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Automakers Bailout Is Illegal, Illiberal and Ill-fated

Why Washington shouldn't run Detroit

Jacob Sullum, Matt Welch and Ronald Bailey
July 14, 2009

On March 30, 2009, the president of the United States told an anxious nation: “Let me be clear: The United States government has no interest in running G.M.” If only he were telling the truth.

One way you could tell Barack Obama was being less than honest was that the day before, he had fired General Motors Chief Executive Officer Rick Wagoner. This unprecedented hostile takeover of a former American manufacturing giant signaled that the basic social contract between U.S. government and private business was being ripped up on live television. The fact that Obama followed his unpersuasive declaration of disinterest with a stern lecture about G.M.’s product lines (“They must ask themselves: have they consolidated enough unprofitable brands?”) only confirmed the suspicion: Not only will this White House seize any company it deems to pose a “systemic risk” to the economy, but it will do so without regard to restraint, to the law, or to basic economic principles. All while dissembling enough to keep its most loyal political supporters distracted from the fact that robbing taxpayers to pay failed corporate executives is almost the definition of economic unfairness. 

Now that the U.S. government is indeed running G.M., after having divvied up failing Chrysler between itself, Canada, the United Auto Workers, and Fiat, it’s worth stepping back and taking measure of this almost unthinkable chain of events. After decades of Europe and most of the West enjoying the fruits of selling off state ownership in private industry, the U.S. is going on a nationalization bender. An inventory of the steps that led us here leads to three inescapable conclusions: This bailout is illegal, illiberal, and ill-fated.

Illegal: The auto bailout makes a mockery of the rule of law
By Jacob Sullum

The last time the federal government bailed out Chrysler, Jimmy Carter’s administration reached a deal with the carmaker in August 1979, but the agreement did not take effect until Congress approved implementing legislation that December. The Constitution, after all, gives exclusive power of the purse to Congress. This time around, George W. Bush dispensed with the legal niceties, loaning more than $13 billion in taxpayer money to Chrysler and General Motors without any statutory authority.

Although he ran on a promise to repudiate Bush’s sweeping view of executive power and respect the constitutional role of the legislative branch, Barack Obama applauded his predecessor’s illegal loans. Since taking office he has followed Bush’s pattern, expanding the bailout without seeking congressional approval. The president’s high-handed personal involvement in the pending merger between Chrysler and Fiat, a deal that flouts well-established bankruptcy principles by forcing secured creditors to the back of the line, confirms that when it comes to industrial meddling Obama is no more committed to the rule of law than Bush was.

The new administration continues to subsidize Chrysler and G.M. (and even the companies that sell them parts) with money that Congress allocated last fall to the Troubled Asset Relief Program (TARP). As the program’s name suggests, the Treasury Department was supposed to use that money to buy mortgage-backed securities and other “toxic” assets from financial institutions, with the aim of making them more stable and encouraging more lending. There is not a word in the Emergency Economic Stabilization Act, the law that created TARP, about automobile manufacturers.

Some bailout supporters claim that G.M. and Chrysler qualify as financial institutions because they loan money to car buyers. The people who make this argumenttend to overlook the fact that Chrysler’s finance division became an independent company in 2007 and that GMAC, formerly a G.M. subsidiary, was mostly owned by Cerberus Capital Management when Bush approved the automaker loans. In any case, this rationale would make any business that extends credit, including department stores, jewelers, appliance dealers, and plastic surgeons, eligible for TARP money.

The Bush administration, recognizing what a stretch it was to describe loaning money to car manufacturers as purchasing troubled assets from financial institutions, strongly resisted using TARP to bail out automakers—right up to the moment when Congress declined to appropriate funds for that purpose. Now Obama is using loans that never should have been made as a pretext to reshape the auto industry. For those who are inclined to forget that Congress never authorized the bailout (a group that seems to include most members of Congress), here is a review of how Bush and Obama trampled the Constitution in their rush to save American automakers from the consequences of their own bad business decisions.

