The Agenda

Luigi Zingales on the Auto Bailouts

Late last month, I wrote a post that revisited the critiques of the auto bailouts that were made as the policy actually unfolded. My main point was that the real dispute was not over whether or not the public sector should contribute to debtor-in-possession financing, though this is what the debate has fixated on in recent months. Rather, it centered on a number of issues, e.g., (1) whether or not there should have been statutory authorization to use TARP funds for this purpose, (2) the politicization of the bankruptcy process as evidenced by the treatment of secured creditors relative to the UAW in the case of Chrysler, (3) the failure to issue deficiency claims to secured creditors who were not paid in full, and (4) the fact that creditors were not given an opportunity to offer competing reorganization plans, among other things.

Yet as Luigi Zingales observes, the debate has mostly centered on misinterpretations of Mitt Romney’s “Let Detroit Go Bankrupt” op-ed:

Romney was very clear in his article that the bankruptcy process should have been “managed” and the government should “provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.” Romney was also very explicit about the fact that management had to be changed, as eventually the Obama administration did. Thus, would Romney have managed Detroit as Obama did?

No. First of all, Romney’s article was written in November 2008 just before the Bush administration handed out $18 billion to GM and Chrysler (not to mention the $8 billion to GMAC) to kick the can down the road. Romney would have forced the two automakers in bankruptcy in December rather than May, saving not only the $26 billion wasted by the Bush administration, but also the extra $6 billion the Obama administration gave GM before it went into bankruptcy.

When finally both GM and Chrysler went to bankruptcy, Romney would have extended the same lines of credit the Obama administration did, but without pushing for a redistribution of value in bankruptcy, redistribution that favored the unions at the expense of the other more senior creditors.

Finally, Romney would have not forced GM to waste so much money in a useless electric car (the Chevy Volt) that found no clients. Thus, the fact that Obama saved a car industry that would have died otherwise is a myth. The reality is that Obama used taxpayers money to subsidize the unions. 

My only disagreement with Zingales, and it is a small one, is on the Chevy Volt. I wouldn’t describe it as useless exactly, and the Volt has found at least some buyers. The deeper problem with the Volt, as Kevin Bullis has explained, is that it hasn’t achieved its larger objectives:

The Chevrolet Volt is interesting in part because anticipated sales of the car helped justify a massive, more-than-$2-billion-dollar push by the U.S. government to help companies build advanced lithium ion battery factories in the United States. But the companies that built those plants are struggling, in part because of lower than expected sales of cars like the Volt. A123 Systems recently declared bankruptcy (see, “A123’s Technology Just Wasn’t Good Enough” and “What Happened to A123?”). Dow said it would take an accounting charge because of a drop in value of its advanced battery venture, Dow Kokam. And LG Chem—which currently supplies battery cells for the Volt from a factory in Korea–has furloughed workers and hasn’t yet started building battery cells at a new factory in Holland, Michigan (see, “Too Many Battery Factories, Too Few Electric Cars”).

By some measures, the car is now doing well. About half of Chevrolet’s models sold more than the Volt, and about half sold less. It outsold the Corvette (1,167), for example. Sales accelerated this year after GM started offering attractive lease rates ($199 a month).

But the Volt far undersold the Cruze (19,121), a sedan about the size of the Volt. And GM isn’t coming close to a goal, set at the end of last year, to sell 60,000 Volts this year. [Emphasis added]

Even if sales of the Volt improve, it is not clear that the U.S. government should devote taxpayer funds to building advanced lithium ion battery factories. As Bullis goes on to note, plug-in hybrids and electric cars have been growing in popularity and one assumes that this trend will continue if gasoline prices continue to rise. It is also possible, however, that low natural gas prices will lead to the proliferation of CNG-powered vehicles, or that we’ll go in some other direction. Making a big and expensive bet on one technology platform doesn’t make sense. Rather, the public sector should invest in upstream innovations that can then be commercialized downstream.

Finally, I recommend reading Peter Schweizer’s recent op-ed in the Washington Times on the growing cost of the auto bailouts.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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