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Thomas Lucente: Auto bailout was about politics, not economics


August 25. 2013 3:30AM
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President Barack Obama’s claim that he “saved” the auto industry would be laughable if not for how many people actually believe it. But, alas, as the election proved, Democrats tend to do best when they misinform already uninformed voters.



The auto industry in 2008 was healthy. GM and Chrysler were not. The same week the CEOs from the Detroit Three were telling Congress the industry was about to collapse, Honda opened a new assembly plant in Greensburg, Ind. In reality, all Obama did was insulate two companies and the United Auto Workers union from their bad decisions.



The so-called auto bailout, in addition to being an unconstitutional abuse of power, was simply downright stupid and an abysmal failure. Unless, of course, your only goal was to gain political points by temporarily saving a few union jobs at a few companies.



Beyond that, the bailout achieved nothing worth bragging about and, in fact, did more harm than good.



Obama and his supporters point to the fact that General Motors still exists today as proof that the bailouts worked. That is hogwash. No one doubted that the U.S. government, with all its resources, could muster enough money to keep a company open.



The real fear was that governmental interference would create many more costs and inflict greater damage.



That is exactly what it did.



The bailout interfered with the proper workings of a competitive market economy by denying the spoils of victory to Ford, Honda, Hyundai, and other automakers who were more efficient and more responsive to consumers than GM and Chrysler. Corporate bailouts, while unfair to taxpayers (our “investment” in GM is $27 billion, but the public’s 500 million shares of GM stock is worth only $10 billion), are also unfair to the successful companies in a given industry.



The woes of GM and Chrysler did not stem from the recession. It stemmed from deep-rooted mismanagement and poor products that did not appeal to consumers.



In a fair and efficient market economy, winners and losers are chosen by the consumers, who clearly marked Chrysler and GM for extinction or, at the very least, reduction in size. And what will happen to the workers at the other companies? Will the U.S. government bail them out during the next downturn because those companies can’t compete with the resources of the federally subsidized GM?



The reality is, the auto industry has an overcapacity. When an industry, any industry, suffers from overcapacity, the market will fix it by running less successful companies out of business. That is the nature of a free market. And GM and Chrysler, thanks to their mismanagement in labor relations, product offerings and quality management, deserved the consequences of their behavior.



Next year, auto workers in Alabama, Tennessee, South Carolina, Indiana, and even Michigan and Ohio may lose their jobs because GM and Chrysler workers’ jobs were spared in 2009.



There are even deeper concerns and costs. The bailout ignored the rule of law. We have a nonpolitical process for failing companies to restructure themselves and it is called bankruptcy. Instead, Obama took money from you and me and gave it to corporate executives as a reward for their bad decisions. That was all completed without any substantive judicial oversight.



Then there are the billions of dollars in property confiscated from GM and Chrysler’s debt holders who, during a legitimate Chapter 11 reorganization, might have been protected.



We also lost any moral superiority and credibility when warning other countries, namely China, against interfering in the market. In fact, the bailout probably violated World Trade Organization rules.



In reality, the bailout was not about economics, it was about politics. The bailout was not about saving jobs, it was about saving “union” jobs.



In the end, the auto bailout was political payback and we all will suffer from it.



Or, as Daniel J. Ikenson, an economist with the Cato Institute put it: “When bad firms are rewarded and good firms penalized, the incentives soon fail to support progress. When investors can no longer be certain that property rights underpin their claims, they will take their money elsewhere. When political expedience surpasses law and justice as a guiding virtue, productive resources will be diverted to serving political, rather than economic ends. These should be the hard lessons of the auto bailouts.”





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