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Dirty Harry says if you didn’t support the taxpayer bailout of General Motors and Chrysler back in 2008 and 2009, you quit on America … punk!That’s basically the message of the Clint Eastwood-narrated Super Bowl ad which told U.S. football fans that Detroit “almost lost everything. But we all pulled together, now Motor City is fighting again. … Detroit’s showing us it can be done. And, what’s true about them is true about all of us.”
What’s it like to live in a country where state capitalism—rather than free-market, entrepreneurial capitalism—is ascendant? Well, it’s one where car commercials morph into reelection ads for the incumbent president. It’s clear Team Obama wants to make the bailout of the U.S. auto industry a big selling point to voters. (In Obamaland, American workers at U.S.-based factories of foreign automakers—like the 400,000 folks who work at plants, design centres, and dealership for Toyota, Honda, and Nissan—don’t really count as being part of the U.S. auto industry.)
Here’s what the president said recently at the Washington Auto Show: “When you look at all these cars, it is testimony to the outstanding work that’s been done by workers—American workers, American designers. The U.S. auto industry is back … And it’s good to remember the fact that there were some folks who were willing to let this industry die. Because of folks coming together, we are now back in a place where we can compete with any car company in the world.”
Obama: “Because of folks coming together …”
Eastwood: “But we all pulled together …”
You get the picture.
But not the entire picture, of course. The most effective propaganda doesn’t present outright falsehoods but merely half truths that form a distorted image. View, if you will, a stock chart comparing General Motors (red), Ford (green), and the S&P 500 index.
Looks like GM still has some work to do to earn investor confidence.
Then there’s the issue of the cost to taxpayers. We received some new info on this late last month:
The U.S. Treasury Department boosted its estimate of government losses in the $85 billion auto bailout by $170 million. In the government’s latest report to Congress this month, the Treasury upped its estimate to $23.77 billion, up from $23.6 billion. Last fall, the government dramatically boosted its forecast of losses on the rescues of General Motors Co., Chrysler Group LLC and their finance units from $14 billion to $23.6 billion. … The Treasury, which initially held a 61 per cent majority stake in GM, now holds a 26.5 per cent share, or 500 million shares in GM. To break even, the government would need to average $53 per share for its remaining stake. At current prices, the government would lose more than $14 billion on its GM bailout. … The government booked a $1.3 billion loss on its $12.5 billion bailout of Chrysler. As part of its $17.2 billion bailout, the Treasury still holds a 74 per cent majority stake in Ally Financial Inc., the Detroit-based auto lender and bank holding company. Ally, formerly known as GMAC, put its IPO on hold indefinitely last year because of market weakness.
Oh, and on top of that $24 million you can add another $13 billion, according to bankruptcy expert David Skeel. He says Treasury estimates “omit the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it’s sold. By waiving this rule, the government saved GM at least $12 to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers’ pockets.”
And what if Washington hadn’t forced taxpayers to ride to the rescue? Well, the centre for Automotive Research, an automaker and union-funded think tank, said back in 2008 that “a drawn-out, disorderly bankruptcy proceeding leading to liquidation of the automakers” would cause a loss of nearly two million jobs over the next two years.
But Skeel disagrees:
If the government wanted to “sell” the companies in bankruptcy, it should have held real auctions and invited anyone to bid. But the government decided that there was no need to let pesky rule-of-law considerations interfere with its plan to help out the unions and other favoured creditors. … Nor would both companies simply have collapsed if the government hadn’t orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. … Although Chrysler wasn’t nearly so healthy, its best divisions—Jeep in particular—would have survived in a normal bankruptcy, either through restructuring or through a sale to a more viable company. This is very similar to what the government bailout did, given that Chrysler is essentially being turned over to Fiat.
Things like moral hazard and unintended consequences are of slight concern when you want to be the Motor City Messiah. But who knows, maybe GM will continue to prosper even though its Japanese competitors are now recovering from Japan’s mega-quake, tsunami, and nuclear disaster. And maybe GM and Chrysler will eventually boost quality enough to get into the first division of automakers.
But given the history of bailed-out companies — such as Chrysler, for instance — there may be opportunity for Eastwood to star in a sequel.
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