JONATHAN COHN OCTOBER 30, 2010
General Motors made news twice this week. First it announced that it was investing $190 million in a Michigan factory that will build its newest Cadillac and, along the way, create 600 jobs. Then it announced it would be buying back some of the preferred stock now owned by the Treasury Department, further reducing its debt to the government.
Even after the repurchase, GM will still owe the taxpayers around $40 billion. And the new GM workers are making a lot less money than old ones do. But the news is still pretty good--and, more important, it’s not isolated. The Detroit Three are making money these days and, if you believe the automotive magazines, they are making good cars, too.
Of course, you wouldn’t know it from the political debate. President Obama’s critics have vilified the auto industry rescue and most Americans, weary of bailouts, seem to oppose it. But I've long held a different opinion. Readers may recall my staunch defense of the auto industry and efforts to rescue it. And although I've been reluctant to revisit the subject prematurely, the signs of success are becoming impossible to ignore. You don't even have to take my word for it.
Back in the spring of 2009, when Obama was debating what to do with the car companies, the Economist magazine came out hard against a rescue. It’s about what you’d expect from a publication that extols the virtues of the free market so consistently and without qualification. And it’s why their subsequent change of heart, published a few weeks ago, is worth taking so seriously:
Many people thought this bail-out (and a smaller one involving Chrysler, an even sicker firm) unwise. Governments have historically been lousy stewards of industry. Lovers of free markets (including The Economist) feared that Mr Obama might use GM as a political tool: perhaps favouring the unions who donate to Democrats or forcing the firm to build smaller, greener cars than consumers want to buy. The label “Government Motors” quickly stuck, evoking images of clunky committee-built cars that burned banknotes instead of petrol--all run by what Sarah Palin might call the socialist-in-chief.
Yet the doomsayers were wrong. ... Mr Obama has been tough from the start. GM had to promise to slim down dramatically--cutting jobs, shuttering factories and shedding brands--to win its lifeline. The firm was forced to declare bankruptcy. Shareholders were wiped out. Top managers were swept aside. Unions did win some special favours: when Chrysler was divided among its creditors, for example, a union health fund did far better than secured bondholders whose claims should have been senior. Congress has put pressure on GM to build new models in America rather than Asia, and to keep open dealerships in certain electoral districts. But by and large Mr Obama has not used his stakes in GM and Chrysler for political ends. On the contrary, his goal has been to restore both firms to health and then get out as quickly as possible. GM is now profitable again and Chrysler, managed by Fiat, is making progress. Taxpayers might even turn a profit when GM is sold.
Megan McArdle, who writes for the Atlantic, was equally critical of the rescue. And, like the editors of the Economist, her policy instincts are strongly libertarian. But after visiting Detroit she, too, has revised her opinion. Although she stops well short of pronouncing it a success, she agrees it hasn't been a boondoggle:
Post-bankruptcy, GM is unquestionably a more viable firm than the stumbling giant we put on life support two years ago. The worst fears of many critics--including me--were overblown. The government did not simply leave the bloated legacy costs intact in order to protect its political friends. ...
The bailout wasn’t a good idea, and it will probably cost billions. But the government wastes billions of dollars every year, because for the United States, $1 billion adds up to the equivalent of less than one venti latte per American. At least in this case, we got something in return: a functional car company, resurrected from the ashes of the old GM’s bloated carcass. Americans probably won’t notice the few extra dollars they spent on the bailout. But they may eventually be glad when another shiny new Buick Enclave rolls off the Lansing assembly line, and into their driveway.
Give credit to McArdle and to the editors of the Economist: Faced with contravening facts, they've modified their assessments. (Let the record show my judgment was off, too: I had thought even a structured bankruptcy might cripple sales. Quite obviously, it did not.) I'm more sanguine about the return on the government's investment than McArdle; remember, it prevented a massive, concentrated unemployment hit when the economy could ill afford it. But I would agree much could still go wrong. GM still has a huge, unfunded pension obligation; friends with ties to the company tell me that it still has too much middle management. Chrysler's situation raises more questions.
But McArdle and the Economist editors want to make sure nobody takes from this episode the lesson that government can reliably manage an enterprise like the auto bailout. There we part company more clearly. This success, however partial and tentative, isn't accidental. It's a product of hard work by public officials who wanted to do right by their citizens. As Steven Rattner details in Overhaul, Obama and his advisers conducted extensive analysis and entertained a wide-ranging internal debate, putting policy well before politics.
I'm not saying they got everything right--not on this issue and not, for that matter, on many others. But they performed the same due diligence we expect of the private sector but have been told, by generations of conservatives, we can't expect of the government. Maybe it's time we revisited those expectations.
Still, designing policy is one thing. Selling it is quite another. Americans on the whole thought the bailout was too generous; those whose livelihoods depend on the auto industry thought it wasn't generous enough. Notwithstanding the announcements of new plants and new jobs, Obama can’t point to the tens of thousands of new, high-paying jobs he created. All he can do is point to the tens of thousands of jobs--actually, make that hundreds of thousands of jobs--that didn’t disappear. Things are a lot better, but they aren't good. And that's not a great slogan.
Making cars? Yeah, administration can do that. The problem is the bumper stickers.