Out of Control Policy Blog

Corporate Welfare and the Restructuring of GM and Chrysler

Over at LATimes.com, Reason magazine's Editor-in-Chief Matt Welch is debating the government's involvement in firing GM's CEO and the bailout of the automakers. Matt writes:

The U.S. housing bubble peaked in June 2006. What was General Motors doing during that time of comparative plenty? Bragging that its North American operations lost "only" $85 million over the previous year. Why would this be a point of pride? Because the year before that the division lost $1.1 billion. To sum up: As the housing market was steaming toward record highs and American consumers were on the way to buying more than 16 million new vehicles (and more than 16 million in 2007), U.S. automakers were "hoping to reverse their sliding market share" and stem the bleeding on their balance sheets. This suggests that the Big Three's root problems lie elsewhere.

As the Sept. 11 hijackings did unto poorly run legacy airlines like United (unlike, say, Southwest), so the 2008 recession did unto poorly run legacy automakers in Detroit (unlike, say, Toyota). It is the worst companies that are hit hardest by bad economies. Typically, the next step is a time-honored legal process called bankruptcy. But in the Bush/Obama years, that has been replaced by an ominous four-word phrase: too big to fail.

Precisely how big is that? Bailout proponents never say. Unfortunately, Obama's track record is already clear. In March, the president announced that $5 billion in funds from the Troubled Assets Relief Program -- a pool of money that was, on passage, statutorily limited to "financial institutions" -- would be given to auto-parts manufacturers. One recipient, the GM supplier American Axle, has all of 3,600 employees, or about as many people as Radio Shack employs in the Dallas-Ft. Worth area alone.

Bankruptcy is not the same as liquidation; the most valuable companies come out on the other end with their brands intact, and even less valuable firms can maintain jobs, factories and divisions. Trying to preserve every industrial job in amber is a recipe for wasting federal dollars on zombie companies whose main customers are bureaucrats, not consumers.

The problem with corporate welfare, as in socialism generally, is that eventually you run out of other people's money. We're already creating federal deficits the likes of which we haven’t seen since FDR was president; what will happen when the bailout zooms past $13 trillion and starts amounting to real money?

The dust-up will be going on all week here.

Adrian Moore is Vice President, Policy


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