The auto companies were not involved in causing the financial crisis. Put another way, despite public perceptions, the Big Three were finally getting it right by the time the downturn arrived, but they were saddled with debt when they, their dealers and consumers were all cut off from credit overnight.
That was potentially a death knell. Government bailouts often create a moral hazard problem. Big companies can take bigger risks if they assume that a bailout will be available if needed, notes Kent Smetters , Wharton professor of business economics and public policy, and faculty director of the Penn Wharton Budget Model. Though GM and Chrysler eventually did get a bailout — Ford did not need help because it had fortuitously secured a large amount of financing shortly before the crisis — it was not all sweetness and light.
GM shareholders were forced to take a big hit, and CEO Rick Wagoner had to resign as a condition for government help, Smetters explains. Going forward, however, I would make sure that creditors of too-big-to-fail firms take a larger hit. Morris A. Yet governments intervene all the time in their national economies, Cohen notes, producing winners and losers even though the distribution can be uneven.
The bailout means some jobs were saved, but maybe consumers all pay more for our cars as a result. So the cost at the individual level … is much greater. Cohen suggests there are two ways to look at the question — from a company and a country point of view. Countries, ideally, try to maximize the welfare of their citizens. They do all sorts of things to accomplish that, he notes. They impose tariffs and quotas. They have restrictions on content and repatriation of profits, and various other tax policies.
But the bottom line, in his view, is that every country is trying to maximize benefits for their citizens, even if sometimes that involves helping companies. And they do, they thrive. They do whatever needs to be done, and it is the same thing in Japan. That is, in part, due to plummeting gas prices. When gas prices tank, U. It's the free-market.
Free marketeers and free traders who like to stand on principle will never be convinced that the U. But there are about 7. And for the election, the only way that Michigan is likely to be in play, rather than being a lock for the Democrats, is if the Republican-controlled statehouse in Lansing makes good on a plan to change the law that would apportion Electoral College delegates proportionally based on total votes rather than the current winner take all system.
Because the success of the auto industry rescue makes Democrats pretty popular in Michigan right now. This is a BETA experience. You may opt-out by clicking here. The result of the law has thus been an unimpressive arbitration record for General Motors, and the retention of many more dealerships than sound business principles could justify. Such political pressures were exerted on behalf of suppliers, too. For instance, GM had for several years purchased the mineral palladium from a Montana mine; upon filing for bankruptcy, the company decided to replace the Montana distributor with cheaper suppliers in Russia and South Africa.
Similarly, when GM announced plans to produce a new subcompact car in China, immense pressure from Capitol Hill forced the company to reverse its decision.
Arriving at more efficient dealership arrangements and more cost-effective relationships with suppliers was, of course, one of the chief reasons given for putting the automakers into bankruptcy. But these aims were seriously undercut by the meddling of elected officials. There is little doubt that General Motors — and, in all probability, Chrysler too — would have emerged stronger and more competitive had they pursued normal bankruptcies perhaps with some help in obtaining financing , not massive bailouts followed by bankruptcies run by the government.
Every piece of the "success story" of the auto bailout would thus seem to be in error. The bailout was not absolutely necessary and was pursued by means of dubious legality; the bankruptcies were highly irregular and inefficient; and the companies that have emerged from bankruptcy are far from lean and fit.
They are certainly in no position to repay taxpayers for the generous loans they were given. But as bad as the facts of the story are, the implications are much worse.
Through their actions, both the Bush and Obama administrations have set dangerous precedents — and made it much more difficult to reverse the trends of executive overreach and excessive government entanglement with private business. As a matter of policy, the Bush interventions early in the process were more ad hoc affairs, motivated largely by panic in the midst of the economic crisis.
This was particularly true of Treasury Secretary Henry Paulson, whose performance in the final months of the Bush administration was disgraceful. But it is hard to avoid the conclusion that, at its core, the Bush approach was also influenced by the imperious view of executive power that had developed in the course of the war on terror and had been supported by some conservative thinkers for much of Bush's presidency. The notion that the president simply must do whatever he judges necessary in an emergency — regardless of whether he has the formal legal authority to do it — is among Bush's foremost legacies.
The concluding months of his presidency should offer a cautionary tale to conservatives inclined to adopt that view of executive power. The Obama administration's role in this story, however, is far more troubling. One cannot explain away Obama's overreach as a panicked response to an emergency; rather, his actions toward GM and Chrysler were part of a considered, coherent approach to the relationship between government and private industry.
And this approach — defined by broad government power unchecked by legal constraints and possessing sweeping authority to pick winners and losers — has guided the administration's policies well beyond the auto bailout. The aim of this approach is to rejuvenate the New Deal vision of the regulatory state, in which regulators are seen as disinterested experts with the factual knowledge, practical wisdom, and unwavering integrity to manage the economy.