October 3, 2008: President Bush signs the Emergency Economic Stabilization Act of 2008, which creates TARP,allocates $700 billion for it, and authorizes the treasury secretary “to purchase…troubled assets from any financial institution,” the aim being “to restore liquidity and stability to the financial system.” As examples of financial institutions, the law mentions banks, savings associations, credit unions, security brokers or dealers, and insurance companies.

November 8, 2008: House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) send Treasury Secretary Henry Paulson a letter urging him to “review the feasibility of invoking the authority Congress provided you under the Emergency Economic Stabilization Act…for the purpose of providing temporary assistance to the automobile industry during the current financial crisis.” The Democratic leaders argue that “a healthy automobile manufacturing sector is essential to the restoration of financial market stability.” The Treasury Department’s response: “We continue to work on a strategy that most effectively deploys the remaining TARP funds to strengthen the financial system and get lending going again.” Deputy White House Press Secretary Tony Fratto likewise says that TARP money “should be used to strengthen the financial system and get lending going again,” not to assist automakers.

November 12, 2008: Regarding a TARP-funded automaker bailout, Fratto says, “We do not welcome efforts to weaken the Treasury program. The Treasury program is working to deal with the financial crisis, and that is what it ought to continue doing.” Paulson says the rest of the TARP money should be used solely “to deal with the financial industry.”

November 17, 2008: White House Press Secretary Dana Perino rejects a Senate proposal to allocate $25 billion from TARP to the automakers, saying it would “raid” the program “of funds needed to stabilize our financial system.”

November 20, 2008: GMAC, once the financial subsidiary of General Motors but now mostly owned by Cerberus Capital Management, announces that it has asked the Federal Reserve Board for permission to become a bank holding company, largely so it can qualify for TARP money.

November 30, 2008: Perino says any assistance to automakers “should come from funds already appropriated in the program specifically intended to assist automakers,” referring to a separate $25 billion loan program aimed at encouraging the development of fuel-efficient cars.

December 11, 2008: Despite strong pressure from the White House to approve a bill authorizing aid to automakers, the legislation fails in the Senate, falling eight votes shy of the 60 needed to end debate.

December 12, 2008: Perino says, “Congress spoke last night. They don’t have the votes to do anything.” She announces that the administration is therefore looking for “a short-term mechanism to help prevent a disorderly bankruptcy that we think could devastate further an already very weak economy.” A Treasury Department spokeswoman explains that “because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry.”

December 19, 2008: The Bush administration announces that it will use TARP money for $13.4 billion in loans to Chrysler and General Motors. “While the purpose of [TARP] and the enabling legislation is to stabilize our financial sector,” Paulson says, “the authority allows us to take this action. Absent congressional action, no other authorities existed to stave off a disorderly bankruptcy of one or more auto companies.” President-elect Barack Obama applauds the decision, calling it “a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers.”

December 24, 2008: The Federal Reserve Board approves GMAC’s application to become a bank and thereby “gain access to billions of dollars in government aid” under TARP, The New York Times reports. As a condition of the approval, G.M. has to reduce its stake in GMAC from 49 percent to less than 10 percent. The Treasury Department says helping GMAC is part of “a broader program to assist the domestic automotive industry in becoming financially viable.”

January 2, 2009: Chrysler Financial reports that it has received $4 billion in TARP money.

March 19, 2009: To “help stabilize a critical component of the American auto industry during the difficult period of restructuring that lies ahead,” the Treasury Department announces that it will use $5 billion in TARP funds for loans to car part manufacturers.

March 29, 2009: President Obama fires General Motors CEO Rick Wagoner.

March 30, 2009: Obama gives a speech in which he unilaterally promises government-backed warranties for buyers of G.M. or Chrysler cars; urges both companies to start “manufacturing the fuel-efficient cars and trucks that will carry us towards an energy-independent future”; says G.M. needs to make sure it has “consolidated enough unprofitable brands”; and tells Chrysler it has to arrange a merger with Fiat by April 30 to continue receiving TARP money, promising another $6 billion in loans if the deal is successful.

