Grasping the Full Costs of the Auto Bailout

E.J. Dionne seems perfectly comfortable with the fact that he doesn’t understand economics—as long as the Washington Post continues to allow him to interpret economic events in a manner that comports with his political predispositions. Dionne sees GM’s recent good fortune as evidence of the propriety of government “step[ping] in when the market fails.” Dionne, like others before him, stands slack-jawed, in awe, ready and willing to buy the Brooklyn Bridge, donning narrow blinders and viewing just a narrow sliver of the world, oblivious to the fact that related events are transpiring in the other 359 degrees that surround him. Dionne is the perfect Bastiat foil.

Last week, GM reported first quarter profits of $3.2 billion—its best quarterly performance in ten years and its fifth consecutive profitable quarter. That’s good for GM (although it remains to be seen how GM performs going forward). But that is really beside the point. Dionne creates a straw man, contending that bailout critics thought that the government couldn’t resuscitate GM. But the most thoughtful criticism—my opposition to the bailout, at least—wasn’t predicated on the notion that GM couldn’t be saved by the government extinguishing debt, rewriting ownership, providing cash infusions, and underwriting sales rebates. That opposition was borne of concern that that the government would do just that.  And it did.

In the process of “saving” GM (which I still contend would have survived without the intervention and the number of jobs losses in the industry would have been comparable to the job losses that occurred anyway), the government inflicted huge costs on the economy, which—rather than repeat—I cite from an earlier post. After all, my argument that IPO euphoria (from November) was misplaced is nearly identical to my argument that GM’s positive financial statement does not confer a verdict of success on the bailout.

Here’s the real issue. Today’s IPO is nothing more than testament to the fact that the government threw GM a lifeline, enabling the company to expunge most of its debts and firm up its balance sheet on terms more favorable than a normal bankruptcy process would have yielded. That enabled GM to partake of the cyclically growing U.S. auto market in 2010 and turn a profit through the first three quarters. So what? Did anyone really think that a chosen company so coddled and insulated from market realities couldn’t turn a short-run profit? Yes, even GM, under those favorable conditions should have been expected to turn a profit this year.

But at what cost? That answer—even the question—seems to be elusive in the public discussion of the IPO. The cost was not only $50 billion—the amount diverted to GM in the first place. Nor was it that $50 billion minus the proceeds raised in today’s IPO (and minus the proceeds raised later when the government divests entirely of GM – it will still hold 33% of GM after today). In other words, making taxpayers whole does not absolve the Bush and Obama administration’s for the auto intervention. Recouping the $50 billion only gets us partially out of the hole. (And I’m not even sure who “us” includes because the costs are so far reaching.)

Yes, GM is making sales and accounting for market share, but only at the expense of the other automakers. Had GM been forced to severely atrophy or liquidate, the other automakers would have had greater revenues, more market share, and probably higher profits). They would have been able to attract GM’s best engineers and line workers. They would have more money to invest in R&D and to lead the industry into the future. Instead, by keeping GM in the mix, some of those industry resources remain misallocated in a company that the evolutionary market process would have made smaller or extinct. 

The auto industry wasn’t rescued with the GM bailout. GM was “rescued.” By rescuing GM, the government overrode market forces, and there are significant costs to assign for that. Witness the stagnant economy with 9.6 percent unemployment. Is it not plausible that businesses are sitting on their cash and not investing or hiring because of the fear inspired by the government interventions starting with the bank and auto bailouts? It’s more than plausible. The regime uncertainty that persists to this day was spawned by the GM bailout and other interventions.

What about the weakening of the rule of law? Doesn’t the diversion of TARP funds by the Bush administration, in circumvention of congress’s wishes and in contravention of the language of the law, represent a cost? How about the property right of preferred bondholders who were forced to take pennies on their investment dollars under the Obama bankruptcy plan? Any costs there? What about U.S. moral authority to dissuade other governments from meddling in their markets or indulging industrial policy? That may be costly to U.S. enterprises. And with the government still holding a third of GM, its hard to swallow the idea that public interest will be the driver of policies affecting the auto industry. And that suggests even more costs.