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Did Obama overreach with GM and Chrysler?

BusinessFinanceFederal Bailout FundsHeads of StateAutomotive EquipmentVehiclesBarack Obama

Today's topic: How deeply involved -- if at all -- should the government be in the operations of a firm it's supplying with aid on the scale of General Motors and Chrysler?

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Barack Obama, president and CEO of General MotorsPoint: Dean Baker

President Obama probably didn't anticipate that oversight of two of the Big Three domestic auto manufacturers would be one of his responsibilities when he was elected last November. However, events have left him with little choice.

The economic crisis caused by the collapse of the housing bubble has devastated the automobile industry. The Big Three, and General Motors and Chrysler in particular, lacked the cash reserves that will allow stronger manufacturers to get through the downturn.

If the government had allowed the manufacturers to fall into bankruptcy, the spillover effects from the direct job losses and the collapse of suppliers would have devastated the economies of Michigan, Ohio and Indiana, where the Big Three's operations are concentrated. Instead of bailing out the automakers, the federal government would have little choice but to bail out states that lacked the resources to sustain their schools and fire departments.

However, handing these companies a blank check would have been neither good politics nor good policy. Obama had no choice but to take a direct hand in the running of these companies and trying to steer them back to a course of profitability. There would have been little political support for a path of endless subsidies to these auto companies.

The need to take direct control does not mean that Obama has made all the right calls. In particular, it is difficult to understand why workers in the auto industry have been treated so much more harshly than the top executives in the financial industry.

When the AIG bonuses became a major national issue, White House economic advisor Larry Summers lectured the public about the sanctity of contracts, while Obama warned about the need to avoid governing out of anger. But concerns for the sanctity of contracts have not prevented the administration from insisting that autoworkers surrender retiree health benefits that they already worked for and are guaranteed by contract. It is difficult not to get the impression that this administration has more concern for highly paid bankers than the working-class types in the automobile industry.

These sorts of judgments, which are inherently political in nature, are inevitable when the government becomes heavily involved in subsidizing an industry. If the economy had been better managed over the prior decade, we wouldn't be in a situation in which Obama must make important decisions for the automobile and financial industries.

However, there is no way to avoid that situation now. The public will have to demand as much transparency as possible to increase the likelihood that these bailouts are conducted in ways that benefit the public and not just a privileged few.

Dean Baker, co-director of the Center for Economic and Policy Research, writes on economic reporting at the American Prospect's Beat the Press blog.

Isn't being president of the United States enough?Counterpoint: Matt Welch

Was it really "the economic crisis caused by the collapse of the housing bubble" that "devastated the automobile industry" in the United States, as you claim, Dean? I'm no economist, but from what I gather of the discipline, one of its functions is to look at the things people say and ask, do the available data support this?

The U.S. housing bubble peaked in June 2006. What was General Motors doing during that time of comparative plenty? Bragging that its North American operations lost "only" $85 million over the previous year. Why would this be a point of pride? Because the year before that the division lost $1.1 billion. To sum up: As the housing market was steaming toward record highs and American consumers were on the way to buying more than 16 million new vehicles (and more than 16 million in 2007), U.S. automakers were "hoping to reverse their sliding market share" and stem the bleeding on their balance sheets. This suggests that the Big Three's root problems lie elsewhere.

As the Sept. 11 hijackings did unto poorly run legacy airlines like United (unlike, say, Southwest), so the 2008 recession did unto poorly run legacy automakers in Detroit (unlike, say, Toyota). It is the worst companies that are hit hardest by bad economies. Typically, the next step is a time-honored legal process called bankruptcy. But in the Bush/Obama years, that has been replaced by an ominous four-word phrase: too big to fail.

Precisely how big is that? Bailout proponents never say. Unfortunately, Obama's track record is already clear. In March, the president announced that $5 billion in funds from the Troubled Assets Relief Program -- a pool of money that was, on passage, statutorily limited to "financial institutions" -- would be given to auto-parts manufacturers. One recipient, the GM supplier American Axle, has all of 3,600 employees, or about as many people as Radio Shack employs in the Dallas-Ft. Worth area alone.

Bankruptcy is not the same as liquidation; the most valuable companies come out on the other end with their brands intact, and even less valuable firms can maintain jobs, factories and divisions. Trying to preserve every industrial job in amber is a recipe for wasting federal dollars on zombie companies whose main customers are bureaucrats, not consumers.

The problem with corporate welfare, as in socialism generally, is that eventually you run out of other people's money. We're already creating federal deficits the likes of which we haven’t seen since FDR was president; what will happen when the bailout zooms past $13 trillion and starts amounting to real money?

You say, Dean, that we need to ensure that the rolling bailouts "are conducted in ways that benefit the public and not just a privileged few." But that's literally impossible. Taking money from U.S. taxpayers to cover terrible bets made by various corporate fat cats is the definition of privileging the few over the many. And having a president involved in the minutiae of private-sector brand consolidation is an excellent indicator that someone's mission has crept.

Matt Welch is editor in chief of Reason magazine.

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