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The Democrats’ False Narrative on the Auto Industry

No, Obama did not "save" the auto industry.

by
Rand Simberg

Bio

September 21, 2012 - 12:15 am

Joe Biden has a bumper-sticker phrase to justify reelecting the president: “Bin Laden is dead, and GM is alive.” Some, such as former Michigan governor Jennifer Granholm, doubled down on the demagoguery during the Democratic National Convention, declaring that Barack Obama saved not just General Motors, but the auto industry itself. But is it really true that were it not for the president, there would be no American auto industry?

Let’s start with Governor Granholm’s claim that Romney said that the “industry should go bankrupt.” Here’s what he actually wrote at the time:

The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.

In other words, he actually endorsed a government bailout. While it would no doubt have been better if the title of his piece hadn’t been “Let Detroit Go Bankrupt” (that likely came from the editorial page copy editor, not Romney himself), what he proposed was completely reasonable, in the context of a bailout (whether there should have been a bailout at all is a separate issue).

Part of the problem is that the governor is either ignorant herself or hopes that her listeners are ignorant of the meaning of the word “bankruptcy.” It doesn’t necessarily mean that the bankrupt company ceases to exist, let alone that the industry itself would disappear. It simply means that the business is restructured to allow it to continue to operate if it is producing viable products. This might include voiding existing contracts and agreements (including labor agreements), and renegotiating with creditors. But to listen to the Democrats, if Obama hadn’t stepped in, there would be no autos built in America today, and millions more people would be out of work. This is nonsense, on multiple levels.

Let’s review the history. In the fall of 2008, amid the general financial crisis and global recession, Ford, General Motors, and Chrysler were hemorrhaging money and came to the government with their hands out. There was a hearing in Washington (at which the well-compensated auto executives were stupidly criticized for attending via private jet, as if their time had no value). Rick Wagoner, then-head of GM, brazenly declared that failure to bail his company out would be the cause of a “catastrophic economic collapse” of the U.S. economy.

Ford was actually in reasonable shape to weather the economic storm compared to its two American competitors, having undergone restructuring on its own in the past half decade, but it came to the table because it didn’t want to be at a competitive disadvantage in terms of access to taxpayer funds. In addition, Alan Alan Mulally, its CEO, claimed that the loss of one or more of its competitors would affect its supplier base, which it shared with them. But all of these claims had to be taken with a grain of salt, considering how self-serving they were.

In early December, unhappy with the automakers’ restructuring plans, the Senate voted down a taxpayer bailout, but lame-duck president George W. Bush, by executive order, overrode Section 102 of the TARP funding, meant to provide bridge loans to prop up failing financial institutions while they came up with restructuring plans, and issued them to GM and Chrysler. This turned out to be not only (probably) illegal, but a terrible policy, because it gave the Obama administration an excuse, as a “watchdog on the taxpayers’ money,” to interfere with what should have been a properly structured bankruptcy for both companies when it came into power in January, to aid its political allies.

What Jennifer Granholm and others need to understand is that in fact both GM and Chrysler did file for bankruptcy, and did restructure. But rather than doing it before an impartial bankruptcy judge with a negotiation between the companies and their creditors, as a major (new) creditor, the federal government (Obama’s federal government) became the arbiter instead, screwing the existing bondholders. Rather than the UAW being forced to renegotiate the terms of its contracts with those companies that had been a partial cause of their financial failure, the administration simply handed part of them over to the union, with an arbitrary amount of stock in return for their pension obligations, and converting its own debt to stock.

What would have happened had the government not stepped in? Well, we know what wouldn’t have happened. It wouldn’t have been the end of the auto industry in America. Honda, Nissan, Toyota, Mercedes and the other companies would have continued to manufacture cars in the U.S. without missing a beat. It wouldn’t even have been the end of the American auto industry, because Ford never received any government funds, and they have actually been pulling thousands of jobs back from Mexico and Asia to the U.S. Chrysler and GM would have probably continued in some form, and undergone a proper restructuring, including renegotiation of the union contracts to make them competitive once more. In the worst case, liquidation, Ford (or someone else, perhaps even a startup) could have acquired their assets and expanded its own production to satisfy the demand created by the disappearance of the two companies.

That is, contra the latest false narrative of the campaign, Obama didn’t “save the car companies from bankruptcy,” let alone “save the auto industry” — he simply saved the UAW, the administration’s political ally, from a bankruptcy judge. Judge Gerber’s ruling in July of 2009 was simply a rubber stamp of a corrupt government restructuring by fiat.

Rand Simberg is a recovering aerospace engineer and a consultant in space commercialization, space tourism and Internet security. He offers occasionally biting commentary about infinity and beyond at his weblog, Transterrestrial Musings.
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