A Reflection on the 2009 American Auto Bailout 

In March 2009, the federal government assumed temporary control of GM and Chrysler. Regulators fired C-Suite executives at GM including CEO Rick Wagnor, forced GM to declare bankruptcy, and required Chrysler to merge with Fiat. Later, Obama-administration officials also required the automakers to meet more stringent fuel efficiency standards to compete with greener firms abroad. In exchange for this restructuring, the Treasury provided both firms with discounted loans and shored up domestic demand with financial support for consumers. [3]The following analysis seeks to determine whether this bailout was ultimately successful in stimulating the domestic auto-industry. We focus on GM and Chrysler because they were the only automakers to accept bailout money.

Since President George W. Bush enacted the bailout in December of 2008 [4], GM and Chrysler have emerged from bankruptcy. Both remain solvent today, but GM was forced to shed struggling albeit popular brands: Hummer, Saturn, Pontiac, and Saab. [5] And as of December 2014, both firms have paid back the entirety of their obligations to the Treasury. However, that repayment doesn’t indicate the intervention was “profitable” for the government. The bailout resulted in a net loss of $9.3 billion for taxpayers, largely due to debts that were restructured in 2009 and forgiven after already having received Bush-era loans [6].

Market indicators suggest that the auto industry as a whole has also undergone a significant recovery. Since the announcement of the bailout in December of 2008, domestic vehicle sales have increased at a rate of 0.74% per month, from approximately 10.4 million per month to 17.9 million per month in February of 2017. Given that average monthly sales between 2006 and 2007 were approximately 16.8 million, these current figures suggest that sales have fully recovered, surpassing pre-bailout levels. [7]

Academics stress that this growth cannot be attributed entirely to the bailout, and that a natural market recovery underlies this rebound in sales. However, this is not to say that the bailout did not play any role in stimulating market performance. Austan Goolsbee, the former Chair of the President’s Council of Economic Advisors, designed a regression model to predict the quarterly vehicle sales in the wake of the recession using core economic indicators in the absence of the bailout. That actual sales have outpaced this model’s prediction suggests that the bailout has had a statistically significant effect on growth and sales. In other words, the domestic auto industry would not have recovered as quickly had GM and Chrysler executed ordinary bankruptcy procedures without government support. [8]

 Image: Lightweight Vehicle Sales Source: American Economic Association

In addition, President Barack Obama has defended the success of this government intervention by citing the creation of 640,000 auto industry jobs since the bailout went into effect in early 2009 [6]. There is little agreement regarding how this figure compares to the counterfactual number of jobs that would have been created during the recovery without the government’s support. But a persuasive camp argues that recovery aside, job loss in the wake of an ordinary GM bankruptcy would have been catastrophic. These analysts claim that GM would not have been able to raise enough capital to continue operating during bankruptcy procedures because most private lending sources were frozen at the time. Without sufficient cash injections, GM would have been liquidated. Bailout proponents claim this liquidation would have eliminated all of the jobs within the firm and many it supported with its supply line. [9]

However, critics contend that this analysis exaggerates the role of the bailout in the context of the global recovery. These bailout skeptics attribute the survival of the domestic auto industry almost entirely to the broader upswing in the economy after the recession. Some say the marginal jobs and revenue generated by the bailout didn’t justify its hefty fiscal price. Others go so far as to suggest the regulatory requirements, management turnover, and structural changes mandated by as loan conditions reduced industry dynamism and revenue so much that the bailout had a net negative effect. A counterfactual analysis conducted by researchers at the University of Texas at Austin supports this claim. The researchers constructed a “synthetic Chrysler” from other automakers to measure how Chrysler may have performed if it had not accepted government loans. Their analysis revealed that Chrysler’s sales could have been 20% higher had they entered ordinary bankruptcy procedures instead of accepting public cash injections. For most of the researchers’ test cases, the “synthetic Chrysler” sold at least 40,000 more vehicles per month than the actual Chrysler. [10].

In addition to potentially harming the firms that received injections, the bailout placed other domestic and international auto manufacturers at a competitive disadvantage by forcing them to compete with subsidized firms. Though difficult to isolate and quantify, this asymmetric competition likely cost jobs and sales at other firms. Thus, we should be wary when evaluating Obama’s claims about the jobs the bailout created: Saving a job at GM may have contributed to the loss of another job at Ford.

Today, American automakers are clearly in a much better place; GM and Chrysler have healthy profits and are once again competitive with their foreign counterparts. Few contest this claim. However, debate over the necessity of the bailout, the precedent it set, and its economic consequences because the counterfactual is difficult to assess. Policy experts and economists have not reached any sort of consensus regarding what would have happened to Chrysler, GM, or the auto industry in the absence of the bailout. When these researchers employ subtly different assumptions to build their models, they generate vastly different counterfactuals. As a result, both liberals and conservatives can find persuasive evidence in the academic literature to support their praise or criticism of the bailout.

But more conclusive evidence likely wouldn’t quell this debate. Regardless of empirical evidence, conservatives, who attribute market failures primarily to regulation and government interference, will continue to argue the free market would have stabilized itself more efficiently without the bailout. And liberals, who have less faith in market forces, will continue to argue the bailout was a necessary component of the recovery. Though the 2008 financial crisis is fully behind us, we ought to expect similar matters to arise in the next economic downturn.

Sources

  [1] https://www.wsj.com/articles/SB124385428627671889

  [2] http://money.cnn.com/2009/06/10/news/companies/chrysler_fiat/?postversion=2009061010

  [3] https://www.treasury.gov/initiatives/financial-stability/TARP-Programs/automotive-programs/Pages/default.aspx

  [4] http://www.politico.com/story/2008/12/bush-announces-174-billion-auto-bailout-016740

  [5] https://www.forbes.com/sites/davidkiley5/2016/01/20/obamas-takes-victory-lap-over-auto-industry-rescue/#7dfc99d9d32d

  [6] https://economix.blogs.nytimes.com/2009/06/01/dont-use-that-word/?_r=0

  [7] https://fred.stlouisfed.org/series/TOTALSA#0

  [8] http://www.ingentaconnect.com/content/aea/jep/2015/00000029/00000002/art00001

  [9]http://www.dbusiness.com/September-October-2012/What-if-Taxpayers-Hadnt-Bailed-Out-GM-and-Chrysler/#.WMvLPPIW7yg

  [10] https://www.forbes.com/sites/danielfisher/2012/10/19/chrysler-might-have-done-better-without-bailout-study-says/#4bb829067b04