Megan McArdle has done consistently excellent reported pieces on the GM bailout, and her recent evaluation of its net effect on the U.S. Treasury is no exception. Her bottom line is that the deal caused U.S. taxpayers to:
burn $10-20 billion in order to give the company another shot at life. To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy. We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks
This is in line with the Obama administration’s $14 billion estimate of the net cost to the Treasury, as reported in the Wall Street Journal. If anything, I think this understates the case on the direct costs, because it does not consider other direct transfers of economic value like the government support for Delphi that inflated the value of the asset that GM sold to create a big chunk of their headline profits this past quarter, green-car development subsidies, and uncompensated interest costs on the government investment.
But no matter what realistic direct bailout costs you estimate, the objection of bailout defenders is that it is dwarfed by the other receipts or avoided expenditures created by the bailout. According to the Wall Street Journal, this is exactly the defense offered by the Obama administration:
The White House report said the money invested in GM and Chrysler ultimately saved the government tens of billions of dollars in direct and indirect costs, including the cost of unemployment insurance and lost tax receipts that the government would have incurred had the big Detroit auto makers collapsed.
There is a lot to this point, but it’s not really so simple. You can’t compare all of these net tax receipts (or more broadly, economic activity) to what would happen in “the world as it is today, minus GM.”
First, in the event of a bankruptcy, you don’t burn down the factories, erase all the source code on all the hard disks, make it illegal to use the brand name Chevrolet, and execute all of the employees. Others take ownership of the assets, and the employees go on with their lives. Some of these assets will be put to use generating revenues, profits, and taxes, and some of these former employees will get jobs or start businesses, and generate revenues, profits, and taxes. In order to measure the effect of the bailout over, say, five or ten years, you have to compare the actual taxes collected to what would happened over this same period in the counterfactual case where the bankruptcy was allowed to proceed. What owners would have bought the factories and IP assets, and what would they have done with them? What businesses would the former employees have started? Who would have moved to Arizona and retired? What new industry clusters will evolve in Arizona because of this transfer of people?
Second, some of the profit GM makes today would have been made by other companies that picked up some of the slack if the company lost market share after a bankruptcy. They would pay taxes on these profits, and as far as government receipts are concerned, money is money. How would auto industry structure evolve over time given whatever changes happened to the assets currently owned by the legal entity GM, or the employees currently paid by it?
Anybody who tells you they can answer all of these questions reliably is full of it.
And that doesn’t even start to get to the really long-run considerations of what effects this has on rule of law and moral hazard (or if you want to make the case for the bailout, social solidarity and degradation of the working class).
I hold the belief, quite strongly, that the net effect of the GM bailout will be negative. More precisely, I hold the belief that over a series of many such decisions, a mindset that would have been stringent enough not to have sanctioned the GM bailout is likely to lead to better overall economic outcomes for America. This belief is ideological — not in the sense that I just hold it for inexplicable reasons that cannot ever be changed by empirical analysis, but in the sense that I don’t believe that human beings currently have the capability to conduct the kind of analysis that should convince a rational observer to change his mind about the GM bailout in isolation from a more profound paradigm-shift-like change in his beliefs about the world.
The GM bailout is not an isolated case of this problem. And as I’ve argued many times, impressive-sounding empirical analysis is typically insufficient to measure the effect of important economic interventions like the stimulus program. If you can’t even measure what effect already-executed programs have had, how likely is it that you can predict the effects of future programs?
Acceptance of this degree of ignorance doesn’t cut equally against all ideological positions. It leads naturally to a call for decentralized decision-making, experiments, and entrepreneurial groping toward knowledge.
A very informative analysis that, once again, picks apart the administration's shallow clap-trap about the wonderful things that flowed from bailing out GM and Chrysler. Keep up the good work.
Reply to this commentLinkReport AbuseThis analysis does not consider the cost to bond holders when the govt forced them to accept less than they were legally entitled to in order to protect the unions.
Beyond that, it is undoubtedly the case that other companies are now paying more in order to obtain loans, now that investors are factoring in the fact that their risks of loss are now greater.
