Sorry Dan Akerson, GM Bailout is Failure

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I made these remarks today at the National Press Club in Washington, DC before the luncheon speech of outgoing General Motors CEO Dan Akerson:

President Obama justified the auto bailout by predicting it would make money for the taxpayer. With Treasury now selling its remaining shares, the direct loss is about $10 billion. So on its most fundamental level, the auto bailout is a failure.

But that $10 billion figure dramatically understates the true cost. There were separate multibillion dollar bailouts of Ally Financial, formerly know as GMAC, and Delphi and other suppliers. There was cash for clunkers, the government guarantee of warrantees, accelerated fleet purchases, etc., etc.

Treasury also allowed a novel application of the tax-loss carryforward provisions of the tax code during the GM bankruptcy, shielding $30-$40 billion in GM profits from taxation.

In addition to all these costs, the bailout probably ensures future bailout costs when GM comes back to the government during the next automotive sales downturn, which will come. All automakers are making money now when the economic cycle is favorable, but only some will be equipped to survive the next downturn.

The bailout insulated GM from market forces that would have forced the company to operate differently. Instead, there has been only modest culture change and the old ways persist, enforced by the UAW, which also is now GM's largest shareholder.

The bailout did not save jobs. The massive misallocation of capital to an inefficient market participant can only cost jobs in the long run. 

A few days ago, a study was released by something called the Center for Automotive Research which claimed that the bailout saved 1.5 million jobs. The study's release seemed coordinated with the Treasury exit and Mr. Akerson's speech today, not surprising in light of the fact this Center is substantially funded by the government. The study's assertion that the bailout saved jobs is only plausible if one also believes in alchemy.

As we are seeing now, macroeconomic conditions are the biggest of determinant of auto sales. There are dozens of manufacturers. Consumers have many choices.  The same number of cars will be sold whether GM was bailed out or not. The cars will have to be built by autoworkers somewhere. Bailing out GM did not increase demand, it did not increase the total number of autoworker jobs, nor did it increase whatever multiplier effect the spending power of those autoworkers had.

No follow-on argument may be made, either, that the GM bailout saved AMERICAN jobs. All the big automakers are now worldwide companies, especially GM. One effect of the bailout may have been to preserve some American jobs governed by UAW contracts at the expense of American autoworkers in right-to-work states. But maybe that was the whole point. Obama narrowly won the critical state of Ohio, whereas Romney won handily in states like South Carolina.

Thus, the GM bailout was at its core, about politics, and the corruption of our political system. This was best illustrated during the final stretch of last year's presidential when GM spokesmen openly attacked Mitt Romney for asserting that bailed-out GM and Chrysler would move jobs abroad, which by the way, is turning out to be true. 

Because of the significant taxpayer stake in GM, the company should have been carefully neutral, whether it considered Romney's assertions fair or not. Although it was something I predicted beforehand, it is outrageous that GM acted as an appendage of the Obama campaign.

The bailout's most serious and unfortunate result, however, is how it undermined property rights and the rule of law. During the rigged bankruptcy process, GM bondholders, who were higher on the securitization hierarchy than the UAW, were wiped out as the UAW was granted billions in equity. In short, it was government-orchestrated theft.

President Obama labeled GM bondholders as "speculators" but they included middle-class people like NLPC Associate Fellow Mark Modica. Mark was the business manager of a Saturn dealership. Mark had most of his savings in GM bonds that became almost worthless.

Dan Akerson is declaring the bailout a success. It certainly will be for him. He will no doubt pop up somewhere else becoming even richer trading on his GM experience. Too bad Mark Modica, or other ordinary taxpayers, will not have the same opportunity.