Thats basically the message of the Clint Eastwood-narrated Super Bowl ad which told U.S. football fans that Detroit almost lost everything. But we all pulled together, now Motor City is fighting again. Detroits showing us it can be done. And, whats true about them is true about all of us.
Whats it like to live in a country where state capitalismrather than free-market, entrepreneurial capitalismis ascendant? Well, its one where car commercials morph into reelection ads for the incumbent president. Its clear Team Obama wants to make the bailout of the U.S. auto industry a big selling point to voters. (In Obamaland, American workers at U.S.-based factories of foreign automakerslike the 400,000 folks who work at plants, design centers, and dealership for Toyota, Honda, and Nissandont really count as being part of the U.S. auto industry.)
Heres what the president said recently at the Washington Auto Show: When you look at all these cars, it is testimony to the outstanding work thats been done by workersAmerican workers, American designers. The U.S. auto industry is back And its good to remember the fact that there were some folks who were willing to let this industry die. Because of folks coming together, we are now back in a place where we can compete with any car company in the world.
Obama: Because of folks coming together
Eastwood: But we all pulled together
You get the picture.
But not the entire picture, of course. The most effective propaganda doesnt present outright falsehoods but merely half truths that form a distorted image. View, if you will, a stock chart comparing General Motors (red), Ford (green), and the S&P 500 (blue) index.
Looks like GM still has some work to do to earn investor confidence.
Then theres the issue of the cost to taxpayers. We received some new info on this late last month:
The U.S. Treasury Department boosted its estimate of government losses in the $85 billion auto bailout by $170 million. In the governments latest report to Congress this month, the Treasury upped its estimate to $23.77 billion, up from $23.6 billion. Last fall, the government dramatically boosted its forecast of losses on the rescues of General Motors Co., Chrysler Group LLC and their finance units from $14 billion to $23.6 billion. The Treasury, which initially held a 61 percent majority stake in GM, now holds a 26.5 percent share, or 500 million shares in GM. To break even, the government would need to average $53 per share for its remaining stake. At current prices, the government would lose more than $14 billion on its GM bailout. The government booked a $1.3 billion loss on its $12.5 billion bailout of Chrysler. As part of its $17.2 billion bailout, the Treasury still holds a 74 percent majority stake in Ally Financial Inc., the Detroit-based auto lender and bank holding company. Ally, formerly known as GMAC, put its IPO on hold indefinitely last year because of market weakness.
Oh, and on top of that $24 million you can add another $13 billion, according to bankruptcy expert David Skeel. He says Treasury estimates omit the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructurednot if its sold. By waiving this rule, the government saved GM at least $12 to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers pockets.
And what if Washington hadnt forced taxpayers to ride to the rescue? Well, the Center for Automotive Research, an automaker and union-funded think tank, said back in 2008 that a drawn-out, disorderly bankruptcy proceeding leading to liquidation of the automakers would cause a loss of nearly two million jobs over the next two years.
But Skeel disagrees:
If the government wanted to sell the companies in bankruptcy, it should have held real auctions and invited anyone to bid. But the government decided that there was no need to let pesky rule-of-law considerations interfere with its plan to help out the unions and other favored creditors. Nor would both companies simply have collapsed if the government hadnt orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. Although Chrysler wasnt nearly so healthy, its best divisionsJeep in particularwould have survived in a normal bankruptcy, either through restructuring or through a sale to a more viable company. This is very similar to what the government bailout did, given that Chrysler is essentially being turned over to Fiat.
Things like moral hazard and unintended consequences are of slight concern when you want to be the Motor City Messiah. But who knows, maybe GM will continue to prosper even though its Japanese competitors are now recovering from Japans mega-quake, tsunami, and nuclear disaster. And maybe GM and Chrysler will eventually boost quality enough to get into the first division of automakers.
But given the history of bailed-out companies such as Chrysler, for instance there may be opportunity for Eastwood to star in a sequel.
Written by James Pethokoukis of the American Enterprise Institute and published on American Thinker, February 7, 2012.
This post originally appeared at The American Enterprise Institute.
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