Can Free Marketeers Embrace Obama’s GM?

June 1, 2009
Certainly most of the free market/conservative/libertarian types I chat with are in a tizzy about the General Motors bankruptcy — or, to put it more accurately, the 60 percent government ownership of GM once it emerges from its quickie bankruptcy. Government Motors. But is there a free market case for the Obama auto bailout? Here is what I was able to gin up:

1) GM is a victim of circumstances. At least a little bit. For all its problems, GM would not be in such a financial fix if not for the once-in-a-century collapse of the credit markets and resulting deep recession. Of course, Toyota and Honda and Ford also have to deal with the terrible economic climate. But the tight credit markets made that much more difficult for private investors to come in and turn around the company had it been allowed to sink into bankruptcy back in late 2008.

2) A straight bankruptcy might have even been costlier to Uncle Sam and taxpayers. This was the argument of White House auto adviser Brian Deese when he argued against the liquidation of Chrysler. As reported by the NYT: “Mr. Deese was not the only one favoring the Fiat deal, but his lengthy memorandum on how liquidation would increase Medicaid costs, unemployment insurance and municipal bankruptcies ended the debate. “

A similar analysis comes from IHS Global Insight in a research note:

Six months ago, the George W. Bush administration was winding down, the government had no significant support for the automotive industry, and most politicians were advocating no assistance at all for GM and Chrysler, preferring to let the bankruptcy process happen. An uncontrolled bankruptcy at GM would have cost over US$100 billion, pensions would have been transferred to the government’s Pension Benefit Guaranty Corp., and the likelihood of a reorganisation without any financial support from the still-frozen financial markets would have quickly been replaced with talk of liquidation.

3) Bankruptcy would have made the terrible U.S. economy far worse. By some estimate, a GM liquidation would have added a full percentage point to the unemployment rate, if not more. This reason has swayed conservative jurist/blogger Richard Posner:
If I am right that the domestic producers should not be allowed to collapse at a time of profound and, it appears, worsening economic distress.  … The realistic goal of an auto-industry bailout is not to reform, revitalize, or restructure the domestic industry; it is merely to postpone its bankruptcy for a year or two, until the end of the depression is at least in sight and consumer confidence is restored to the point at which the bankruptcy of the domestic manufacturers can be taken in stride.
Me: Now I doubt my pal Larry Kudlow would buy any of this:
Instead of putting the failed car enterprise into bankruptcy six months ago — where Carl Icahn or Wilbur Ross could have bought it — the Bush administration chose Bailout Nation. Under Team Obama, that bailout has morphed into full-scale government ownership. Twenty-billion dollars of TARP money is already invested in GM, with another $50 billion on the way. And that number could easily double unless GM car sales miraculously climb back to 14 million this year. That’s highly unlikely, with car sales presently hovering around 9 million a year. … But it’s the bigger picture that has me most concerned. What does Government Motors say about the direction of the United States? Historically, we don’t own car companies –or banks or insurance firms. But we do now. Tick them off on your fingers: GM, Citi, AIG. Oh, and let’s not forget Fannie and Freddie, those, big quasi-government, taxpayer-owned housing agencies. California is broke and likely headed to bankruptcy. Will we the taxpayers own that, too?
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