Obama's Restructuring of the Auto Industry

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Dean Baker
Los Angeles Times, April 1-3, 2009

The following three articles were part of an online debate held by the Los Angeles Times on Obama's restructuring of the auto industry, between CEPR Co-director Dean Baker and Reason Magazine editor Matt Welch.

See articles on original website: Day 1, Day 2, Day 3

Topic for day 1: How deeply involved -- if at all -- should the government be in the operations of a firm it's supplying with aid on the scale of General Motors and Chrysler?

Barack Obama, President and CEO of General Motors

By Dean Baker

April 1, 2009

President Obama probably didn't anticipate that oversight of two of the Big Three domestic auto manufacturers would be one of his responsibilities when he was elected last November. However, events have left him with little choice.

The economic crisis caused by the collapse of the housing bubble has devastated the automobile industry. The Big Three, and General Motors and Chrysler in particular, lacked the cash reserves that will allow stronger manufacturers to get through the downturn.

If the government had allowed the manufacturers to fall into bankruptcy, the spillover effects from the direct job losses and the collapse of suppliers would have devastated the economies of Michigan, Ohio and Indiana, where the Big Three's operations are concentrated. Instead of bailing out the automakers, the federal government would have little choice but to bail out states that lacked the resources to sustain their schools and fire departments.

However, handing these companies a blank check would have been neither good politics nor good policy. Obama had no choice but to take a direct hand in the running of these companies and trying to steer them back to a course of profitability. There would have been little political support for a path of endless subsidies to these auto companies.

The need to take direct control does not mean that Obama has made all the right calls. In particular, it is difficult to understand why workers in the auto industry have been treated so much more harshly than the top executives in the financial industry.

When the AIG bonuses became a major national issue, White House economic advisor Larry Summers lectured the public about the sanctity of contracts, while Obama warned about the need to avoid governing out of anger. But concerns for the sanctity of contracts have not prevented the administration from insisting that autoworkers surrender retiree health benefits that they already worked for and are guaranteed by contract. It is difficult not to get the impression that this administration has more concern for highly paid bankers than the working-class types in the automobile industry.

These sorts of judgments, which are inherently political in nature, are inevitable when the government becomes heavily involved in subsidizing an industry. If the economy had been better managed over the prior decade, we wouldn't be in a situation in which Obama must make important decisions for the automobile and financial industries.

However, there is no way to avoid that situation now. The public will have to demand as much transparency as possible to increase the likelihood that these bailouts are conducted in ways that benefit the public and not just a privileged few.

 

Topic for day 2: Is there a good reason for keeping the Obama administration intimately involved in the firms it aids in Detroit but not the firms on Wall Street?

Bankers Wrecked the Auto Industry

By Dean Baker

April 2, 2009

It is in fact very difficult to see any policy reason why the Obama administration feels more need to run the auto industry than the financial industry. After all, it was the greed and incompetence of Wall Street that is most immediately responsible for the devastation in Detroit.

The Big Three's executives have committed many sins over the years, but General Motors and Chrysler would not be facing bankruptcy right now if it were not for this economic collapse. This is important to remember, and in my view provides most of the rationale for the bailout. Even Toyota and Honda, which are generally viewed as the world's top car companies, have seen their sales drop by more than 30% compared with a year ago.

Because it was the bankers who wrecked the auto industry, it makes it especially difficult to stomach a situation in which Detroit gets micromanaged while the Wall Street crew continues to do business as usual. This is especially galling because pay scales on Wall Street are so vastly out of line with compensation elsewhere in the country.

Many pundits have expressed outrage over the fact that United Auto Workers members get paid $57,000 a year. The top Wall Street brass can earn more than 1,000 times as much.

Even worse, the Obama administration's latest plan for dealing with toxic assets will reinforce these pay patterns. By subsidizing the purchase of these assets, banks will be able to substantially reduce the losses that they have incurred, in effect having the government directly pick up their bad bets. In addition, some investors will be able to take advantage of the taxpayers' generosity to make large sums on assets that they might have purchased even without the subsidy. We may see some of the hedge and equity fund folks clear hundreds of millions or even billions at the taxpayers' expense.

It would be interesting to hear an explanation from the administration for the difference in its treatment of the auto industry and the banks other than the fact that the banks have more political power. It is not clear what such an explanation would look like.

 

Topic for day 3: Would we be better or worse off now if the government had let General Motors and Chrysler slip into bankruptcy?

Chapter 11 for GM and Chrysler Would Make Lehman Seem Like a Party

By Dean Baker

April 3, 2009

When Lehman Brothers went bankrupt last September, the financial world shook. A major money-market fund "broke the buck," as it was no longer able to honor its deposits at 100 cents on the dollar. Banks stopped normal inter-bank lending, and investors everywhere bought Treasury debt as the one safe asset.

Many economists came away from the Lehman bankruptcy thinking that we could never let a bank fail again. Although this conclusion does not follow (we can and should let some banks go through an ordered bankruptcy), economists are right to be cautious about the effects of an uncontrolled bankruptcy of a major corporation.

Had General Motors and Chrysler been allowed to go into bankruptcy last fall, it would have quickly led to a chain of bankruptcies by a whole set of parts suppliers, all of whom are owed large amounts of money by these two companies. It is virtually certain that these companies and their suppliers would be forced to shut down, because no one would have stepped forward to provide credit to operate through bankruptcy without a government guarantee. Because Ford shares many of these suppliers with GM and Chrysler, the disruption to the supply chain almost certainly would have been enough to push Ford over the line as well.

This would have meant almost a complete shutdown of the auto industry in the states of Michigan, Indiana and Ohio. In these states, the auto industry and its suppliers account for close to 6% of total employment. Imagine if the country suddenly lost 8.4 million jobs (more than twice the actual job loss over the last five months). Such is the impact these three states would face were the Big Three to cascade into bankruptcy.

This sort of catastrophic job loss would have had huge ripple effects in the region, as laid-off autoworkers would be forced to cut back on all sorts of spending in the local economy. Many would face losing their homes. Already hard-pressed state and local governments in the region would be swamped with demands for services at the same time that their tax revenue would be plummeting. The area would soon be seeing suffering and poverty that matched what the country experienced during the Great Depression.

President Obama (like President Bush) was right in opting not to go this route. It is unfortunate that we are in a situation in which the government has to bail out the auto industry.

The fault lies first and foremost with the incredibly incompetent performance of the Federal Reserve board and other financial regulators. This economic collapse was entirely foreseeable and preventable. The Big Three and their employers, and the regions that are economically dependent on them, are the victims. They may deserve blame for many serious mistakes, but they are on life support right now not because of their own errors but because of Wall Street's sins.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.