President Obama is in Michigan today, which means his handlers at the White House recently consulted their very thin manila file folder labeled “Economic Successes or Anything That Might Pass for Such” to cull talking points about the auto bailout. Of course, nothing has been more celebrated as an economic policy success of this administration by this administration than the “rescue” of GM and Chrysler.
I spent a good deal of time in 2008-2010 analyzing, commenting, and testifying about the collateral damage--the often unseen but important externalities and longer term costs--that was being inflicted on third parties, the U.S. economy, and the rule of law, all for the purpose of ensuring that specific interests were insulated from the consequences of their behavior. So let me just summarize by repeating some previous thoughts.
It is galling to hear the auto bailouts characterized as “successful.” The word should be off-limits when describing this unfortunate chapter in U.S. economic history. GM and Chrysler, through their own relatively poor decisions with respect to labor contracts, product offerings, and quality management, failed by the market’s judgment and were rightful candidates for downsizing or liquidation. The bailouts essentially deprived the better auto companies of the spoils of competition and forestalled a capacity reckoning, which meaning that in the years ahead, auto workers in Alabama, Tennessee, South Carolina, Indiana, and even Michigan and Ohio may lose their jobs because GM and Chrysler were propped up beginning in 2009.
Calling the bailouts “successful” is to whitewash:
- the diversion of funds from the Troubled Assets Relief Program by two administrations for purposes unauthorized by Congress;
- the looting and redistribution of claims against GM’s and Chrysler’s assets from shareholders and debt-holders to pensioners;
- the use of questionable tactics to bully stakeholders into accepting terms to facilitate politically desirable outcomes;
- the unprecedented encroachment by the executive branch into the finest details of the bankruptcy process to orchestrate what bankruptcy law experts describe as “sham” sales of Old Chrysler to New Chrysler and Old GM to New GM;
- the costs of denying Ford and the other more deserving automakers greater market share and access to GM’s and Chrysler’s best workers and capital;
- the costs of insulating irresponsible actors, such as the United Auto Workers, from the outcomes of an apolitical bankruptcy proceeding, and;
- the diminution of U.S. moral authority to counsel foreign governments against similar market interventions, to name some.
Acceptance of the president’s claim of auto bailout success demands profound gullibility or willful ignorance and virtually guarantees similar interventions in the future.
If you're looking for something scary to do on Halloween, check out Cato senior fellow Johan Norberg's documentary, “Europe’s Debt: America’s Crisis?” on PBS stations across the country.
It's been running for awhile, and will be seen in Maryland and Michigan on Sunday night. But it will be seen in many markets, from Tampa to Fairbanks, next Wednesday, October 31.
The Free to Choose Network, which produced the film, describes it this way:
Four investigative reports, shot on location in Greece, Brussels, California and Washington DC, highlight this in depth examination of Europe’s current debt crisis and its connection to the U.S. economy. Narrated by Swedish author Johan Norberg, and George Mason University professor, Don Boudreaux, the investigative reports ask: “Where did Europe go wrong” and “is the United States now repeating the same mistakes?”
Participants include Cato friends Jacob Mchangama and Tanja Stumberger, as well as such key players as former comptroller general David Walker, former European Commissioner Frits Bolkestein, and Ann Johnson, mayor of Stockton, California.
For broadcasts in your area, check the listings here.
For Johan Norberg's books and articles, click here.
The central economic selling point of the Obama reelection team is that the president saved the U.S. auto industry. That such a contestable proposition serves as the administration’s economic headline does more to underscore its abysmal record than to inspire confidence in its continued economic stewardship.
The administration didn’t save the auto industry. The stronger case is that it damaged the auto industry along with several important institutions vital to capitalism’s proper functioning. However, it should be granted that President Obama’s commandeering of GM’s and Chrysler’s bankruptcy process saved jobs at those companies and elsewhere in their supply chains (and provided an opportunity to dole out spoils for politically favored interests). How many jobs were saved is impossible to determine because it’s not clear what would have happened to GM’s and Chrysler’s assets had a normal, non-political bankruptcy process been allowed to unfold.
Yes, jobs were saved for the time being in Michigan, Ohio, and a few other industrial states in the Midwest. That is what can be seen. And politicians are hardwired to tout the benefits—and only the benefits—of their policies.
But an informed citizenry should insist on a proper accounting of the costs of those policies, as well—not just the losses put on the taxpayers’ tab (right now taxpayers’ "investment" in GM is $27 billion, but the public’s 500 million shares of GM stock is worth only $10 billion), but the unseen costs.
