The Essential Lesson of the Auto Bailout

By Steve Conover 

What do companies get when they act responsibly? Government-subsidized competition.

On July 5 in the swing state of Ohio, President Obama treated voters to his campaign-2012 synopsis of the 2009 auto industry bailout: "When the American auto industry was on the brink of collapse and more than one million jobs were on the line, Governor Romney said we should just let Detroit go bankrupt."
His message was clear: The Obama administration’s 2009 decision to bail out the auto industry allegedly saved it from the fate it would have suffered had Romney’s approach—bankruptcy—won the day.
The map below, adapted from the Ohio affiliate of the U.S. Census Bureau, shows automobile assembly plants in the Midwest and South, and helps to illustrate the “industry” in question. Red indicates companies rescued by the bailout; green indicates companies that didn’t participate in the bailout.

Also in his speech, Obama noted that top-down economics doesn’t work, and that risk-taking, hard work, and taking responsibility should be rewarded. The irony in that was easy to miss: The bailout was the government version of top-down economics, and the companies that had responsibly prepared themselves for surviving a downturn were not rewarded, they were penalized.

Although the campaign rhetoric may be effective with some of Ohio’s voters, anyone familiar with more than just the headlines of the 2009 auto bailout would know that it doesn’t stand up to scrutiny, for several reasons:

• The choice in 2008-2009 was not bankruptcy versus no bankruptcy; instead, the choice was between precedent-driven bankruptcy and White House-driven bankruptcy—rule-of-law versus rule-of-czar.

• The taxpayer bailout was not applied to the “American auto industry”—instead, it was applied only to the two failed companies, GM and Chrysler, bypassing companies that had been sufficiently prepared for the downturn, including Ford, Honda of America, Toyota, Nissan, BMW, and others.

• Orderly, rule-of-law bankruptcy might have led to continuing operations under restructuring for GM or Chrysler, in which case many auto-making jobs would have remained in Michigan.

• Alternatively, orderly bankruptcy might have led to a shutdown of GM or Chrysler and an open auction of assets—probably to surviving companies—in which case car buyers would have shifted to surviving companies’ products and auto-making jobs would have migrated to those same survivors. (When a grocery store closes, its customers don’t stop shopping, they take their business elsewhere; car buyers behave in the same way.)

• The notion that the White House should intervene with a specially designed bankruptcy process, thereby sidestepping rule-of-law bankruptcy, originated in the Bush White House in 2008, not in the Obama White House in 2009. A more honest name for the program would therefore be the “Bush-Obama Bankruptcy/Bailout” for Detroit’s two failed auto companies.

• Ironically, top-down economics was the de facto remedy applied to “save” GM and Chrysler—but in this case “top-down” was the government-knows-best notion that political wisdom, trickling down to displace a century of evolved bankruptcy case law, was supposedly a superior alternative for the two failed companies. Top-down economics, the politicians’ version of  “intelligent design,” directly rewarded GM and Chrysler with special-interest life support—instead of indirectly rewarding their surviving competitors with new customers and the necessary additional workers.

• For the record, the only thing that “saves” any company, not just auto companies, is a sufficient number of buying customers—not the government, not union bosses, and not incompetent management. It’s a truth that all but two of the American-based auto companies understood sufficiently to withstand the 2008 downturn without help from the taxpayers.

As of the 2008-2009 crisis, American workers in companies such as Ford, Honda of America, and Toyota had won the marketplace battle against GM and Chrysler for survival during hard times. They had planned successfully for a “rainy day,” proving their competiveness in the auto market. Unfortunately, however, they couldn't compete against the politicians in power, the rule-of-czar bankruptcy process, or intelligent design economics. When government wisdom, not consumer choice, decided which companies deserved to be kept alive and which types of cars consumers should decide to buy, it was the two failed companies that were rewarded; perversely, hard work and acting responsibly was not. What the responsible companies got was government-subsidized competition.
A more intellectually honest synopsis for Ohio’s voters would be something like the following:

When GM and Chrysler failed, Governor Romney’s approach would have been a rule-of-law bankruptcy process, followed by consumer-driven selection of the pecking order for American-based car companies. Instead, both the Bush and Obama administrations favored White House-directed bankruptcy, followed by life support for the two failed companies. 

That begs a question: How many jobs in Ohio and elsewhere would the car-buying public have awarded to the responsible companies if Romney’s preferred approach had been the policy? Unfortunately, we'll never know. The unemployed who would have had new auto-making jobs don't even know who they are and therefore have zero political clout. That's a fatal disadvantage against the politically connected crony capitalists and union bosses who are skilled at employing intelligent design economics to protect themselves.
It’s also standing in the way of a new Golden Era for the U.S. economy; in the July 6 Wall Street Journal, Michael S. Malone summarized the problem in his article, “The Sources of the Next American Boom”:

Getting there won't be easy, as we are currently governed by leaders who want to manage our complex and dynamic economy from the top down, to tame entrepreneurs with regulation, to tax the productive and, ultimately, to pick the next generation of winners. That's never worked well and it isn't working today.

Not only will we never know the number of auto-industry jobs that would have migrated to Ohio and the Sun Belt, we’ll never know the answer to a final hypothetical question: Instead of spending taxpayers’ money to bail out two irresponsible car companies, might it have been better to invest it in a useful infrastructure project such as wider highways leading away from failed companies and towards the more responsible ones in Ohio and points south?
We shouldn’t expect an answer to that question anytime soon, let alone during campaign season.
Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy. His website is www.optimist123.com.