Free Market Fundamentalist

“General Motors is Alive”, But at What Cost?

President Obama saved jobs, but business confidence is fading.

Vice President Joe Biden’s case for reelecting Barack Obama in November is simple. “Osama bin Laden is dead and General Motors is alive.” He reiterated that message at the Democratic National Convention in Charlotte, North Carolina on Thursday.

The president, Biden argued, “saved more than a million American jobs.”

He added,

If the president didn’t act immediately, there wouldn’t be any industry left to save.

The first statement is true, at least in the short term, but the second is patently false.

Bankruptcy

When Barack Obama became president in January 2009, Chrysler and General Motors were on the brink of bankruptcy.

Republican presidential candidate Mitt Romney wrote an op-ed in The New York Times arguing that the automakers had to go through bankruptcy to reduce employment costs and replace management. A “managed bankruptcy,” he argued, “would permit the companies to shed excess labor, pension and real estate costs.”

But don’t ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost.

The libertarian Cato Institute’s Randal O’Toole agrees and takes issue with Biden’s claim that there “wouldn’t be an industry left” if it hadn’t been for President Obama’s intervention. If Chrysler and General Motors had gone through bankruptcy, “most of their factories would have stayed open and they would have continued making and selling cars.”

Bankruptcy would have allowed the companies to avoid interest and dividend payments for a time and to renegotiate union contracts. Under bankruptcy laws, stockholders would have lost the value of their stocks but bond owners — who have first claim to company assets and profits — would have been paid off, if not in whole than at least in part.

Bailout

Instead, the automakers received a bailout and were effectively nationalized. Once in government hands, they still had to file for bankruptcy, but now, not just stockholders but Chrysler’s bondholders lost everything.

And instead of renegotiating pay and pensions, the administration gave unions — who, in previous years, had constantly demanded salary increases despite rising foreign competition — greater control.

In other words, the administration didn’t bail out the companies; it bailed out the unions at the expense of (in Chrysler’s case) the bondholders.

Uncertainty

The result was uncertainly in bond markets. “Bonds were supposed to be safer investments than stocks.” Not anymore. The auto bailouts showed that, at any moment, government can step in and void the legal rights of bondholders.

The result is that bond sellers must be willing to pay more interest to attract buyers.

O’Toole concludes that even if the Obama Administration saved jobs, it “prolonged the recession by discouraging private investment in American industry.”

Downgrade

Indeed, this very week, the World Economic Forum downgraded (PDF) America’s competitiveness in its ranking in part because the business community “continues to be critical toward public and private institutions” and is “concerned about the government’s ability to maintain arms length relationships with the private sector.”

Similarly, the Index of Economic Freedom, compiled annually by the conservative Heritage Foundation and The Wall Street Journal, argues that “recent government interventions have eroded limits on government” and,

Fading confidence in the government’s determination to promote or even sustain open markets has discouraged entrepreneurship and dynamic investment within the private sector.

One comment

  1. The World Economic Forum does not give the kind of support to his position that Mr. Ottens would like to claim. Worthy of your time is a full reading of the two paragraphs (page 21) that summarize the WEF’s view on the US. WEF is considerably more nuanced, even with its declared preference to analyze economies from the perspective of capital and bonding, over the claims of workers.

    There is an “on the other hand.” American labor productivity has been increasing for decades while wages have been stagnant or dropping. Wealth is being distributed upwards. Unions as a force in the economy are almost nonexistent. WEF concludes its summary of the US economy with this positive statement about how the US economy is doing:

    “On a more positive note, measures of financial market development continue to indicate a recovery, improving from 31st two years ago [2010] to 16th this year in that pillar, thanks to the rapid intervention that forced the deleveraging of the banking system from its toxic assets following the financial crisis.”

    The TARP “deleveraging” intervention (2008) came as a climax to full-bore, unregulated ‘arms-length relationships’ that charm the writer. But it’s pure ideology to say we can return to ‘arms length’ without finding ourselves again neck deep in toxic assets.

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