Auto bailout was not unmitigated success


Alan Mulally, chief executive officer of Ford Motor Co., speaks as he stands in front of new Ford Mondeo automobiles during the company's "Go Further" launch event at the Ziggo Dome in Amsterdam, Netherlands, on Thursday, Sept. 6, 2012. In a bid to take on the luxury interlopers, Ford Motor Co styled the new Mondeo to look like an Aston Martin, James Bond's car of choice and a former Ford unit. (Jock Fistick/BLOOMBERG)
September 6, 2012

At the Democratic National Convention, the Obama campaign has celebrated the rebirth of the American auto industry — pointing out, as Vice President Joe Biden has done, that “Bin Laden is dead and General Motors is alive.”

What Democrats don’t mention is that bailing out the car industry initially cost $80 billion, or roughly $30,000 per automotive worker. Despite the sector’s resurgence, taxpayers are still owed $25 billion from GM and its former financing firm.

The path toward reclaiming that money isn’t clear, and there have been other costs, too. Tens of thousands of jobs at car dealerships may have been lost under government directives that General Motors and Chrysler, which received the majority of the auto bailout, shutter dealers to save costs.

“The elimination of thousands of GM and Chrysler dealerships in 2009 was unnecessary,” said Bailey Wood, a spokesman for the National Automobile Dealers Association. “Sadly, this action threatened more than 100,000 jobs.”

To be sure, one of President Obama’s major accomplishments has been overseeing the rescue of the American auto industry from near-certain collapse in 2009. He’s touted the achievement all year long and called for a similar manufacturing resurgence across the country, in cities where factory work has long been in decline.

Some observers objected to the auto bailout because it involved such a dramatic government intervention in the private market. But many economists agree that restructuring the automobile industry was a critical element of the government’s plan to pull the economy out of a deep recession.

“Without financial help from the federal government, all three domestic vehicle producers and many of their suppliers might have had to liquidate many operations, with devastating effects on the broader economy, and especially on the Midwest,” economists Mark Zandi, of Moody’s Analytics, and Alan Blinder, of Princeton University, wrote in an analysis.

Since stabilizing, the auto companies have enjoyed a robust rebound. Auto companies have added 250,000 jobs. In August, the rate of U.S. vehicle sales surged ahead at a pace of 14.5 million per year.

“I said, ‘I believe in American workers. I believe in this American industry.’ And now the American auto industry has come roaring back,” Obama said in a campaign stop last month.

Yet the auto bailout has not been an unmitigated success — either for taxpayers or for the auto industry.

The Treasury Department owns 500 million shares of GM, but the firm’s share price of $22.45 is half what it must be for taxpayers to be repaid. Ally Financial, formerly GM’s financing arm, also owes about $12 billion to taxpayers. Chrysler, on the other hand, has repaid its loans in full.

What’s more, while the industry has bounced back, it is far from reclaiming its old glory. Employment in the auto industry is still 12 percent below what it was before the recession began in December 2007. By contrast, overall private employment is only 4 percent below what it was before the recession began.

And then there are the lost dealerships. Under pressure from the Obama administration, GM and Chrysler ceased relations with 2,000 dealers — each one with roughly 50 employees. At the Treasury Department, the administration’s “Auto Team” concluded that there were too many dealers and that reducing the number of them would also slim competition, increase profitability and bolster the overall industry.

In 2010, the auto bailout’s government watchdog, Neil Barofsky, raised questions about the strategy. “It is clear that tens of thousands of dealership jobs were immediately put in jeopardy as a result of the terminations by GM and Chrysler,” a report said. “Treasury should have taken special care given that the Auto Team’s determination had the potential to contribute to job losses.”

(The precise toll on employment is difficult to calculate because many shuttered dealers began selling other brands or used automobiles.)

The administration responded to the watchdog report in a letter arguing that the restructuring of the auto companies “required deep and painful sacrifices from all stakeholders. . . . The outcome under the restructuring plans is far better than the likely alternatives had the Administration not stood behind the companies.”

The initial auto rescue was launched in the final weeks of the George W. Bush administration. GM and Chrysler were on the verge of imminent bankruptcy — weighed down by overbearing pension costs, a profound decline in business and dwindling cash reserves.

The Obama administration then plowed more money into the automakers and their lending companies. Ford declined to take aid, but many analysts say it was helped by the decision to rescue GM and Chrysler. The administration also unveiled a program to subsidize car purchases by paying consumers thousands of dollars to trade in their old clunkers for new cars.

Zachary A. Goldfarb is a staff writer covering the White House, focusing on President Obama’s economic, financial and fiscal policy.
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