Auto Industry Expert: “Romney’s Plan Also Would Have ‘Saved’ Detroit”

by Hans Bader on November 5, 2012 · 1 comment

in Bailout Watch, Economy, Employment, International, Legal, Politics as Usual, Zeitgeist

Earlier, we noted that the auto bailouts temporarily look more successful right now than they likely will be in the long-run since Toyota’s bogus safety issues, and a series of massive natural disasters that temporarily devastated Japanese automakers, gave General Motors only a temporary advantage over its Japanese competitors in 2010-2012 that won’t last (the Obama administration left serious problems at GM unresolved, and failed to implement needed reforms that would have antagonized the powerful UAW Union but were essential to make GM cost-competitive in the long-run).

Writing in The Wall Street Journal, auto industry expert Edward Niedermeyer argues the Obama administration’s costly bailouts resulted in much higher costs to taxpayers, and poorer prospects for GM’s long-run survival, than if Romney’s cheaper plan for aiding the auto industry had been followed.

GM and Chrysler could have averted tens of thousands of lost jobs, and the government could have preserved billions of dollars in tax revenue, by undergoing a true bankruptcy reorganization, even if the government had provided full debtor-in-possession financing.

In a true bankruptcy guided by the law rather than by a sympathetic, rule-bending political task force, GM and Chrysler would have more fully faced their competitive challenges, enjoyed more leverage to secure union concessions, and had the chance to divest money-losing operations like GM’s moribund Opel unit. True bankruptcy would have lessened the chance that GM and Chrysler will stumble again, a very real possibility in the brutally competitive auto industry.

Certainly President Obama threw enough money at GM and Chrysler to create a short-term turnaround, but if the auto makers find themselves on hard times and return to Washington with hats in hand, his policy will have been no rescue at all.

In his column, “Romney’s Plan Would Also Have ‘Saved’ Detroit,” Niedermeyer also notes the Obama administration abused and politicized the bankruptcy process after General Motors filed for bankruptcy, in order to rip off taxpayers to the tune of billions of dollars, and preserve costly union privileges that will harm General Motors’ long run viability:

Making matters worse, the Treasury Department issued notices which let ‘New GM’ acquire $45 billion in tax write-offs from its defunct predecessor, a blatant violation of basic bankruptcy law. This not only deprived the government of billions in tax revenue, it hid the true cost of the bailout while disproportionally benefiting the UAW, an unsecured creditor.

By giving the UAW’s unsecured claims against GM and Chrysler a higher priority than those of secured creditors, the government’s reorganization further damaged bankruptcy precedent. The net result was a $26 billion transfer to a key Democratic ally and political donor, according to analysis by scholars from the Heritage Foundation and George Mason University.

As John Berlau and others have noted, the Obama administration’s handling of the Chrysler bailout also was flawed, ignoring better alternative rescue options with more synergies for the U.S. auto industry, and could result in the loss of American jobs and the transfer of U.S. jobs in Jeep production to Italy, home of Fiat, the troubled automaker that was given control of Chrysler by the Obama administration. (Fiat plans to “export new . . . Jeep models from Italy to prevent [Italian] plants from closing,” and “protect Italian jobs . . . by exporting premium brands from Italy to the U.S.”)

In the bailouts, the Obama administration left GM’s uncompetitive, inefficient work rules and high labor costs largely intact to appease the UAW union, and saddled GM with future losses in the billions through massive deferral of UAW pension obligations. Nevertheless, the bailout superficially appeared quite successful, because GM got a huge temporary boost first from Toyota’s safety issues, and then from the massive earthquake and Tsunami that devastated its Japanese rivals. As Mickey Kaus noted, “Sales and prices” went up at GM “because competing Japanese car suppliers” were “crippled by the earthquake and tsunami.” Later, GM benefited from massive floods in Thailand, which did $45 billion in damage, shut down Japanese car-parts factories there for months, and crippled Japanese automakers’ global supply chains, disrupting car production even back in Japan.

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