They alone are presumed to be capable of steering the nation toward prosperity. It was this approach that clearly animated, for instance, the financial-reform legislation enacted by President Obama and the Democratic Congress last year. Just as the government was seen as having the wisdom to micromanage the restructuring of Chrysler and General Motors, so the new financial-reform law creates a vast web of regulatory bodies and presumes that they will have the know-how to successfully reshape America's entire financial system.
The same basic pattern can be seen in several of the Obama administration's other legislative achievements — from the massive stimulus package to the health-care reform bill to a host of environmental regulatory initiatives. Taken together, these laws have dramatically worsened the entanglement of government and the private sector, and have thereby led to an increase in lobbying activity by special interests seeking government favors or protection.
The financial-reform law, for instance, is littered with special-interest provisions intended to entice major corporations into supporting the administration's new approach to economic policy. Auto-finance lenders are inexplicably exempted from the jurisdiction of one of the law's new creations, the Consumer Financial Protection Bureau, thereby sparing them and the influential auto dealers they work with from the regulatory costs and hassles caused by the CFPB.
The nation's biggest banks, too, ultimately came to support the creation of the CFPB, as they recognized that its heavy regulatory burdens would be borne much more easily by large institutions — which can more readily afford to hire lobbyists and lawyers to help navigate the law's complexities — than by their smaller competitors. Other examples abound; among them, the most outrageous is probably the sweeping health-care law enacted last year.
The legislation had the support of America's major health insurers — likely because the law made them the first suppliers in American history to see the federal government mandate the purchase of their product by every single citizen. The opposition of pharmaceutical manufacturers, too, was significantly dampened; presumably this had something to do with the administration's promises of increased market demand for their products.
Even the American Medical Association — which should have been representing the interests of doctors, who will face enormous difficulties under the law — rolled over, partly to obtain a repeal of rules that had limited certain Medicare reimbursements.
Again and again, large corporate actors and other organizations have been willing to sell some freedom of action in return for a competitive advantage provided by the government. The Obama administration's economic policy, therefore, returns us to the thinking of the s and '60s — to an economy in which big business, big labor, and big government are tied together in a relationship of mutual succor and support.
The auto bailouts exemplify this new reality. Sold as a means of revitalizing the economy, they are in fact a means of transforming the relationship between the state and the market in a way that empowers large players at the cost of economic growth. The overall effect of such state capitalism is a kind of controlled stasis, in which the preservation of old jobs takes priority over the creation of new ones. Managed decline, rather than dynamic growth, is the defining feature of the Obama economy.
It is not hard to understand why those who embrace this vision of politics and economics would see the bailouts of Chrysler and General Motors as a great success story. But their notion of success is a far cry from old-fashioned prosperity.
The Obama administration's idea of what is good for General Motors, much like its idea of what is good for America, is unlikely to be particularly good for either.
Forgot password? The Auto Bailout and the Rule of Law. Previous Article. Next Article. Fixing the Confirmation Process Tevi Troy. Insight from the Archives. The Center for Automotive Research, an independent research group that gets some funding from automakers, predicted harsh outcomes if GM and Chrysler went belly up.
Beyond the immediate jobs lost, there would be a partial collapse of the supplier industry that would lead to a 50 percent drop in production at Ford and the American-based foreign car plants.
Imports would replace 70 percent of the lost GM and Chrysler production, the group predicted. When President Obama took office, he created a task force with a sweeping mandate to determine the fate of GM and Chrysler. In March , Obama rejected those plans and said if the firms wanted federal money, they had to go through bankruptcy. That happened quickly. The car companies filed for bankruptcy in June and emerged in July.
Between and , carmakers closed or scheduled the closure of 16 plants and cut their ties with about 2, dealerships. Stockholders were wiped out and creditors such as banks and pension funds wrote off about two-thirds of the value of their claims. The companies shed their entire obligation to pay for the health care of retired autoworkers and that burden shifted to an independent trust fund in which the United Auto Workers union appoints five out of 11 board members. Under new ownership What emerged was a smaller American auto industry with a very different set of owners.
The Italian car company Fiat became the majority stockholder of Chrysler. The second largest owner of Chrysler now is that retiree trust fund. For GM, the U. Private shareholders account for about 35 percent. The retiree trust fund owns about 10 percent. The union gave up the right to strike through and ended automatic pay raises.
Back in , it had agreed to a two-tiered wage scale that allowed the companies to hire new workers at much lower pay. Between the new wage rates and the savings from taking over retiree health costs, labor costs fell by about a third and are now on par with those of the foreign carmakers.
The turnaround Today, total employment for carmakers and parts suppliers is up about , from In , sales rose 10 percent for GM, 13 percent for Ford and 14 percent for Chrysler. The auto industry is on firmer ground because it can sell far fewer cars than it once did and still be profitable.
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