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Auto Bailout Critics Get Desperate

Auto Bailout Critics Get Desperate

As the North American International Auto Show opens in Detroit, there is optimism in the air that has not been felt for years.

U.S. light-vehicle sales are soaring to pre-recession levels, profits are strong and factories are humming on overtime. Automakers and suppliers are expanding capacity and hiring thousands of new workers throughout the U.S. to keep up with demand.

Nowhere is the enthusiasm greater than at General Motors and Chrysler. Faced with extinction in 2009, they now are rolling out a record number of award-winning vehicles such as the Chevy Corvette and Silverado, Ram 1500 pickup and new Jeep Cherokee CUV.

General Motors just announced it will spend $1.3 billion at five U.S. manufacturing facilities to build new engines and transmissions, as well as upgrade an existing assembly plant in Flint, MI, a rust-belt city very much in need of new investment.

In key auto-producing states such as Michigan, Ohio, Indiana and Tennessee, the benefits of the government rescue of GM and Chrysler can be seen everywhere.

Property values are rising and there are fewer home foreclosures. More people have good jobs and are earning salaries and paying income and Social Security taxes instead of collecting unemployment, food stamps or welfare.

Americans should be celebrating bipartisan support of the U.S. auto bailout by two U.S. presidents, a departing Republican and an incoming Democrat, that averted an economic apocalypse. The U.S. economy now is well on the road to recovery thanks in large part to a robust North American auto industry.

Sadly, some critics are so invested in political dogma they can’t bear the idea the federal government succeeded in helping two crucial U.S. companies survive the worst economic crisis since the Great Depression. This has driven bailout opponents to create desperate and downright silly explanations for why they believe the auto bailouts were not successful.

Desperate talking point No.1: The auto bailouts were supposed to prevent Detroit from going bankrupt. The city of Detroit has declared bankruptcy so the bailouts failed.

Equating the U.S. auto industry with the city of Detroit is utter nonsense. The government rescue was designed to prevent GM and Chrysler from closing their doors and causing the loss of 1.2 million jobs and a 1930s-style depression in the industrial Midwest.

In late 2008, advisers to President Bush told him there was no way to save GM and Chrysler other than a government-funded managed bankruptcy. Despite his personal aversion to bailouts, Bush knew failing to step in would cause an economic catastrophe. “I didn’t want there to be 21% unemployment,” he has said publicly. 

In order to prevent GM and Chrysler from ceasing operations, Bush signed off on $17.4 billion in bridge loans, requiring the two automakers to develop restructuring plans under President Obama's watch in 2009.

The Obama Admin. then provided tens of billions of debtor-in-possession financing to allow the automakers to pay suppliers and keep the lights on while they went through a managed bankruptcy in an incredibly short 40 days.

The goal was to save more than a million jobs and the national economy. It did that. The states of Michigan and Ohio have benefitted especially, but the proceedings did not target specific cities to be saved.

Desperate talking point No.2: Allowing the government to save struggling companies is socialism and kills competition.

Ford, Toyota, Renault-Nissan and Honda all publicly backed government assistance for GM and Chrysler. If the two automakers failed, it was widely believed there would not be enough volume to sustain the huge but fragile automotive supply chain.

“If GM and Chrysler would’ve gone into a free-fall, that could’ve taken the entire supply base into free-fall also, and taken the U.S. from a recession into a depression,” Ford CEO Alan Mulally said last June.

GM should have gone through a conventional bankruptcy.

This is pure fantasy. The Bush and Obama administrations determined a conventional bankruptcy proceeding was not feasible. In 2009, light-vehicle sales were down 50%. The global auto industry was drowning in excess capacity, machinery and employees. Even though GM and Chrysler assets such as the Chevy and Jeep brands had great worth in better times, they had zero appeal to investors at the height of the global financial meltdown.

It only made sense for the U.S. to bail them both out because the government otherwise would be forced to deal with the social consequences of the ensuing massive unemployment.

The Center for Automotive Research, a Michigan-based think tank, calculated the cost to the government and taxpayers of doing nothing for GM would have been almost $40 billion, including lost revenue from income and Social Security taxes and higher costs related to increasing use of food stamps, welfare and other social services.

That’s why the taxpayers’ loss of about $10 billion when the government divested all its shares in GM ultimately is a bargain.

Japan, Germany, Brazil, China, Russia and other auto-producing countries all offered money, incentives, tax breaks or “cash for clunkers” programs to prop up their auto industries in 2009 for the same reason: It was less expensive than dealing with the social costs of massive unemployment.

They also were keenly aware that a successful domestic auto industry is a key element of every major economy, as well as a source of national pride.

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