The auto bailout was always a bad idea

Milton Friedman once said his greatest fear about the 1979 bailout of Chrysler by the U.S. federal government was not that it would fail, but that it would succeed. Friedman didn’t mean he was wrong to oppose it. What concerned him was how Chrysler’s rescue (approved by the U.S. Congress in late 1979 and signed into law by President Jimmy Carter in 1980) might lead some to draw the wrong conclusion: the notion that such actions save jobs, among other illusions.

An example of an errant summary arrived again recently from federal Finance Minister Jim Flaherty. Flaherty held a press conference with members of the Canadian Autoworkers Union (CAW) and Chrysler. They were there to trumpet how the most recent Chrysler bail-out, in 2009, was a “success” because Chrysler has repaid some—but not all—of the money it owes Canadian taxpayers.  

Several commentators followed up with praise for the government/taxpayer largesse. They argued opposition to such corporate welfare was based on neo-classical economics and “dogmatic impulses.”

But such views, including Flaherty’s, assume that conclusions about corporate welfare are derived from ideology. Actually, they result from an examination of the pumped-up claims about government subsidies to business. Taxpayers, politicians and columnists should oppose corporate welfare not on ideological grounds, but on the plain fact that such subsidies don’t perform as advertised, and didn’t, even in the case of Chrysler.   

First though, let’s deal with the payback. Chrysler just repaid $1.7 billion of the $2.9 billion loan from 2009. The remaining $1.2 billion will never come back as Finance Minister Jim Flaherty admitted this week. “That part of the loan, initially, was made to the old Chrysler that is no longer with us,” said Flaherty. It was in reference to Chrysler before bankruptcy reorganization absolved the “new” Chrysler of past debts.  

That $1.2 billion loan was pure folly. No sober Canadian bank—recall, the much-praised ones that survived the recession’s meltdown—would have thrown a billion-plus at a company about to go under. Only a politician would and for purely political reasons.

To make this loss even more real, consider that coincidentally in 2009, the net federal income tax take from Newfoundland and Labrador was almost the same ($1.175 billion). I wonder how taxpayers in that province enjoy the thought that the equivalent of all their federal tax that year went to Chrysler, never to return.

On another claim—Chrysler is healthy and a success because it paid back a portion of the government loan, that misses a salient point. Take any person or company in financial trouble, relieve them of their debt via bankruptcy and of course their position will improve. It doesn’t mean they were somehow brilliantly successful. By that measurement, anyone who defaults on their mortgage is a whiz at real estate investing.  

The Finance Minister defended the Chrysler-GM bailout on the grounds that 52,000 auto sector jobs were protected. But to use an example from the other side of the country, 92,000 full-time jobs evaporated in British Columbia between June 2008 and June 2009, the latter month being the Chrysler-GM bailout month.

B.C.’s job losses were far higher than those auto sector jobs Flaherty thinks he “saved.” The Finance Minister could not have, and nor should he have tried, to save every business in B.C. (or anywhere else) or the attached jobs.  Instead, a defensible role for government, and what was already in play via the employment insurance program, is to provide a bridge for individuals. After all, companies will rise and fall, including large ones. In 2009, Canada-wide, 5,420 companies went bankrupt; only two were bailed out.

The “government-saved-jobs argument” from Flaherty misses another obvious point: the cash disbursed to Chrysler (and GM) came from somewhere, from individual taxpayers and profitable businesses. All the bailout did was redirect jobs away from other companies, especially Chrysler’s competitors.  

Even had Chrysler and GM never exited bankruptcy court, other, healthier automakers in Canada such as Ford, Toyota and Honda could have captured more market share; they would have hired more workers as their sales picked up. But, instead, the sickest and worst-managed companies were propped up. That punished the best-run businesses and rewarded poorly-run ones.  

Such bailouts have become a habit, at least for Chrysler. Chrysler was first bailed out in 1979/80 only to survive and repeat history three decades later. That happened because politicians ignore the substitution effect. That’s where taxes and jobs are politically transferred from healthier competitors to weak companies. The job losses at the former are less visible because cameras are not around when pink slips are handed out.

Ignoring that reality is no virtue, nor economically defensible, no matter how often politicians pretend otherwise.