Debate still rages over the effectiveness of auto bailouts

| Thursday, May 12, 2011
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Speakers at a General Motors Co. plant investment announcement in Toledo this week issued a spirited defense of the federal government's $50 billion bailout of GM in 2009. That led to an outbreak of opinions about whether former President George Bush (yes, he cut the first checks) and President Barack Obama should have saved GM and Chrysler or let them fail.

The morning after GM said it planned to invest $2 billion in 17 plants, preserving and adding 4,000 jobs, Tom Gantert at the free-market think tank Mackinac Center for Public Policy wrote a piece drawing on views by the Reason Foundation and the Cato Institute that said the feds should have sent GM and Chrysler to the junkyard.

E.J. Dionne Jr., writing in the Washington Post, disagreed, citing GM's $3.2 billion first-quarter profit as evidence that GM has turned the corner and that the bailouts worked.

I agree that the government-backed bankruptcies of GM and Chrysler were necessary. Call me a homer if you like, but Michigan's already hard-hit economy would have been obliterated had GM and Chrysler been forced to liquidate.

Dan Ikenson at the Cato Institute doesn't see it that way, of course. Ikenson argues that had GM failed, Ford Motor Co. simply would have hired GM's engineers, captured most of its sales and life would gone on without much trouble.

The problem with that reasoning is GM and Ford (and many other auto companies) share the same suppliers. Many of them likely would have failed in the aftermath of a GM liquidation, threatening Ford's survival. Even Ford CEO Alan Mulally acknowledged that risk.

Many conservatives and free-market types have argued that GM and Chrysler should have gone through bankruptcy without the federal government's help. But as AOL Autos Editor David Kiley says in his in-depth analysis of the bailouts, banks that would normally would have provided bankruptcy financing to GM and Chrysler all were in trouble, leaving the federal government as the only option.

But maybe former President Bush provided the best explanation in 2008 for his decision to intervene and provide assistance to the automakers:

If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy," Bush said at the White House, in remarks carried live by the national broadcast networks. "In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action. The question is how we can best give it a chance to succeed.

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