Is the Bailout of GM a Success?

E. J. Dionne thinks so, in an articled titled, “How Big Government Saved General Motors.” I’m not wholly persuaded.

Dionne’s argument for the claim that General Motors has been saved is…well, he doesn’t actually make much of an argument, beyond the fact that GM currently exists, which isn’t really saying much. His strongest claim is that the Obama administration kept its hands off GM, and is letting it run itself like a business, rather than making politicized choices for it.

Well, okay, but of course prior administrations kept their hands off GM as well, yet the company still managed to fail, so clearly “hands off” isn’t a sufficient condition. Perhaps it’s the combination of a massive cash infusion combined with a hands-off approach. Let’s consider that idea for a moment. Even if it works in this particular case, would Dionne really argue for a general policy of “give large failing companies massive amounts of taxpayer money, then leave them alone and don’t hold them accountable for that money?” I just don’t see that as a wise course of action.

But of course it’s not true that the Obama administration was completely hands off. Right after the bailout, Obama effectively fired GM CEO Rick Wagoner (suggesting that the President may actually have more business savvy than people like me anticipated!). Then he ensured that the company would not move its headquarters out of Detroit. Obama also pushed GM to put more focus on hybrid cars (the Volt will be available soon–at a price that’s drawing very wary looks from industry observers).

So Dionne is not precisely correct in his claim that the government hasn’t interfered. But if GM really is saved, he’d have an even stronger argument for government intervention if he pointed out how the governments “hands on” actions saved it.

But what are the grounds for claiming GM is saved? Again, Dionne doesn’t really say, beyond the fact that GM is still–at this moment–still building cars. Of course if you manage to shed a large amount of debt through bankruptcy and receive tens of billions of dollars from the government, you ought to be able to stay in business for at least the next year or so. Although, to be sure, GM was losing as much as $9-15 billion per quarter, so perhaps they deserve credit for stretching the $49.9 billion ($6.7 billion in loan, the rest in the government purchase of shares of GM) they received beyond 4 quarters.

Dionne could have mentioned that GM had repaid its $6.7 billion government loan early, but fortunately he didn’t. Fortunately, I say, because GM didn’t really repay the loan, at least not with their own money. Rather, they repaid the government loan with government money invested in the company, then asked the Department of Energy for a $10 billion dollar loan–even more than they had borrowed in the first place.

GM did indeed post a profit this quarter. But the real issue is how long they will be around. The big reason to doubt Dionne’s claim that GM has been saved is that we’ve gone through this before. Chrysler was bailed out to the tune of $1.5 billion in 1979, but thirty years later needed to be bailed out again. Granted, Chrysler did pay back that original loan, but was it really saved that first time around, or was its demise just delayed? Would we have been just as well off now if it had died then, and Michigan had begun it’s economic diversification a generation earlier, rather than having to give it another $15 billion three decades later?

Dionne’s major argument in favor of the GM bailout–which is distinct from a claim that it has actually saved GM–is that a million jobs would have been lost if they had not saved the auto industry. The rough math works out to $50,000 per job (it’s hard to say exactly, as the final cost is unknown until the government sells its shares of GM, and we see if it pays back it’s DOE loan. It’s actually possible the government won’t take a loss, or will take a very small one, on this bailout. But there’s still the question of whether it was an efficient use of public funds.

Dionne claims also that without the bailout, “[t]he decision to lose one of our core manufacturing sectors would also have been irreversible.” Ponder that for a moment. If GM went out of business, no other company could have stepped into meet the demand for automobiles in the U.S. Really? Dionne is primarily worried about jobs, but he seems not to notice that Honda, Subaru, Toyota, Kia and Mercedes all employ American autoworkers. He seems not to notice that some of the Big Three’s plants are quite modern, and buying them at firesale prices might have been more attractive than building a new plant from scratch. He seems not to understand that letting GM or Chrysler simply go into bankruptcy and be sold off might have resulted in new owners, rather than the wholesale elimination of the company.

In short, E. J. Dionne (whom I like, really–he’s one of the few liberals who ever has anything good to say about libertarians), is looking only at the surface, ignoring the facts, and not considering the long-term implications of continuing to bailout failing firms just because they’re large. In the best case scenario the government turns a small profit on the GM bailout. But by bailing out GM–as with their bailouts of the large banks–they only create incentives for businesses to act carelessly, anticipating that the government will be their lender of last resort. That’s not a path toward creating a more stable economy.