Reply to this commentLinkReport AbuseMark W highlights the true "moral hazard" and long term consequence of this "reward the unions who elected Obama" in the GM bailout. I find little difference between Chavez expropriating the assets of foreign oil companies and what Obama and a sycophantic judge did to the GM bond holders. This was nothing but government theft of private property.
Reply to this commentLinkReport AbuseChrysler is one of the premier engine makers in the world. They could have gotten out of the car business and sold their engines.
Jeep could have been sold and no one would have been the wiser.
GM could have sold the Corvette brand and no one would have been the wiser. Same goes for Cadillac.
The GM and Dodge Ram lineup could have been spun off as independent ventures.
There were a lot of things that could have been done, but all of these options would have done one thing: It would have busted up the unions. Indeed, Meagan's recommendation of paying each working $250,000 at GM would have been optimal compared to the immoral and haphazard bailout, but it would have destroyed the unions. The bailout was meant to save the unions and it was dressed up as saving the entire economy. We are worse off because of it.
Reply to this commentLinkReport AbuseBy the by, the basic premise of Obamanomics is this: If we don't act, bad things happen. There is no way to ever prove this empirically, as Jim states above. The other immoral thing about Obamanomics is that even after the action is taken and bad things still occur, the goal posts are moved and bad things that are happening would be worse had they not acted. You can apply this to the stimulus, to the bailouts, to their foreign policy, and even to healthcare (just wait until Obama is reelected). That anyone even considers this to be a serious, intellectual argument is a sign of the deterioration of our society as a whole.
Reply to this commentLinkReport AbuseJim - I think one aspect that you include as unknowable actually was very - indeed, painfully - knowable at the time, which is that there WERE no private buyers for the car companies or their assets at the time. There was no finance for private buyers of ANYTHING back then, let alone assets that hadn't produced acceptable returns for years, and for whose products the market had basically gone up in smoke. It really was the bailout or lock the gates.
Sure, maybe a few years later somone might have had a look at some of the assets, but as any bankruptcy practitioner knows, one of the keys to a failing business surviving is continuity. Once the gates shut, the labor force disperses, plant and equipment begins to deteriorate, suppliers go about of business, logistics dissolve, and so on. The costs to restart escalate very quickly.
In short, it's just a fantasy to suppose that if the automakers had been left to fail, those assets would have been picked up to operate on anything like the scale that they now do. I take your general point about the inherent difficulties of this kind of analysis, but frankly, this is about the easiest case of its kind that you'll find.
Reply to this commentLinkReport AbuseWhat's your point, that me and you couldn't have gotten a loan to buy GM if it had gone bankrupt?
Reply to this commentLinkReport AbuseIf no one had money how did banks by the remnants of other banks for billions of dollars? They weren't loaning to regular guys like you and me, they were still loaning to massive businesses with sustainable ideas like buying up assets from a bankrupt competitor for pennies on the dollar. Furthermore the majority of them didn't need loans, they had been wise and hoarded up money during the boom and, as they have done in many other cases, could have spent it on highly discounted GM assets.
Then shrewd businessmen would be in control of those assets, not a bunch of government liaisons masquerading as budgetary specialists.
GBH,
No buyers? Not for 50 cents on the dollar? How about 25? Or 10? Or 5?
Of course there would have been buyers. The question is how much they would have paid and what they would have done with the assets. At a low enough price plant equipment is profitable if sold for scrap.
Reply to this commentLinkReport AbuseThe Fed opened up the discount window to many companies who needed emergency financing back then so a traditional bankruptcy probably would have been enough for the profitable sections of the company to survive in one form or anither.
Anyway, the incentive to run a business like a blue state government is firmly in place (for the bailed out sections of the economy) now, which is why bailouts are always wrong regardless of the situation.
Reply to this commentLinkReport Abusegbh: You seem mighty sure that there were no buyers. What is your evidence for this claim.
Reply to this commentLinkReport AbuseGbh is pretty cogent.
Also, consider the suppliers, many of which already emerged from their first bankruptcies. A slew of Chapter 22's we didn't need.
