What the Democrats Won’t Tell You About the Auto Bailout

This was written before the Democratic Convention, but the author has been proven absolutely correct about what the Democrats will conceal.

The central economic selling point of the Obama reelection team is that the president saved the U.S. auto industry. That such a contestable proposition serves as the administration’s economic headline does more to underscore its abysmal record than to inspire confidence in its continued economic stewardship.

The administration didn’t save the auto industry. The stronger case is that it damaged the auto industry along with several important institutions vital to capitalism’s proper functioning. However, it should be granted that President Obama’s commandeering of GM’s and Chrysler’s bankruptcy process saved jobs at those companies and elsewhere in their supply chains (and provided an opportunity to dole out spoils for politically favored interests). How many jobs were saved is impossible to determine because it’s not clear what would have happened to GM’s and Chrysler’s assets had a normal, non-political bankruptcy process been allowed to unfold.

Yes, jobs were saved for the time being in Michigan, Ohio, and a few other industrial states in the Midwest. That is what can be seen. And politicians are hardwired to tout the benefits—and only the benefits—of their policies.

But an informed citizenry should insist on a proper accounting of the costs of those policies, as well—not just the losses put on the taxpayers’ tab (right now taxpayers’ “investment” in GM is $27 billion, but the public’s 500 million shares of GM stock is worth only $10 billion), but the unseen costs.

Sure some jobs were preserved in some locations, but what about the less visible consequences and ripple effects? What isn’t so easily seen, but is every bit as important to assessing the auto interventions is the effects on the other auto companies and their workers (i.e., the majority of the U.S. auto industry). Will the public remember or know enough to attribute layoffs of American workers at Ford or Toyota or Kia during the next downturn in auto demand to the fact that a necessary reckoning on the supply side was precluded by the interventions of 2009?

The auto industry is plagued with overcapacity, which is a problem that demands a thinning of the herd. GM and Chrysler, through their own relatively poor decisions with respect to labor relations, product offerings, and quality management were failing by the market’s judgment and were the rightful candidates to be thinned. But that process was forestalled. In 2013, auto workers in Alabama, Tennessee, South Carolina, Indiana, and even Michigan and Ohio may lose their jobs because GM and Chrysler workers’ jobs were spared in 2009.

That is only one of the many unseen or under-rug-swept costs of the auto bailouts. The following passage from congressional testimony I gave last year identifies several others:

It is galling to hear administration officials characterize the auto bailouts as “successful.” The word should be off-limits when describing this unfortunate chapter in U.S. economic history. At most, bailout proponents and apologists might respectfully argue — and still be wrong, however — that the bailouts were necessary evils undertaken to avert greater calamity.

But calling the bailouts “successful” is to whitewash the diversion of funds from the Troubled Assets Relief Program by two administrations for purposes unauthorized by Congress; the looting and redistribution of claims against GM’s and Chrysler’s assets from shareholders and debt-holders to pensioners; the use of questionable tactics to bully stakeholders into accepting terms to facilitate politically desirable outcomes; the unprecedented encroachment by the executive branch into the finest details of the bankruptcy process to orchestrate what bankruptcy law experts describe as “Sham” sales of Old Chrysler to New Chrysler and Old GM to New GM; the costs of denying Ford and the other more deserving automakers the spoils of competition; the costs of insulating irresponsible actors, such as the United Autoworkers, from the outcomes of an apolitical bankruptcy proceeding; the diminution of U.S. moral authority to counsel foreign governments against similar market interventions; and the lingering uncertainty about the direction of policy under the current administration that pervades the business environment to this very day.

In addition to the above, there is the fact that taxpayers are still short tens of billions of dollars on account of the GM bailout without serious prospects for ever being made whole. Thus, acceptance of the administration’s pronouncement of auto bailout success demands profound gullibility or willful ignorance. Sure, GM has experienced recent profits and Chrysler has repaid much of its debt to the Treasury. But if proper judgment is to be passed, then all of the bailout’s costs and benefits must be considered. Otherwise, calling the bailout a success is like applauding the recovery of a drunken driver after an accident, while ignoring the condition of the family he severely maimed.

Like all crony capitalism, the auto bailout rewarded those politically well-connected with the ruling administration: unionized workers, badly managed firms, firms in swing states.

And of course, certain people get screwed over: non-unionized auto workers, bond holders who had to lose money that the law said they were owed.

Mess It Up

Detroit’s Union Problem

From the Wall Street Journal, an insightful article from Logan Robinson.

And yes, the problem is the United Auto Workers, but this has ramifications beyond the obvious.

It is perhaps the mode of doing business in a unionized company that remains a crippling disadvantage. The UAW is arguably the most successful industrial union of all time. But its very strength has allowed it to permeate into every aspect of manufacturing in the Detroit Three.

The collective bargaining agreement with the UAW is a heavily negotiated document the size of a small telephone book. It is virtually identical for each of the Detroit Three, owing to “pattern” bargaining, but it doesn’t exist at all in their U.S. competition, the nonunionized transplants. Not only work rules, but fundamental business decisions to sell, close or spin-off plants are forbidden without permission. That permission may come, but only at a price, since everything that affects the workplace must be negotiated.

Both the UAW and the Detroit Three maintain large staffs of lawyers, contract administrators, and financial and human-resources representatives whose principal job is to negotiate with the other side. These staffs are at all levels, from the factory floor to corporate headquarters and the UAW’s “Solidarity House” in downtown Detroit.

The collective bargaining agreements are now renegotiated every four years; in each negotiation the power and penetration of the union grows. If the company asks to change the flow of work for any reason, from cost-savings to vehicle improvements, the local union president will listen politely, and then say something like, “We can help you with this, but what’s in it for my guys?”

Typically, he will have a list of things he wants, some understandable (better cafeterias) some questionable (hire my nephew), but there is always a quid pro quo. These mutually sustaining bureaucracies exist to negotiate with each other.

In an environment of downsizing, the problem is exacerbated, as the entrenched bargaining structure causes innumerable inefficiencies. Typically each plant or warehouse is a “bargaining unit” and has a union president, who has a staff. If the company consolidates facilities, there will be no need for two presidents and two staffs. Since neither president wants to play musical chairs, they will both point to the bargaining agreement and resist consolidation. As a result, unnecessary facilities are not sold, but kept open, lit and heated, just to preserve a redundant bargaining-unit president and his team.

To anybody who knows anything much about bureaucracy, the analysis rings true. Yes, the unions are greedy and self-serving. And yes, auto executives have been incompetent. But it has been the bureaucratization that has accompanied unionization that has been fatal.

Detroit Hybrid

Running On Empty