March 31, 2009: Asked what law gives Obama the authority to intervene so extensively in the auto industry, House Majority Leader Steny Hoyer (D-Md.) tells CNSnews. com, “The administration clearly believes it does have the authority to use some of the remaining TARP funds for the automobile industry. I would be kidding you to mouth some words on that, because I don’t know technically where that authority would be.

April 1, 2009: Regarding Obama’s warranty offer, House Budget Committee Chairman John Spratt (D-S.C.) tells CNSnews.com, “I would think that for a government officer to extend a warranty that will create a liability for the government, an act of law would be required. If I were the beneficiary of the warranty, I would certainly want to know the entity that extended it to me had legal authority to grant it.”

April 2, 2009: House Financial Services Committee Chairman Barney Frank (D-Mass.), whose panel is supposed to oversee TARP, tells CNSnews.com he is “not very well informed” about the president’s restructuring plans for the automakers and does not think Congress willvote on them. Frank’s counterpart in the Senate, Christopher Dodd (D-Conn.), says he “wasn’t consulted at all on the process,” adding, “I’ve been reading about it in the papers, basically.”

April 30, 2009: Complaining that recalcitrant creditors (whom he dubs “speculators” and “holdouts”) have blocked the merger between Chrysler and Fiat, Obama says Chrysler now has no choice but bankruptcy.

May 3, 2009: Chrysler asks the U.S. Bankruptcy Court for the Southern District of New York to let it sell most of its assets to New Chrysler, a company created and owned by Fiat, the United Auto Workers, and the U.S. and Canadian governments. Contrary to the U.S. Bankruptcy Code, the plan favors unsecured creditors such as the union over secured creditors such as Chrysler bondholders.

May 4, 2009: Secured creditors object to the merger plan, which they describe as the “patently illegal” result of “a tainted sales process dominated by the United States government” that “strips the Chrysler senior lenders of the protections of [the Bankruptcy Code] and improperly attempts to extinguish their property rights without their consent,” thereby violating the Fifth Amendment. Noting that the Obama administration is “relying on purported authority provided by TARP” to impose the merger, they say it cannot “retroactively alter existing liens of property” even “assuming that TARP provides the Treasury Department with authority to provide funding” to Chrysler.

June 1, 2009: In a deal orchestrated by the Obama administration, General Motors files for the second largest bankruptcy in U.S. history. Taxpayers are on the hook for another $30 billion, in exchange for owning 60 percent of the new company. Obama says, “We are acting as reluctant shareholders.” Members of Congress who stood by as two presidents snatched the power of the purse and illegally diverted funds to the automaker bailout are outraged by bankruptcy-driven plans to shut down an estimated 2,400 G.M. and Chrysler dealerships.

In December 2007, Barack Obama proudly told The Boston Globe, “I reject the view…that the president may do whatever he deems necessary to protect national security.” A year later, he welcomed George W. Bush’s unauthorized loans to Chrysler and General Motors because he deemed them “necessary” to protect economic security. And as president he has not even bothered to ask a Congress firmly controlled by his own party to approve his taxpayer-funded reorganization of the auto industry. Obama supporters who argued that he would help restore the balance among the three branches of the federal government have a choice to make: They can condemn this abuse of executive power, or they can admit that it was just Bush’s policies, and not his unconstitutional methods of implementing them, to which they objected all along.

Jacob Sullum (jsullum@reason.com) is a nationally syndicated columnist and senior editor at Reason magazine.

 
 
Illiberal: Corporate welfare for Detroit flouts traditional Democratic notions of fairness
By Matt Welch

Free marketeers and constitutional originalists are not the only people to note that the ongoing bailout of Chrysler, General Motors, and their suppliers flouts the rule of law. 

