The auto industry rescue may be the single best way to understand the choices voters face this election.

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PLANK OCTOBER 25, 2012

Why the GM Rescue Should Matter in Ohio—and Everywhere Else

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Nobody familiar with the electoral map should be surprised that the auto industry keeps coming up in the presidential campaign, as it did on Monday night during a debate that was supposed to focus on foreign policy. The entire election could come down to Ohio. And in Ohio, about one out of every eight jobs has ties to the carmakers. Take it from somebody who lives over the border in Michigan, the only state that has even more auto-related jobs than Ohio. In these parts, people care a lot about what Obama did—and what Romney might have done—when Chrysler and General Motors were in trouble.

But those of us in auto country shouldn’t be the only ones thinking about this episode. Perhaps more than any presidential campaign in recent memory, this election offers a set of stark choices. Obama and Romney have very different philosophies of government. And they have very different leadership styles. The auto industry story puts these contrasts into almost perfect relief.

* * *

The American automakers were in trouble long before Chrysler and GM came to Washington in late 2008, seeking emergency assistance. Once models of American efficiency and emblems of American industrial power, the companies had struggled to keep up with foreign competitors. Unburdened by the same union contracts and obligation to provide health benefits, and guided by more imaginative leadership, these foreign competitors paid lower compensation and built better cars. By the 1980s, all three American carmakers, including Ford, were losing market share. It was only a matter of time before they were losing money.

Ford was the first to take matters into its own hands, largely because it ran into trouble first. In the 1990s, while the economy was strong, it began reinventing itself as a leaner, stronger firm. Chrysler and GM were slower to react. By 2008, they were building better, more appealing cars than they had been. But they hadn’t restructured their operations as fully as Ford had: They hadn’t reduced capacity to match their diminished market share. They hadn’t fully renegotiated agreements with labor and suppliers to keep up with the competition. They bled money and, once the economy collapsed, they simply couldn’t pay their bills. That's when they came to Washington, begging for help.

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President Bush gave them a temporary loan, enough to get them through the beginning of 2009—and leaving the industry’s fate up to Obama, once he took office. Under the same law that rescued the financial industry, Obama had unilateral authority to authorize a loan. He didn't have to negotiate with Congress, the way he had with the stimulus and would soon do with health care reform. The decision would rest with him and him alone.

But plenty of people were telling Obama not to act. As they saw it, government shouldn’t be in the business of rescuing companies or industries. The economy works best when the market functions without interference, they said, even if that means companies fail and people lose jobs. Instead of asking government for help, they suggested, Chrysler and GM should do what companies usually do when they run out of money: Downsize and reorganize under the supervision of a bankruptcy judge, using loans from the private sector to finance operations while the reorganization is underway.

The counter-argument, made by folks like me, was that the auto industry crisis was an unusual situation requiring unusual action. Because of the financial crisis, no private lender was in a position to provide Chrysler and GM with funds. If government turned down the companies, their only recourse would be liquidation—they’d have to shut down operations and sell off their assets. Their workers, numbering in the hundreds of thousands, would quickly become unemployed. And the damage wouldn’t stop there. The companies that provided Chrysler and GM with parts would start shutting down, disrupting the entire supply chain and threatening even relatively healthy carmakers, like Ford. Credible estimates suggested that more than a million people would lose their jobs—at the very moment when, because of the very same financial crisis, hundreds of thousands of Americans were already losing jobs every month.

As you know, Obama decided on a rescue. He was actually tougher on the companies than most people remember: He forced them into bankruptcy, a move many of us thought might handicap them permanently, and he extracted concessions from all parties. (Yes, even the labor unions.) But Obama's decision to back the companies was firm and unequivocal. The industry was too important, he said, to the Midwest and to the nation as a whole. If government did not act to save it, nobody would. And the effects could be catastrophic.

What would Romney have done? It’s impossible to know for sure—in part, because he’s made made inconsistent and, at times, contradictory statements. Those of you who want to read the full story can check out the item I posted on early Tuesday morning, right after the debate, describing the many different positions he's taken. But Romney has been relatively consistent on one point: He wanted the automakers to get financing from the private sector. They could ask the government to backstop warranties on the cars and to guarantee "post-bankruptcy" financing, but they should go to the private sector for the actual loans—even though such loans would have been impossible to get. Even Bain Capital rejected an appeal, according to published reports.