Sure some jobs were preserved in some locations, but what about the less visible consequences and ripple effects? What isn’t so easily seen, but is every bit as important to assessing the auto interventions is the effects on the other auto companies and their workers (i.e., the majority of the U.S. auto industry). Will the public remember or know enough to attribute layoffs of American workers at Ford or Toyota or Kia during the next downturn in auto demand to the fact that a necessary reckoning on the supply side was precluded by the interventions of 2009?
The auto industry is plagued with overcapacity, which is a problem that demands a thinning of the herd. GM and Chrysler, through their own relatively poor decisions with respect to labor relations, product offerings, and quality management were failing by the market’s judgment and were the rightful candidates to be thinned. But that process was forestalled. In 2013, auto workers in Alabama, Tennessee, South Carolina, Indiana, and even Michigan and Ohio may lose their jobs because GM and Chrysler workers’ jobs were spared in 2009.
That is only one of the many unseen or under-rug-swept costs of the auto bailouts. The following passage from congressional testimony I gave last year identifies several others:
It is galling to hear administration officials characterize the auto bailouts as "successful." The word should be off-limits when describing this unfortunate chapter in U.S. economic history. At most, bailout proponents and apologists might respectfully argue — and still be wrong, however — that the bailouts were necessary evils undertaken to avert greater calamity.
But calling the bailouts "successful" is to whitewash the diversion of funds from the Troubled Assets Relief Program by two administrations for purposes unauthorized by Congress; the looting and redistribution of claims against GM's and Chrysler's assets from shareholders and debt-holders to pensioners; the use of questionable tactics to bully stakeholders into accepting terms to facilitate politically desirable outcomes; the unprecedented encroachment by the executive branch into the finest details of the bankruptcy process to orchestrate what bankruptcy law experts describe as "Sham" sales of Old Chrysler to New Chrysler and Old GM to New GM; the costs of denying Ford and the other more deserving automakers the spoils of competition; the costs of insulating irresponsible actors, such as the United Autoworkers, from the outcomes of an apolitical bankruptcy proceeding; the diminution of U.S. moral authority to counsel foreign governments against similar market interventions; and the lingering uncertainty about the direction of policy under the current administration that pervades the business environment to this very day.
In addition to the above, there is the fact that taxpayers are still short tens of billions of dollars on account of the GM bailout without serious prospects for ever being made whole. Thus, acceptance of the administration's pronouncement of auto bailout success demands profound gullibility or willful ignorance. Sure, GM has experienced recent profits and Chrysler has repaid much of its debt to the Treasury. But if proper judgment is to be passed, then all of the bailout's costs and benefits must be considered. Otherwise, calling the bailout a success is like applauding the recovery of a drunken driver after an accident, while ignoring the condition of the family he severely maimed.
The New York Times has an article today on the plight of Central Falls, Rhode Island, a 19,000-population industrial city that may declare bankruptcy under the fiscal weight of $80 million in pension obligations for police and fire officers. Unlike some coverage of municipal fiscal woes, this one does not dance around the way some of the problem originates in misguided labor policy:
The city, just north of Providence, is small and poor, but over the years it has promised police officers and firefighters retirement benefits like those offered in big, rich states like California and New York. These uniformed workers can retire after just 20 years of service, receive free health care in retirement, and qualify for full disability pensions when only partly disabled.
"Promised" is a word of art here, because the city wasn't really making all of these concessions on a voluntary basis, as its negotiator explains:
state law called for binding arbitration, which for many years was a clubby process that emphasized comparable benefits all across the state more than any city’s ability to pay.
"Binding" arbitration, just to be clear, does not mean that the city agreed beforehand to settle disputes with the unions by way of arbitration; it means that state law imposed an arbitrator's edict whether city managers ever signed up for the arbitration route or not. It thus differs from the contractually specified arbitration upheld lately in consumer contexts by the U.S. Supreme Court in AT&T v. Concepcion, a decision assailed by many of the same politicos who see no problem with genuine mandatory arbitration in the labor context.
The crisis in municipal finance wrought by binding public-sector arbitration and related laws comes as no surprise to readers who remember Cato's excellent 2009 study "Vallejo Con Dios: Why Public Sector Unionism Is a Bad Deal for Taxpayers and Representative Government" by Don Bellante, David Denholm, and Ivan Osorio. (The California city of Vallejo declared bankruptcy in 2008 following the failure of negotiations with police and fire unions over unsustainable compensation.)
One point the otherwise thorough Times article omitted: many politicians in Washington have worked for years to impose a Central-Falls-like legal climate on states and localities lucky or farsighted enough to have avoided one in the past. During last fall's lame duck session, then-Majority Leader Harry Reid (D-Nev.) tried to push through the truly appalling Public Safety Employer–Employee Cooperation Act, which not only would have forced police and fire unionization on reluctant states and localities but also provided that in case of impasse (quoting Heritage) "States would have to provide a dispute resolution mechanism, such as binding arbitration." And the misnamed Employee Free Choice Act (EFCA), a priority of President Obama during his first years in office, would have imposed binding arbitration on the private sector. Central Falls may now be hurtling toward the waterfall, but how many other communities are just one political shove away from plunging into the same fiscal rapids?