Just because the teenager with the car keys gets away with reckless driving once doesn’t mean he always will. It just increases the odds he’ll drive more recklessly in the future, with predictable consequences.

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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10 Responses to Is the Bailout of GM a Success?

  1. James K says:

    There’s also an unstated premise that saving the US auto industry would be a good thing. Perhaps you car industry is too large and a partial collapse would be beneficial. During Rogernomics, New Zealand lost most of its manufacturing base, but I think we’re stronger for it, we’re focusing on our comparative advantage in stead of trying to do a bit of everything.

  2. James Hanley says:

    James K,

    It would be hard to overstate the mystical awe Americans have for manufacturing in general, and the auto industry in particular. Most observers of the auto industry agreed that GM had too many different brands, but didn’t think that overall size could possibly be a problem. Since I moved to Michigan, I’ve been fascinated by the attitude of the Detroit newspapers toward the auto industry. It is a rare day–literally–when there’s not a front-page article about the auto industry in both Detroit papers, usually above the fold. And for several years (until the bailout and bankruptcy) there was a sort of death-watch countdown as GM lost market share to Toyota. The auto industry journalists seemed certain that remaining the largest auto company in the world, by units sold, was tremendously important, even though GM was losing money on every unit sold (which of course brings up the old punchline, “we make it up on volume”).

    Somehow we lose all rationality when it comes to the auto industry, even as we increasingly drive “foreign” cars.

  3. D.A. Ridgely says:

    The emotional and often irrational attitudes toward the mostly southern and now mostly disappeared U.S. textile manufacturing industry was largely the same a couple of decades ago. Of course, it isn’t irrational when it’s your job on the line, which is really the point. Tell the UAW that G.M. can become a thriving U.S. based business once again but that it will have to replace 90% of its workforce with robotics to do so and see what the reaction is.

    Which is also the point. U.S. manufacturing remains fairly robust. But it is robust typically in those areas where productivity has risen in large measure because of fewer low skill employees and more productive high skill employees.

    Which leads me to yet another tedious recitation of one of my favorite but probably apocryphal USSR anecdotes. A dam was taking much longer to construct than the central planners in Moscow had expected, so they sent one of their chief engineers to inspect the work site. Upon arrival he found thousands of workers digging away with picks and shovels while earth movers and other heavy equipment lay idle nearby. “Why aren’t you using the bulldozers, Comrade Manager?” “Because, Comrade Engineer, if we did that we would put thousands of people out of work.” “Aha,” the engineer replied. “My mistake. I thought you were trying to build a dam. Since you’re merely trying to keep people employed, why don’t you take away their shovels and give them all spoons?”

  4. James Hanley says:

    DAR,

    That’s definitely apocryphal. In the USSR they would have judged success solely on how many tons of earth had been moved from point A to point B! But it’s a great anecdote, very much in the vein of Bastiat, and I’m going to steal it for future use.

  5. buddyglass says:

    “There’s also an unstated premise that saving the US auto industry would be a good thing.”

    I feel like a country with the size and economic “stature” of the U.S. ought to be able to support at least one domestic car company. Probably two, just for some domestic-on-domestic competition. So GM may in fact be superfluous.

    It might have been interesting to see what would arise from the ashes of GM and Chrysler (and maybe Ford) if they’d been allowed to crash and burn. All their former employees who depend on a pension would be screwed, but with all that technical expertise released at around the same time…seems like a new auto company might coalesce around it. Not centered in Detroit, and much more union-averse.

    Or is that crazy talk? (Which is entirely possible.)

  6. James K says:

    James Hanley: I only lived under Muldoonism for the first 2 years of my life, but I understand that there were similar blocs in New Zealand. The thing about removing their protections is that those blocs disappear fairly quickly 🙂

    DAR: Pre-Rogernomics New Zealand’s car industry worked just like that anecdote. In order to avoid prohibitive quotas Japanese manufacturers would build cars in their domestic plants, disassemble them, then ship the bits to a plant in New Zealand which would put them back together.

    buddyglass:

    I feel like a country with the size and economic “stature” of the U.S. ought to be able to support at least one domestic car company. Probably two, just for some domestic-on-domestic competition. So GM may in fact be superfluous.

