Every so often, we ought to celebrate our victories. The auto bailout is a case in point. Six years ago, it was wildly controversial, with the fate of General Motors and Chrysler hanging in the balance. Now, it’s clear that the bailout was a solid success.
GM and Chrysler are also more competitive. As conditions for government aid, the companies closed several dozen plants, pared billions of debt, adopted lower wages for new workers and slashed the number of dealerships. The companies returned to profitability in 2010 and recouped some of their lost market share. In mid-2014, the Big Three (Ford avoided federal aid) had a market share of 45.1 percent, up from its 2009 low of 43.7 percent but below the pre-crisis 50.5 percent.
Even some bailout supporters profess surprise at how well it worked. In a new essay (from which most of the numbers here are drawn), economists Austan Goolsbee of the University of Chicago and Alan Krueger of Princeton University — both worked for the Obama administration in early 2009 — admit that the "industry's outsized contribution to the economic recovery [was] . . . unexpected." At one meeting, they were polled about whether Chrysler would survive five years even if it received aid. Both voted no.
With hindsight, the rescue was fairly cheap. All told, GM, Chrysler and GM’s financing arm received $80.7 billion in federal assistance. But $70.5 billion was recovered. Although the $10.2 billion net cost is a lot, the benefit — a crucial industry stabilized in midcrisis — was worth far more.
Goolsbee and Krueger recall that Chrysler almost didn’t receive aid. Its estimated job loss was much lower than GM’s; its mix of vehicles overlapped with GM’s and Ford’s, meaning that lost sales at a shuttered Chrysler might have helped GM and Ford; and, finally, two previous efforts at streamlining the company had failed.
But other considerations prevailed. One was the impact on suppliers. Two-thirds of Chrysler’s suppliers were also suppliers to GM; half were suppliers to Ford. Without Chrysler, some of these firms might have collapsed, further disrupting the industry. “We feared a chain reaction,” write Goolsbee and Krueger in a working paper for the National Bureau of Economic Research. Probably more important was raw politics. It would have been hard for President Obama to justify saving GM while sacrificing Chrysler.
The bailout’s success suggests three lessons.
First, desperate times justify desperate measures that otherwise might seem indefensible. “No one involved [in the rescue] . . . wanted to be in the position of bailing out failed companies or having the government own a majority stake in a major private company,” write Goolsbee and Krueger.
But the alternative was worse. The Obama administration estimated a job loss approaching 1 million, with 300,000 attributed to Chrysler. There would also have been a psychological jolt. If GM — America’s most storied industrial firm — had collapsed, it would have deepened the fear that was causing consumers and companies to cut spending and hoard cash.
Second, “tough love” is necessary when government rescues private firms. The plant closures, bondholder losses and wage reductions (not enough, to some critics) were essential. Without them, the companies might have required continual government aid to survive, say Goolsbee and Krueger. Japan went down that path for years by propping up “zombie firms that were not viable companies.”
Finally, fear is a great motivator. When Sergio Marchionne, chief executive of Fiat, which now owns Chrysler, was asked how the company had changed so quickly, he replied: “When you’re broke, you change your ways a lot faster.”
All this is now history. GM and Chrysler got a second chance. But if “they are mismanaged in the future,” warn the economists, there may not be a third.
Read more from Robert Samuelson's archive.
Read more on this topic: