Why surprising?
Because despite the efforts of the administration and its willing accomplices in the media, the belief that the auto bailouts were a success is simply a myth. Leave aside the obvious point that the government still stands to lose billions of dollars on its investment as well as many billions more from the preferential tax treatment of the reorganizations. Not only was the bailout unnecessary to save the American automotive industry but the politicized bankruptcy process left both General Motors and Chrysler in a weaker competitive position than if they had simply reorganized in a standard chapter 11 process.
First, the belief that the bailouts were a success rests on a central misunderstanding: the belief that GM and Chrysler would have collapsed had the government not intervened. Yet large corporations reorganize in bankruptcy routinely in the United States and GM in particular is the prototype of the type of firm for which chapter 11 was designed: a firm with strong going-concern value, specialized labor and capital investments, but plagued with decades of bad management decisions and a need to fix crushing labor agreements, eliminate underperforming lines, and streamline an overgrown dealership network. Given the obvious viability of a leaner, more-efficient GM there is little doubt that it would have successfully reorganized. Moreover, to the extent that GM would have been unable to obtain post-bankruptcy operating loans, that would have been solely because of the credit crunch that began in 2008. And if so, then this would have made a possible case for use of TARP funds or the equivalent in order to finance or guarantee a narrowly-tailored bridge loan to overcome the temporary credit freeze-after all, to the extent that the TARP had any rationale at all it was to deal with the short-term liquidity problems in the banking industry that interfered with the ability to make even high-value loans, like a loan to GM would be.
As for Chrysler-which didn't even really reorganize but instead was sold as a going concern to Italian carmaker Fiat-there is no reason to believe that the Italians would not have bought Chrysler without the intervention of the U.S. government. Nor is it obvious why American taxpayers should care so much more about promoting the fate of Fiat's American-based workers than, say, Honda, Toyota, or BMW's.
In both cases then to say the bailouts were a success is akin to rolling a rock from the top of a hill and calling it a success when it reaches the bottom: the results in both cases would have almost certainly been the same without the intervention of the U.S. government except that American taxpayers wouldn't have lost billions of dollars in the process.
But even if one still believes that the bailouts were necessary to save the American auto industry (or to promote the Italian auto industry, as the case may be) that still doesn't excuse the egregious lawlessness and corruption of the bankruptcy process that took place in these cases. Even if was necessary for the government to intervene to prop-up Chrysler, does that justify plundering Chrysler's secured bondholders (including, among others, the Indiana Firefighters and Teachers Retirement Plans) simply to line the pockets of the United Autoworkers? In fact, finance scholars Deniz Anginer and Joseph Warburton have found that the government's intervention in the GM and Chrysler cases destabilized bond markets as investors adjusted to the new reality of the potential for government bailouts of unionized and politically-connected firms.
But perhaps most misleading about the myth of the auto bailout success is that by restructuring through a politicized bailout process both companies were left in a weaker competitive position than they would have been had they simply gone through a traditional chapter 11 process. Rather than a restructuring process focused on maximizing the economic value and viability of the firms, they were saddled with 535 new members of their boards of directors driving decision making through the lens of politics rather than economics. Efforts to streamline an overgrown dealership network has been thwarted by the intervention of politicians across the country designed to keep open local dealers and special legislation that permits dealers to seek arbitration of any decision to close their dealerships. From Barney Frank's intervention to keep open an outmoded manufacturing plant in his district to the efforts of Montana's delegation to insist on GM's continued use of home state palladium mines, politics has corrupted decision-making throughout the process.
But perhaps the greatest danger lies in President Obama's decision to trumpet the auto bailouts as a successful experiment in government industrial policy rather than a reluctant intervention to avert a perceived larger harm (the motivation for the initial intervention by President Bush). Celebrating the auto bailouts as an affirmative success can really have only one rationale: to lay the foundation for similar interventions in the future. For if the auto bailouts were truly a triumph of industrial policy why shouldn't the government intervene in the future to save major firms in other industries from the rigors of bankruptcy?
In turn, trumpeting the success of the auto bailouts is an open invitation to moral hazard by similar firms in the future, especially those with politically-favored constituencies. Nor is the moral hazard problem limited to the private sector-public employee unions in cash-strapped states such as California and Illinois must be rejoicing at the blessing of future bailouts implicit in President Obama's endorsement of the auto bailouts as a positive good rather than a necessary evil. If a bailout was good for GM and its workers why wouldn't it also be good for California and its employees?
Bailouts and novel governmental interventions into the economy during the heat of the financial crisis were justified as short-term and unfortunate necessities to stabilize a teetering economy. Not only is it misleading to claim the bailouts as a success, but by endorsing them in the cool light of ordinary economic conditions President Obama is proposing a radical alteration in the future relationship between business and the government. Understanding the real truth about the auto bailouts will help to avert similar disasters in the future.
No comments:
Post a Comment