Like other critics of the rescue, Romney opposed government loans because he doubted that officials could run the auto industry in a way that was good for the carmakers, its workers, and the country as a whole. But that is precisely what has happened. Today, Chrysler and GM are making money. They are also making good cars. Only time will tell whether they can thrive in the long term. But, for now, all three domestic carmakers have stopped shedding workers and, these days, nary a month goes by when the news doesn’t make announcements about new shifts or new hires at the local plants. Next week, for example, a Chrysler plant in north Detroit will welcome 1,100 new workers to help meet rising demand for the company’s Jeep Cherokee.

The effects on the regional economy have also been impressive. Overall, unemployment in the auto-producing states has fallen more quickly than in any other part of the country. And while Michigan’s unemployment rate went up to 9 percent last month, after falling precipitously for most the last three years, Ohio’s sits at 7 percent. That's below the national average, although the auto sector's strong performance is one reason the national economy has been improving over the last two years.

The Obama Administration can't take all the credit for all of this. But it can take a lot, as even some former critics of the rescue have conceded. “An apology is due to Barack Obama,” the editors of the Economist magazine wrote in August, 2010. “His takeover of GM could have gone horribly wrong, but it has not.”

* * *

Looking back, the key disagreement between Obama and Romney wasn’t over whether the auto industry should survive. It was over whether the government should act to make the industry's survival possible—whether, facing an instance of market breakdown, the government should intervene in order to protect hundreds of thousands, and maybe more than a million, people from losing their jobs.

And that’s really the same philosophical argument Obama and Romney are having when they debate other areas of policy. When investors take risks that exploit consumers and jeopardize the economy, should government stop investors from taking those risks? When health insurers make profits by discriminating against people with serious medical issues, should government force insurers to treat those people like everybody else? When manufacturers and energy companies fill the air with carbon, creating climate problems that will affect everybody on the planet, should government find ways to curb their activities? Obama thinks the answer to these questions is yes. Romney thinks it is no.

But the Detroit rescue reveals another difference between the two—one that is more about character than ideology. In 2009, you didn't need a crystal ball to see that Michigan, Ohio, and the rest of the midwest would be important parts of the 2012 election. But rescuing the companies would entail its own risks. The public by that point was tired of bailouts and, according to polls, they didn’t find the autoworkers a whole lot more sympathetic than the bankers. Conditioned by years of anti-union propaganda and stories (or personal experiences) with substandard American cars, the American public had come to see employees of the Big Three as pampered, slothful, and undeserving of help. Even in the Midwest, where the effects of a shutdown would be most acute, the rescue elicited mixed responses.

Obama understood this. Even if the rescue worked as he hoped it would, chances were good that progress would be slow in coming—that, by today, the companies would still be struggling, creating a political embarrassment. Obama approved the rescue anyway. And that included granting assistance to Chrysler. Half of his economic advisers opposed that, fearing, among other things, the shrinking car market was too small to support both companies. Obama’s rationale was simple: If he had the power to stop the devastation of either company shutting down, he was going to use it.

Romney’s inconsistent rhetoric may leave us wondering precisely what he really thought and would have done. But they tell us a lot about how he operates in the face of political pressure. When Romney was trying to appease conservatives and win the Republican primaries, he went out of his way to attack the rescue as a waste of taxpayer dollars. When Romney was trying to win over voters in Michigan and, now, as he has been trying to win over voters in Ohio, he has emphasized the similarities between the remedy he proposed initially and the solution Obama eventually chose. Can anybody who’s followed these shifts say honestly Romney has the mettle to make a tough decision and stick with it?

Put it all together, and it’s possible to draw from the auto industry rescue a pretty good lesson about the real differences between Obama and Romney. Obama understands that the market doesn’t always work on its own—that sometimes government must intervene in order to protect Americans from economic harm. Romney doesn’t. Obama is also willing to act in the face of political peril. Romney isn’t.

Those differences should matter to all Americans, not just those of us who live in Michigan and Ohio.

Update: I reworded a few passages for clarity and added some more historical context, including a line about the fact that the American automakers were responsible for providing health and retirement benefits—a burden foreign competitors did not have to bear. For more on that, see this article I wrote about the history of the United Auto Workers and the noble, if ill-fated, effort to provide through the private sector what most countries do through the public sector. Also, Romney on Thursday claimed that Chrysler was moving Jeep production to China. His source were online reports that turn out to be untrue. Chrysler is simply ramping up production for Chinese consumers.

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Why the GM Rescue Should Matter in Ohio—and Everywhere Else

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