“The government-led restructuring of Chrysler and General Motors has been twice delegated—first by Congress to the Executive, and then by the President to a task force,” one critic complained in an open letter to Sen. Chris Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.) in May. “Formally made up of cabinet officials and high-level political appointees, control over the process has in fact been delegated, without adequate standards, to a handful of special advisers. Thus has the future of a centerpiece of American manufacturing capacity been delegated to a small unelected and largely unaccountable group arranged to avoid the Federal Advisory Committee Act.”

That naysayer was none other than the legendary consumer advocate Ralph Nader, a man who burst onto the national stage by tangling with General Motors over the safety of the Chevrolet Corvair. Nader’s long history of antagonism with G.M.—the company once sent a private investigator to dig up dirt on the monastic crusader’s personal life and paid Nader $425,000 to settle the ensuing lawsuit-- underscores an awkward political constraint on President Barack Obama: Self-described liberals and progressives tend to distrust and even despise giant corporations. (“The evolving multinational corporatism is a gigantic control machine,” Nader says in a typical passage from his 2004 book The Good Fight.) And few categories of corporations have incurred as much liberal wrath over the years as Detroit automakers. Handing out $100 billion and counting in corporate welfare to pollution-generating, out-of-touch fat cats is an outrage to traditional liberal notions of fair play.

In May, The Nation’s John Nichols called the auto bailout the “most wrongheaded expenditure of federal dollars since, well, the bank bailout of last fall.” Robert Reich, Bill Clinton’s secretary of labor, wrote the same month that “there’s no point spending tens of billions of taxpayer dollars for an auto industry that’s a tiny fragment of what it was before. We could achieve that objective by doing nothing.” And documentary filmmaker Michael Moore, whose career-making debut film Roger & Me was a cri de coeur about how G.M. helped destroy his native Flint, Michigan, wrote in December, “Let me just state the obvious: Every single dollar Congress gives these three companies will be flushed right down the toilet.”

It’s not just the price tag. It’s how the money is being spent. A critical component of Obama’s hands-on strategy for auto manufacturers is incentives, credits, and subsidies for U.S.-owned carmakers to “plan for a future in which they are building the cars of the 21st century.” The Department of Energy ponied up $25 billion in loans toward that end in 2007. The stimulus bill in 2009 provided $25 billion more, and a cap-and-trade bill being discussed at press time included yet another $50 billion to help automakers meet the stricter fuel efficiency standards that Obama unveiled in May.

But presidents have been throwing money down that exact same rabbit hole for decades, to a chorus of mostly boos from lefty commentators. Though many libertarians and conservatives might find it hard to believe now, Ralph Nader and other progressives in the 1990s were especially bitter about the role played in these Detroit clean-energy boondoggles by none other than Al Gore.

“Clearly, the Gore who wrote in the book Earth in the Balance (1992) that the internal combustion engine was a major threat to the world’s environment was different from the Vice President Gore who helped combine a billion-dollar taxpayer subsidy to G.M., Ford, and Chrysler over a clean engine project that produced nothing in eight years other than federal regulatory abdication of fuel efficiency improvements,” Nader wrote in his 2002 book Crashing the Party.

It’s not that liberals are more likely to oppose Obama’s micromanagement of the auto industry. To the contrary. Rasmussen Reports polling from May showed that 59 percent of Democrats opposed further bailouts of G.M. and Chrysler, compared to 81 percent of Republicans and 74 percent of independents. Liberal economist Paul Krugman supported the original bailout of the auto companies in late 2008 on the grounds that bankruptcy proceedings during the height of the credit crunch would have led to devastating liquidation instead of necessary reorganization. Economic populists such as Nader are upset that Obama’s restructuring plans cut too many unionized U.S. manufacturing jobs while allowing automakers to continue building plants in authoritarian countries such as China. Michael Moore wants no part of a bailout, but he thinks the feds should just buy the Big Three outright and retool the factories to build clean-energy light rail cars and the like.