The market is like a vicious dog. Sometimes it's good to have a vicious dog. But sometimes it's not.
Reply to this commentLinkReport AbuseGM DID go thru bankruptcy ... yes Obama turned out to be the White Knight but then again nobody else was allowed to bid ...
No way GM would have disappeared ... someone would have bought it, torn up the union contracts and obligations and emerged much better off than the current GM ...
Reply to this commentLinkReport AbuseDoes the existence of GM (and Chrysler) cause more cars to be sold? Likely not.
So the disappearance of GM would not have changed the market. Instead, the same number of cars would have been sold by (increasingly) profitable car companies rather than a mix of profitable and unprofitable car companies. Market consolidation occurs to increase the profits of surviving companies.
Would the expansion of other companies have fully used GM's resources? Likely not; instead cars would be cheaper because of efficiences and competition for market share. Isn't that supposed to be a good thing?
Justification for the bailouts, if any, should be based on factors other than the on-going effect on the economy.
Reply to this commentLinkReport AbuseYes, the unions got their bailout. But not all the employees benefitted. As I understnad it, the white collar workers got the proverbial shaft.
Reply to this commentLinkReport AbuseThere would definitely have been buyers. It may seem illogical to you or me but there are a lot of extremely successful car lovers out there in investor land.
Consider Kirk Kerkorian (Tracinda).
In the 90s and 00s he tried to acquire both GM and Chrysler. Don't you think he would have loved to acquire either one of them at fire sale prices?
Reply to this commentLinkReport AbuseExcellent article--great read.
To all the naysayers out there, please take a step back from your hatred of the entrepeneur. You're wearing your ignorance of basic market principles on your sleeves. People need vehicles. The demise of GM would not have affected that need in any way, shape, or form. The need simply would have been met by OTHER vehicle makers. And the empty factories would have been gobbled up by current suppliers, and new suppliers would have been born (read the story behind Tesla's factory if you don't believe me...).
When's the best time to invest in a company? When the price is high? Of course not. And dont' give me that whole "banks weren't loaning money" garbage. Entrepeneurs find ways to get what they need, even when times are slow.
This is so simple as to be ridiculous.
Reply to this commentLinkReport AbuseThis analysis stresses that the evaluation of the bailout is inherently ideological but completely ignores the political motivations and implications of the bailout. The bailout was as much or more about politics as ideology. The Dems are more about politics than ideology.
The bailout handsomely rewarded unions and provided rich feedback to the unions that their political contributions to the Dems were well spent. By preserving the union's contracts, the Dems guaranteed future political contributions from the unions and strengthened the unions' chances to survive and thrive.
Manzi states:
"And that doesn’t even start to get to the really long-run considerations of what effects this has on rule of law and moral hazard".
Why is this really long run? The bailout was Chicago style corruption in the here and now. The union was illegally jumped ahead of the bond holders in the here and now, not some distant future.
It is good that Manzi understands that simulating the economy is beyond difficult (too bad he never figured out that simulating the climate is at least as challenging for the IPCC).
It isn't clear why NR wants Manzi as a contributor. HuffPost would be a better match.
Reply to this commentLinkReport AbuseThe moral hazard point is key, I think. Why should union leaders agree to necessary future benefit cuts if the government can be counted on to bail out their unsustainable contracts?
Reply to this commentLinkReport AbusePolitical? Idological?
Of course!
I don't want a country with a ruling class of very smart, very capable, very well-off people served by a vast army of low-paid service workers. That's what we're trending toward.
I'm glad others agree with me. You prefer the market? I prefer the market distortion when it saves a boatload of well-paying jobs -- even if it costs me in the long run. I know, I know: you don't want to pay for that.
Reply to this commentLinkReport AbuseMikeB:
First off, it didn't save any jobs, not in the long run. For two reasons. Any jobs shed by GM would have been picked up by someone else. Secondly, if you think GM's in any better shape now than it was, you aren't paying attention.
Secondly, why should I, or anyone else, sacrifice so that someone else can earn more than their labor is worth?
Thirdly, I love the way you imply that you are in any way shape of form, taking part in any of this sacrifice.
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