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Treasury underestimated power of the auto dealers' lobby

Tuesday, July 20, 2010; A20

IN EARLY 2009, as the American economy teetered on the brink of collapse, the Obama administration decided to rescue General Motors and Chrysler. But Mr. Obama's Treasury Department did not write automakers a blank check. It conditioned aid on restructuring -- enforced in bankruptcy court -- that included big layoffs and plant closings -- and swifter cutbacks to overgrown auto dealer networks than GM and Chrysler initially proposed.

Now comes the special inspector general of Treasury's Troubled Assets Relief Program, Neil M. Barofsky, to criticize Treasury's decision in hindsight. It was, he writes, not clearly "necessary for the sake of the companies' economic survival or prudent for the sake of the Nation's economic recovery." The resultant shuttering of dealerships swelled unemployment rolls, Mr. Barofsky's report suggests, "all based on a theory and without sufficient consideration of the decisions' broader economic impact." Rep. Darrell Issa (R-Calif.), one of the auto dealers' many congressional friends, of both parties, has pounced on the report, calling it a "wake-up call as to the implications of politically orchestrated bailouts."

Mostly a rehash of familiar dealer complaints about the supposedly unfair process by which the companies selected dealerships for closure, the report offers a remarkably unfair and unrealistic assessment of a tough decision. The Obama administration was perfectly frank about the fact that jobs would be lost because of the restructuring, in both dealerships and in auto manufacturing plants. The alternative was zero jobs for everyone -- either immediately, if the companies were allowed to collapse, or eventually, if they were not credibly restructured.

What the report calls "a theory" about the need for downsized dealer networks was the overwhelming view of industry analysts. GM and Chrysler dealers were competing against one another for a shrinking customer base. Though some were profitable thanks to repairs and used-car sales, low new-car revenue forced them to skimp on showrooms and customer service -- which repelled buyers, which, in turn, fed the downward cycle. Toyota's smaller network boasted triple GM's average revenue per dealer. Dealers exploited state protectionist laws for which they had lobbied over the years -- so the Obama administration reasonably urged the car companies to trump them in bankruptcy.

Alas, the auto dealers have since prevailed on Congress to grant them relief in the form of arbitration. Many dealerships that should probably have been closed will remain in business, in part because GM cannot afford to litigate the matter. Chances are that the eventual taxpayer cost of the auto bailout will be higher as a result. This is proof of the dealers' enduring political clout, not Treasury's faulty reasoning. Perhaps Treasury's only failure was not anticipating how easily its sound policy trade-off could be lobbied to death by a special-interest group with well-heeled members in every congressional district. Why a supposed defender of the public interest would endorse this special-interest group's special pleading is beyond us.

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