Making a case for federal auto industry bailouts.
The U.S. auto industry was careening toward disaster when the executives of the General Motors Company, the Ford Motor Company, and Chrysler met with legislators in Washington, DC, in late 2008 to ask for federal assistance. Barack Obama had just been elected president and the full force of the worst recession of our lifetime began to take hold.
After much deliberation, GM and Chrysler received federal bailouts, declared bankruptcy and were restructured. Ford, with millions of dollars of cash on hand was told to make do with what it had. Tens of billions of dollars were poured into GM and Chrysler with American and Canadian taxpayers footing the bill. Much of that money has been repaid, but some of it will never be recovered. Still, a recently released report by the Center for Automotive Research (CAR) says that the assistance benefited the US economy and far more than what it has cost taxpayers.
Nonprofit Research Organization
CAR is a non-profit research organization based in Anne Arbor, Michigan. It receives its support from 65 industry organizations including Ford, Chrysler and GM. Honda, Nissan, Volkswagen and Toyota are also supporters as are numerous automotive suppliers, federal entities and other businesses.
“Two consecutive executive administrations in Washington decided in late 2008 and early 2009 that the consequences of the potential losses and outcomes to the U.S. economy–and harmful effects to numerous employees, retirees, and business owners — were worth avoiding through a federal intervention. CAR is confident that in the years ahead this peacetime intervention in the private sector by the U.S. government will be viewed as one of the most successful interventions in U.S. economic history,” said Dr. Sean McAlinden, CAR’s chief economist, who led the analysis.
Two Possible Scenarios
CAR employed a pair of separate alternative scenarios for its study using both economic performance data for 2009 and 2010, and employment numbers from Chrysler and GM, and the other automakers. The first scenario assumed a full collapse of the auto industry in 2009, one that lasted for the year, before achieving a 50 percent recovery in 2010 and a full recovery in 2011.
The second scenario considered net employment loss for GM only for 2009 and a continued and partial loss in 2010. That scenario looked at what would have happened if GM shut down while the rest of the auto industry survived — CAR’s attempt to gauge that impact on the North American automotive supplier sector.
Had GM and Chrysler both gone out of business, US employment would have fallen by 2.631 million jobs in 2009 followed by 1.519 million jobs in 2010. Had only GM gone out of business, it would have impacted 1.196 million jobs in 2009 and another 675,000 jobs in 2010.
Countering the Bailout Loss
CAR’s study also assumes that the US Treasury will never recover $13.7 billion of the more than $50 billion lent to prop up GM ($11.8 billion) and Chrysler ($1.9 billion). However, its data also shows that the loss pales in comparison to the $105.3 billion that would have been lost had the industry crashed, revenue that would not have generated transfer payments, personal taxes and social insurance taxes. Thus, the likely loss is countered by a 768 percent gain achieved through taxpayer investment.
In the GM scenario, CAR estimated that the surviving automakers would not have replaced GM’s lost capacity before 2011. It assumed that the supplier sector would have survived, but it also looked at the very real possibility that state and local tax revenue would have taken a beating to the tune of a $39.4 billion loss. That loss would have been more than three times the investment the US Treasury (taxpayers) made to save GM and Chrysler.
A Second Chance
Much has been made about the bailout with conservatives generally criticizing the move while most liberals have embraced it. Before the Great Recession of 2008-2009, all three US automakers had been losing money for years with each company heavily invested in large pickup trucks and sport utility vehicles with few fuel efficient cars to offer. When the economy dropped and consumer buying sentiment abruptly changed with it, all three companies were ill-prepared to handle the sudden shift.
Bankruptcy and restructuring gave GM and Chrysler a rare second chance, although the cost to shuttered dealers, local businesses, and for stockholders has rarely been considered. Nonetheless, the CAR study makes a compelling case for the federal bailout, what two automakers are eager to finally leave behind.
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