The Detroit Money Pit

by James Sherk

President Obama is touting the success of his administration’s bailout of the Detroit automakers. But this victory lap is like the woman who boasted to her friend that she made her husband a millionaire. When the friend asked what her husband had been before, she answered, “a billionaire.”

General Motors and Chrysler are much better off because Bush gave them $24 billion and Obama gave them another $60 billion. Any company would be. Pouring federal dollars into businesses does improve their bottom lines, but that doesn’t mean it helps the overall economy. The real question is: What would have happened to that money if the government had not spent it in Detroit?

The government shouldn’t plan on getting its money back. President Obama concedes that the $24 billion Bush spent — more than NASA’s annual budget — is gone for good. And Obama’s claims to the contrary, the money he spent isn’t coming back, either.

General Motors would have to command a market value of more than $70 billion for the taxpayers’ stake in the company to be worth what Obama paid for it. Since General Motors’ highest-ever market valuation was $52 billion in 2000, at the peak of the dot-com boom and the SUV craze, that seems improbable — especially since Obama’s new miles-per-gallon regulations won’t let them build as many of those highly profitable SUVs. At the end of the day, the government will still have sunk tens of billions of dollars into GM and Chrysler with no hope of recovering it.

The government got that money from investors who bought government bonds. If they hadn’t bought those bonds, most of those investors would have invested their money somewhere else in the economy, creating jobs and spurring hiring. The bailout helped two declining companies at the cost of stifling investment in newer enterprises with brighter futures. The government should not make that tradeoff.

The major force driving unemployment higher has been a sharp drop in business hiring and business startups. Reduced job creation — not increased job losses — accounts for most of the rise in unemployment since the recession began. The current credit crunch has made it harder for entrepreneurs to get the funds they need to start or expand a business.

Spending billions to shore up politically favored companies also cuts off financing for job creators elsewhere in the economy. The jobs saved in Detroit came at the cost of jobs not created for other unemployed workers.

Washington shouldn’t play economic favorites and pick winners and losers. And it certainly shouldn’t pretend that doing so helps the economy.

— James Sherk is the Bradley Fellow in Labor Policy at the Heritage Foundation.