The president has navigated this inchoate and frequently innumerate mix of economic impulses by promising all things to all people. The “uncontrolled bankruptcy” that was so offlimits in the fall became a more palatable and controlled series of bankruptcies by spring, with unions receiving a sweetheart deal at the expense of Wall Street creditors. To environmental dreamers Obama continued to promise millions of new “green jobs” through fuel efficiency mandates, tax rebates for plug-in vehicles, and a cap-and-trade scheme. And economic nationalists were continually told, though not quite reassured, that America would lead the world in making the cars of tomorrow. “The fact is, everyone wins,” Obama said when announcing the new fuel efficiency standards.

But the strain of maintaining that sunny face is starting to show. Liberal Democrats such as Rep. Dennis Kucinich (D-Ohio) have accused Obama of misleading them when he told them in a phone conversation that his Chrysler deal “will not disrupt the lives of the people who work at Chrysler or the communities that depend on it,” just before the carmaker announced several plant closures. “To me,” Kucinich told the Cleveland Plain Dealer, “it really becomes a question of credibility.” Rep. John Conyers (D-Mich.) complained that the administration’s G.M. strategy was “designed to either intentionally or unintentionally eliminate American jobs by shifting them overseas.” Nader, in May testimony to Congress, called current plans “a death star to tens of thousands of jobs.”

The White House has now steered G.M. to bankruptcy, involving yet another tranche of $30 billion to lubricate the process. Paying heed to critics on both his left and right, the president has continued to insist, with less and less conviction, that the massively unpopular federal involvement will be a short-term thing. “You know,” he said in an April press conference, “I don’t want to run auto companies. I don’t want to run banks. I’ve got two wars I’ve got to run already. I’ve got more than enough to do. So the sooner we can get out of that business, the better off we’re going to be. We are in unique circumstances.”

It’s a plea falling on increasingly deaf ears within Obama’s ideological base. “Bailing out the auto companies while forcing them to lay off tens of thousands of their workers, imposing higher fuel-economy targets on them that prompts them to build more cars abroad, and lending them billions more to meet those new targets,” Robert Reich wrote in May, “seems oddly unrelated to the large structural transformation the economy must go through.”

Yet it’s a decision that will haunt America for years to come.

Matt Welch (matt.welch@reason.com) is editor in chief of Reason magazine.

 
 
Ill-Fated: The government takeover of the auto industry is doomed to failure
By Ronald Bailey

On May 19, President Barack Obama proposed new regulations that would require U.S. automobiles to achieve an average fuel efficiency of 35 miles per gallon by 2016.Remarkably, the president insisted that the new mandate would somehow pay for itself while creating new jobs.

“Consumers pay less for fuel, which means less money going overseas and more money to save or spend here at home,” he said during the announcement ceremony at the White House. “The economy as a whole runs more efficiently by using less oil and producing less pollution. And companies like those here today have new incentives to create the technologies and the jobs that will provide smarter ways to power our vehicles.”

The main problem: Mandates cost money. And a new fuel standard regime is just one of many new mandates that the federal government is imposing on an industry already suffering from a massive decline in sales.

The administration’s own economists estimate that the stricter standards will add an average of $1,300 to the price of a new car by 2016. In general, when prices go up, people buy less. And already, new-vehicle sales in the U.S. are down from an average of 17 million per year for most of the decade, to 14 million in 2008, to an estimated 9 million this year. All other things being equal, less demand for a product—such as cars—means fewer jobs, not more.

Several other initiatives would also increase the cost of producing vehicles, thus further damaging the auto industry. In April, Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.) introduced a 1,000-page cap-and-trade climate change bill, the American Clean Energy and Security Act. The bill mandates that electricity retailers meet 20 percent of their load by 2020 using either renewable sources or conservation, and it requires greenhouse gas emissions to be reduced by 17 percent below 2005 levels by 2020, 42 percent by 2030, and 83 percent by 2050.

“The Waxman-Markey bill will create jobs by spurring investment in renewables and efficiency,” the liberal Center for American Progress declared when the bill was passed out of the House Energy and Commerce Committee in May. In fact, producing all that low-carbon electricity will cost more money.