GM’s long-rumored initial public stock offering will take place Thursday and self-anointed savior of the U.S. auto industry, Steven Rattner, is pretty bullish about the prospect of investors turning out in droves.
I’ve been saying for a while that I thought the government’s exposure [euphemism for taxpayer losses] in the auto bailout was in the $10-billion to $20-billion range.
But since investor interest has pushed the initial price up from the $26-to-$29 per share range to the $32-$33 range, Rattner now believes:
[T]his exposure is in the single-digit billion range, and arguably potentially better.
I won’t argue with Rattner’s numbers. After all, they affirm one of my many criticisms of the bailout: that taxpayers would never recoup the value of their “investment.” My bigger problem is with Rattner’s cavalier disregard for the other enduring—and arguably more significant—costs of the auto bailouts.
Rattner is like the foil in Frederic Bastiat’s excellent, but not-famous-enough, 1850 parable, That Which is Seen and That Which is Unseen. Rattner touts what is seen, namely that GM and Chrysler still exist. And they exist because of his and his colleagues’ commitment to a plan to ensure their survival, along with the hundreds of thousands (if not millions, as some “estimates” had it) of jobs that were imperiled had those companies vanished. (For starters, I very much question even what is seen here. I am skeptical of the counterfactual that GM and Chrysler would have disappeared and that there would have been significantly more job loss in the industry than there actually was during the recession and restructuring. But I’ll grant his view of what is seen because, frankly, the specifics are irrelevant in the final analysis).
For what is seen, Rattner admirably admits of a cost. And that cost is not insignificant. It is anywhere from $65 billion to $82 billion (the range of the cost of the bailout) minus what is being paid back and what investors are willing to pay for GM shares—in the “single-digit billion range,” as Rattner says. But Rattner is willing to stand by that trade-off, claiming his efforts and the billions in “government exposure” were a small price to pay for saving the U.S. auto industry, as it were. It’s merely a difference in philosophy or compassion that animates bailout critics, according to this position.
No. Not so fast. All along (quite contemptuously in this op-ed, which I criticized here) Rattner has been unwilling to acknowledge the costs that are unseen. Those unseen costs include:
- the added uncertainty that pervades the private sector and assigns higher risks and thus higher costs to investing and hiring (whom might government favor or punish next?);
- the diversion of resources from productive to political purposes in the business community (instead of buying that machinery to churn out better or more lawn mower engines, better to hire lobbyists to keep Washington apprised of how important we are or how this or that policy might be beneficial to the national employment picture!);
- excessive risk-taking and other uneconomic behavior that falls under the rubric of moral hazard from entities that might consider themselves too-big-to-fail (perhaps, even, the New GM!);
- growing aversion to—and rising cost of—corporate debt (don’t forget what happened to Chrysler’s “preferred” bondholders in the bankruptcy process!);
- the sales and market share that should have gone to Ford or Honda or VW as part of the evolutionary market process;
- the fruitful R&D expenditures of those more disciplined companies;
- the expansion of job opportunities at those companies and their suppliers;
- productivity gains passed on to workers in the form of higher wages or to consumers as lower prices;
- the diminution of the credibility needed to discourage foreign governments from meddling in markets, often to the detriment of U.S. enterprises.
The list goes on.
Yet, Rattner, seemingly oblivious to the fact that the economy remains stuck in the mire, speaks triumphantly of the successful auto bailout. But nobody ever doubted that taxpayer resources in the hands of policymakers willing to push the bounds of legality could “rescue” GM from a fate it deserved. The concern was that policymakers would do just that, leaving behind wreckage to our institutions not immediately discernible. But anemic economic activity, 9.6 percent unemployment, and a private sector unwilling to invest is pretty darn discernible at this point.
Rattner should take off the tails, put down the champagne flute, and acknowledge what was originally unseen.
That's the name of the website of Jack Dean, who is interviewed in this new Reason.tv video about how excessive pension promises to bureaucrats are creating a fiscal nightmare for state and local governments.
The economist Herb Stein famously said, "If something cannot go on forever, it will stop." That's a good riposte when people wring their hands over something unsustainable. Of course, that fact doesn't tell you how unsustainable situations will stop, and some ways are less pleasant than others.
I thought of "Stein's Law" when I read former California Assembly speaker Willie Brown's response to a question about whether California's lavish public-employee pensions would bankrupt the state:
No, it's not going to bankrupt the state. My guess is that the State of California, like most places involved with pensions, is going to cease to pay them.