The former Obama auto czar, Ron Bloom, was on Capitol Hill last week telling Congress what a grand bargain the auto bailout has turned out to be for taxpayers. (His testimony should be on the Syfy channel.) But much was missing from his story that he might have heard if he had hung around for the next panel. (Full disclosure: I was on it.)
The story that Bloom told, and that President Obama is making the signature theme of his re-election campaign, goes like this: If the administration hadn't infused $80 billion into GM and Chrysler, the companies would have hemorrhaged to death. Financial markets, themselves in panic mode, would not have given them the funds necessary to restructure through Chapter 11 bankruptcies and stay in business. Hence, they would have had to shut their factories, sell their assets for scrap and liquidate. And this would have bankrupted auto parts suppliers, shut down dealerships, laid off 1 million workers—whose pension and unemployment benefits taxpayers would have had to foot—and devastated entire communities. GM and Chrysler may never repay taxpayers in full. But any loss is less than the cost of this economic Armageddon.
This narrative would make for a great horror movie. But any resemblance to real world events is purely coincidental.
For starters, many experts suspect that at least GM could have obtained private bankruptcy financing if it had presented a credible restructuring plan addressing the cause of its malaise: the uncompetitive costs of its unionized work force. If it couldn't, then the government could have offered guarantees to private lenders for the amounts they loaned, which likely would have been smaller than the bailout.
But the administration took matters in its own hands, using taxpayer dollars to commandeer the bankruptcy process to protect key constituencies, while giving short shrift to others. It gave Chrysler's secured creditors, who would have had priority in a normal bankruptcy, 29 cents on the dollar. Chrysler's unions, on the other hand, got more than 40 cents, even though they are equivalent to low-priority lenders. This made a mockery of longstanding bankruptcy law, something that will make credit markets wary of lending to political sacred cows in the future.
The administration favored union workers not only over creditors, but also other workers. All United Auto Workers retirees at Delphi, GM's auto supplier, got 100 percent of their pension and retirement benefits. But 21,000 nonunion, salaried employees lost up to 70 percent of their pensions, and all of their life and health insurance. The Treasury could have covered 93 percent of the benefits of all employees for the same funds it spent on full union benefits, testified Bruce Gump, a representative of the Delphi Salaried Retirees Association.
Even for GM and Chrysler, the bailout constitutes a missed opportunity, not a second chance. They didn't get nearly the kind of relief from labor costs that they would have in a normal bankruptcy. Not only are they on the hook for most of their legacy costs, they still pay union workers $58 per hour including benefits. This wouldn't be so bad if Toyota, whose costs are $56 per hour, were setting the industry's cost curve. But that's no longer the case. Hyundai and Kia, with $40-an-hour costs, do that. The bailout prepared GM and Chrysler to compete with the industry leaders of yesterday, not tomorrow.
Absent the bailout, these companies would have survived, but they would have looked very different. They might have merged into one, pooling resources and slashing excess capacity from the industry. Alternatively, entrepreneurs might have purchased their more viable brands and run them as independent companies, breaking up the industry's big vertically-integrated players into myriad smaller ones. Either way, the labor and capital squeezed out from the industry would have been more productively deployed elsewhere. History offers examples: A bankruptcy-triggered reorganization of the steel industry three decades ago led to an 18 percent increase in employment in the plastic industry, which replaced steel for some uses. The auto bailout has entrenched the status quo, strangling new possibilities.
Worse, it has unleashed a systemic moral hazard. GM had accrued $70 billion in losses in the two years before the bailout and debt 24 times its market capitalization. By contrast, Ford had eliminated money-losing brands and mortgaged all its assets—including its logo, the Blue Oval—raising funds to weather the economic downturn. By bailing out GM, the administration rewarded its recklessness and penalized Ford's prudence. Every company that feels it is too big to fail, or is a national icon or major regional employer, will wonder whether it makes more business sense to save for a rainy day or simply hold out for taxpayer assistance. And just as the Wall Street bailout became a justification for the auto bailout, the auto bailout will become a justification for the bailout of future reckless players.
The administration is casting GM as an Atlas-like figure carrying the economy on its shoulders. In fact, the real Atlases are the taxpayers and creditors carrying GM—and they got screwed by the bailout.
Shikha Dalmia is a senior policy analyst at Reason Foundation and a columnist at The Daily. This article originally appeared at The Daily.