The economy has not been cooperating with the Democrats’ “recovery summer”: Unemployment remains stubbornly high; new and existing home sales indicate that housing prices have still farther to fall from their pre-bubble highs; the Dow is struggling to stay above 10,000; and a host of other economic indicators point toward continued weak growth, if not an outright double-dip. Searching for bright spots, the Obama administration has seized upon the resurgent U.S. auto industry, and specifically on the bailed-out GM — which has posted its first profitable quarters since 2004 and looks set to relaunch itself as a public company this fall, just in time for the elections.
But if we have learned anything from the stimulus, it is that a few quarters of success attributable to government policy do not mean that the policy was successful. Home sales took off last April as the expiration of the New Homebuyers Tax Credit neared, only to plummet this summer when it became clear that the policy had merely pulled demand forward instead of stimulating new demand. The same thing happened with Cash for Clunkers, to a lesser extent: A brief bump in sales of cars and light trucks was followed by a steep drop. Sales have since gone up slightly, but the latest forecasts predict weaker demand for autos to go with weaker demand for housing and continuing high unemployment.
That’s a problem for GM: As part of its government-financed bankruptcy, it has indeed done an admirable job of cutting costs, and this is the primary reason the company is back in the black. Can it stay that way in an environment of falling sales and declining market share? Then there are GM’s pension obligations. In the Financial Times
, Tony Jackson recently pointed out that the company is forecasting returns on its pension investments of around 8.5 percent a year. That’s pretty optimistic in the current environment of wildly fluctuating stocks and low interest rates on fixed-income securities. Jackson thinks a more realistic calculation would leave GM’s pension with an annual shortfall of around $7 billion, which might dampen investors’ appetite when the company’s IPO rolls around.
The success of that IPO is crucial to determining whether the bailout of GM can be said to have succeeded (which is a separate question from whether the government was right to bail out the company at all). Much of the taxpayers’ “investment” in GM is held in the form of preferred stock. According to the government’s own estimates, GM’s market capitalization would have to reach $67 billion for taxpayers to break even. At its peak, in 2000, GM’s market cap was $57 billion. One GAO report concluded that “Treasury’s own analysis suggests that the circumstances necessary for the companies to reach market capitalizations high enough for Treasury to fully recover its equity investments are unlikely.”
Amid misleading claims that GM has paid back all of its bailout money, it is important to keep in mind just how much government support the automakers received: Out of $50.7 billion in loans to GM, only $7 billion, or 13.8 percent, has been repaid. (If you believed GM’s claim that it paid back its loans to the government in full, with interest and ahead of schedule, can you loan me some money?) Chrysler got $10.7 billion, of which it has repaid $2 billion. And let’s not forget about GMAC (now Ally Bank), GM’s financing arm, which received $16.2 billion and has yet to repay any of it. GM rid itself of GMAC’s problems by spinning it off shortly before declaring bankruptcy, but the money loaned to GMAC should count toward GM’s bailout: If it hadn’t been necessary to keep financing available to GM customers, GMAC probably would have been allowed to fail.
The bottom line is that GM and Chrysler still owe the government a great deal of money, and it is far from clear that they will be able to repay it all. As long as the prospect of large losses for taxpayers loom in the distance, it is impossible to say that the jobs saved didn’t come at the expense of other jobs. Even if all the money is paid back, it is hard to predict what consequences will follow from such an unprecedented bailout. The automakers have had a good couple of quarters; if the Democrats are lucky, they’ll have a couple more. But we are a long way from being able to say that the bailout “worked,” much less that we wouldn’t have been better off letting GM and Chrysler reorganize in bankruptcy without our help.
– Stephen Spruiell is an NRO staff reporter.
editor’s note: This article has been amended since its original posting.