Simply Red

"Listen, I'm a politician which means I'm a cheat and a liar, and when I'm not kissing babies I'm stealing their lollipops. But it also means I keep my options open."
--Jeffrey Pelt (Hunt for Red October)

Ironically, in the same radio address that proposed increased regulation to stop tax payer funded bailouts, President Obama defended his administration's auto industry bailouts, presumably based on recent reports that GM plans to repay an $8 billion bailout loan by summer.

In early 1980 the Carter administration bailed out Chrysler, providing $1.5 billion in loan guarantees when the company was about to go under. Chrysler repaid these loans in 1983. The deal was hailed as successful since it saved 200,000 jobs. But over the next 20 years, many of those jobs disappeared as Chrysler continued to produce unpopular cars with a bloated cost structure.

In 1998 Chrysler was purchased by Daimler Benz for about $36 billion; in 2007 Daimler sold it to Cerberus Capital for $7 billion. Losses and debt continued to increase while market share declined.

Then, accompanied by GM, Chrysler was back at the bailout table in 2009 as a casualty of the credit market meltdown. Why should credit market probs matter to these two? Their business models had migrated toward more focus on financial products such as car loans than on car production. Moreover, they had both assumed crushing debt loads to keep operations afloat. As credit markets collapsed, both were unable to finance more debt and faced insolvency.

In unhampered markets, inefficient operators lose control of productive resources when they fail to create economic value. In centrally planned economies, such failures are not permitted to occur and losses are socialized.

But with GM preparing to pay back their bail out loan, perhaps this time things 'worked', as the president suggests.

In the short run, employees of GM and associated supply chain operators may indeed benefit as everyone else subsidizes their jobs. All others are worse off. Let's list some specifics:

Less capital for future investment. Resources that could have been freely applied toward other endeavors have been confiscated from their owners and given to the auto folks. Because we have no net savings, this transaction is one of capital consumption. It consumes capital that could have been applied toward productive investment in the future (imagine dipping into your nest egg to fund a lavish vaction and you'll start to get the picture of what we mean).

Prudent decision makers penalized. Automotive operators and entrepreneurs who made prudent decisions are also hurt. This group stood to gain from a Chrysler and GM liquidation as resources changed from weak to strong hands. When inefficient operators are allowed to persist, the prudent operators, including those who may have entered the industry given the opportunity, are penalized.

US citizens poorer. The $8 billion in GM debt only scratches the surface of government stimulus programs to keep the wheels on the economic wagon. These programs required borrowing and money printing in the $trillions. Claiming that the amount going GM's way stopped at $8 billion is disingenuous, as spillovers ranging from low Fed borrowing costs to cash for clunkers have served to help keep GM afloat. This company has received much more than $8 billion in corporate welfare here.

We also lose all future innovation and efficiency gains that would have occurred had entrepreneurial operators assumed GM's role in the system.

At both the company and government level, debt problems cannot be solved with more debt.

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