    If GM and/or Chrysler can survive on their won, then fine by me, the thing about bailouts is that you should never bail out a company that needs a bailout. Sort of a Catch-22 really.

  7. buddyglass says:

    “you should never bail out a company that needs a bailout. Sort of a Catch-22 really.”

    This is maybe only tangentially related, but I once visited a friend of mine who was enrolled at the Kennedy School at Harvard. Just because I wanted to see what “a Harvard class” was like, I went to one of his classes. The prof. was talking about subsidies and, generally, how terrible they were and resulted in lower prosperity. I can agree with that. The one contrary example he gave was the airline industry. According to this guy, the R&D cost required to design a new jetliner is so huge that the entire global market can’t support two players. In this case Boeing and Airbus. But, he suggested, it was to “the world’s” advantage to have two players, since without them you’d have a total monopoly and that’s “bad”. So the U.S. and E.U. both subsidize “their guy” in order to make it possible for there to continue to be two players.

    When it comes to U.S. auto companies, it seems like it might be a good idea to keep one around purely for defense reasons, but maybe this is just archaic thinking. For instance, if we suddenly find ourselves in need of a ton of jeeps and Hum-Vs.

    Thinking more globally, though, it strikes me as sort of odd that the U.S. can’t seem to make a car company “work”. I mean, the Japanese seem to do ridiculously well, and that’s hardly the freest economy. Germany seems to have successful players. South Korea. There’s even Peugeot, Renault and Fiat. (Though, I’m willing to believe they only exist due to subsidies.) If Germany can do it, why can’t the U.S.? (Mostly a curiosity question.)

  8. James K says:

    When it comes to U.S. auto companies, it seems like it might be a good idea to keep one around purely for defense reasons, but maybe this is just archaic thinking. For instance, if we suddenly find ourselves in need of a ton of jeeps and Hum-Vs.

    I can accept this argument, in fact it’s what led Adam Smith to support the requirements that British ships be crewed by mostly British men. Of course, that would only support keeping 1 manufacturer, and probably only one that made SUVs and trucks.

    Thinking more globally, though, it strikes me as sort of odd that the U.S. can’t seem to make a car company “work”. I mean, the Japanese seem to do ridiculously well, and that’s hardly the freest economy. Germany seems to have successful players. South Korea. There’s even Peugeot, Renault and Fiat. (Though, I’m willing to believe they only exist due to subsidies.) If Germany can do it, why can’t the U.S.? (Mostly a curiosity question.)

    Political systems aren’t everything, but if I were going to guess I’d say the UAW. Your environmental and safety regulations are also spectacularly ham-fisted.

  9. buddyglass says:

    Political systems aren’t everything, but if I were going to guess I’d say the UAW. Your environmental and safety regulations are also spectacularly ham-fisted.

    Hmm. I thought about unions, but then it seems like Germany would also have this problem. Not unions per se, but the prevailing cultural idea that an auto worker should merit a certain standard of living that’s higher than what his skills would otherwise dictate.

    Seems like some of it has to be just poor product. American cars don’t look as good. They’re not as safe. They’re not as reliable (as the Japanese ones, at least). They are, however, cheaper, which is why a lot of people buy them. I drive a Honda Civic. When I bought it, it had best-of-class reliability, near-best-of-class gas mileage and actually looked decent. What were my American options? Ford Focus? (Designed in Europe, btw.) Chevy Cobalt? Dodge Neon? Please. I got a Cobalt as a rental not long ago and it drove like crap. I can’t imagine the Neon is much better. The only cars I really considered besides the Civic were the Mazda 3, Toyota Corolla and Subaru Impreza.

    My other thought is that one reason auto manufacturing can “work” in Germany is the various services they provide for everyone. These could act as a subsidy on labor since they provide things low-to-medium wage workers would otherwise have to purchase with their wages. Health care, retirement and university tuition being the main ones.

  10. James K says:

    My other thought is that one reason auto manufacturing can “work” in Germany is the various services they provide for everyone. These could act as a subsidy on labor since they provide things low-to-medium wage workers would otherwise have to purchase with their wages. Health care, retirement and university tuition being the main ones.

    Yes, but those entitlements must be paid for with tax revenues, so it must be no better than a wash in aggregate. Theoretically it could benefit some industries, but only at the cost of other industries, but government action is a bit less efficient overall, so that means the cons should outweigh the pros.

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