Don’t Get Fooled Again – Auto Bailouts Still Stink
On Tuesday, May 24, 2011, the Democratic National Committee (DNC) unveiled a video that can only be described as the first Obama-for-President advertisement of the 2012 election cycle. The video purports to skewer likely presidential candidates Mitt Romney, Tim Pawlenty, and Newt Gingrich over their opposition to the auto industry bailouts of 2009. Since General Motors (GM) and Chrysler have graciously paid back some of the money that taxpayers were forced to loan to them two years ago, Democrats are seizing this opportunity to try to make critics of the bailouts look bad. In so doing, they ignore the case against bailing out private companies, misleading claims by Chrysler, and the remaining losses that will come from the taxpayers’ investment in GM.
On Monday, May 23, Chrysler declared that its bailout loan has been paid back. It will come as no surprise if that “repayment” gets touted during next year’s election cycle as proof positive that the government can mess with the economy and come out smelling like a rose. In reality, Chrysler’s original bailout was worth $13 billion, and its repayment is for $7.6 billion. Further, Fiat, the Italian company that owns Chrysler, was only able to make the $7.6 billion payment after it purchased an additional 16 percent of Chrysler’s stock, which, because of the conditions of the bailout, could only occur once Chrysler had repaid $3.5 billion of its loan from the Treasury. But Fiat and Chrysler are having a hard time getting private loans, so they got a $3.5 billion loan from the Department of Energy through a program that has been criticized by the GAO for lack of oversight and direction, and – miracle of miracles – suddenly they are solvent enough to pay the Treasury $7.6 billion.
At GM, the situation is even worse. Despite last year’s claims to the contrary, U.S. taxpayers are still on the hook for Government Motors. As The Atlantic’s Megan McArdle pointed out on May 12, 2011, the federal government still owns 26.5 percent of GM’s stock, and has about $20 billion left to recoup on the initial $40 billion loan. According to McArdle, that means “we need to sell the approximately 365 million shares we have left at about $55 per share, net of underwriting and legal costs. At the current share price of $31, we’d be left with a loss somewhere north of $9 billion–plus the $1 billion we gave the ‘old GM’ to wind things up, and the $2.1 billion worth of GM preferred stock we own.” In light of those looming losses, it is hard to keep a straight face when the DNC claims that the bailouts were the right choice.
The DNC’s supposedly damning video shows Mitt Romney claiming, both in print and on national television that, “if you write a check … you’re going to see these companies go out of business.” But the fact that government can inject enough cash into an industry to keep it viable over the short-term should never have been in dispute. Certainly a government with an annual budget of more than $3 trillion can pick and choose any handful of firms it pleases to shower with cash and “save.” The question is whether the government should be spending its money on more valuable investments, and, more broadly, whether government should be in the business of deciding which firms rise and which firms fall.
Governments cannot use money to bail out one firm without robbing millions of private earners who would have used the same money in innumerable transactions across the country. To argue, as the DNC video does, that President Obama’s decision to bail out GM and Chrysler “saved thousands of jobs” is to focus on what the nineteenth-century French economist Frédéric Bastiat called the “seen,” rather than the “unseen.” In the case of the auto companies, what is seen are two large, famous firms that avoided collapse, and a large group of workers that kept their jobs. What is unseen are the purchases, loans, and investments diffused throughout the economy that could not take place because the money was transferred to Detroit, and the ugly precedent the bailouts set for future administrations with regard to politically favorable businesses.
Perhaps the most striking aspect of the DNC’s video is the question it leaves unanswered. At the :44 second mark, Tim Pawlenty warns, “it’s a slippery slope – where does it end? Does my friend who owns a small business in Minnesota – he’s having a hard time – does he get a loan?” After all, taxpayers bailed out Chrysler in 1979, only to see them belly up to the government trough again 30 years later. That bailout, one presumes, was also hailed as a success.
– Luke Gelber