Currently, solar photovoltaic electricity production costs about 33 cents per kilowatt-hour, wind-generated electricity costs about 9 cents per kilowatt-hour, and coal-fired production with carbon capture and sequestration is estimated to cost up to 10 cents per kilowatt-hour. In contrast, producing electricity by means of conventional coal-fired plants now costs 6.5 cents per kilowatt-hour, and nuclear power costs 7.5 cents per kilowatt-hour. 

Once again, all other things being equal, higher costs mean that the energy industry will raise the prices of its goods and services to consumer and producer alike. Consumers will buy fewer goods, and producers will either pass along the price hikes or take a deeper hit on their profits. Considering that G.M. lost more than $1,000 per every vehicle sold in the U.S. during 2007 (compared to Toyota, which earned more than $2,000), this new cost could make a bad situation untenable.

Though the president and his supporters continue to pretend that the solution to man-made global warming will cost virtually nothing while producing more jobs than it destroys, members of his own administration were singing a different tune as recently as last year. In testimony before the Senate Energy and Natural Resources Committee in 2008, Peter Orszag, now Obama’s director of the Office of Management and Budget, admitted that a 15 percent cut in carbon dioxide emissions would reduce American incomes. According to Orszag, the lowest quintile of households would pay an average of $680 more each year for goods and services (3.3 percent of their incomes), and the highest quintile would pay $2,180 more (1.7 percent of their incomes) than they would have in the absence of carbon rationing.

In July 2007 Orszag, then head of the Congressional Budget Office, noted that a “cap-and-trade program would lead to price increases for energy and energy-intensive goods. Such price increases would occur regardless of whether the government sold the allowances or gave them away.” Orszag added, “Those price increases are essential to the success of a cap-and-trade program because they are the most important mechanism through which businesses and households are encouraged to make investments and behavioral changes that reduce CO2 emissions.”

An era of permanently higher fuel prices would produce far-reaching changes in the ways companies do business, hitting consumers hard at the pump. And as we learned definitively in 2008, Americans respond with alacrity to higher fuel prices: As gasoline soared to over $4 per gallon, total auto sales declined, transit ridership increased, and consumer demand for smaller cars rose by 37 percent over the previous year. There is no reason to expect higher gas prices to result in increased car sales.

Both Chrysler and General Motors are down more than 50 percent in sales this year from 2008. For the first time ever, Toyota—with its healthy, bailout-free factories in the South—is projected to surpass G.M. as the domestic market leader in 2009.

At press time, the U.S. government had just taken 60 percent ownership of G.M., giving 17.5 percent to the United Auto Workers (UAW) and issuing $30 billion in new loanswhile steering the once-proud company through Chapter 11 bankruptcy. Pending various court actions, Chrysler, after an iron-fisted bankruptcy process in which the government favored the UAW over bonded creditors, will be owned 55 percent by the union, 20 percent by the Italian automaker Fiat, 8 percent by the U.S. government, and 2 percent by the governments of Canada and Ontario.

“We cannot,” Obama said in March, “make the survival of our auto industry dependent on an unending flow of tax dollars. These companies—and this industry—must ultimately stand on their own, not as wards of the state.” Yet now that the state owns the auto industry, is guaranteeing its warranties, and is bailing out its parts suppliers, it will be easier than ever to use Detroit as a submissive vehicle for imposing costly new climate change rules. When those rules lead inevitably to reduced sales, pressure will intensify on Obama to fulfill his other promise from that same March speech: “We cannot, we must not, and we will not let our auto industry simply vanish.”

The president now has the power to prevent the Big Three automakers from vanishing. Whether he can force consumers to buy their products is another story.

Ronald Bailey (rbailey@reason.com) is Reason magazine's science correspondent.

This feature first appeared in Reason magazine.


Jacob Sullum is Senior Editor

Matt Welch is Editor in Chief, Reason

Ronald Bailey is Science Correspondent


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