Where the spending is concentrated, in complex business arrangements,  will likely remain.
• A poke in the eye at the auto industry over the bail-out--UAW made out, but investors (carefully not called creditors) got screwed. I predict he'll change his tune on this one in the general campaign.
• Only small fixes to Social Security.
• A shout-out to Ryan's plan to voucherize Medicare, but with unspecified differences. This void shows how dangerous a definite policy commitment would be. I doubt that Romney will choose the deeply unpopular voucher approach.
• Turn Medicaid into a block grant. (I'm on the fence as to whether this will be beneficial or not.)
• Support for a balanced budget amendment that is more a strait-jacket than a workable plan.
• Tough talk about sanctioning China for currency manipulation.

Gaping holes in the plan:

• No plan for the uninsured or for lowering health care costs.
• No specific areas of spending cuts, but a reduction of the federal workforce by attrition.
• No proposed federal budget with numbers.

So, my overall impression is that the plan isn't extreme considering it came from a Republican: no major tax cuts, a reasonable goal on regulation. But it fails in two essential ways:

• It isn't a plan unless it contains actual numbers.
• It isn't honest about what will be painful. 

This plan is meant to get Romney elected, and only then will we find out if he'll grapple with tough issues. I'm sure no one is surprised that Romney is playing it safe.

 ...but don't expect a straight answer.

Should I review Michele Bachmann's plan now? ... No, I'll stick to real candidates.

Update 12/13/11. Romney announced his plans for Medicare reform, and they look a lot like Ryan's plan to voucherize the program.The big advantage of vouchers is that the federal government can decide how much to spend year-to-year. A big disadvantage is that it puts cost-containment onto insurance companies. To be fair, cost-containment is the boogey man in all Medicare plans. ...Oh, it's not a voucher, it's premium support. Don't ask me to explain the non-existent difference between the two.


Wall Street Journal review of Romney's plan