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Opinion

The myth of auto bailout jobs

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Photo - WASHINGTON, DC - JANUARY 31:  (AFP OUT) U.S. President Barack Obama looks at a Chevrolet Malibu during a visit to the DC Auto Show at the Convention Center January 31, 2012 in Washington, DC. Obama touted his bailout of General Motors and Chrysler three years ago.  (Photo by Olivier Douliery-Pool/Getty Images)
WASHINGTON, DC - JANUARY 31: (AFP OUT) U.S. President Barack Obama looks at a Chevrolet Malibu during a visit to the DC Auto Show at the Convention Center January 31, 2012 in Washington, DC. Obama touted his bailout of General Motors and Chrysler three years ago. (Photo by Olivier Douliery-Pool/Getty Images)
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With a policy agenda that has caused economic stagnation and massive job losses in the industrial Midwest, President Obama has made the auto bailout the centerpiece of his argument for re-election. He claims that it rescued the industry from collapse and saved a million jobs or more.

There's one problem: That story isn't true. If anything, the Obama auto bailout left Chrysler and GM in worse shape than they would have been otherwise, while funneling over $25 billion in taxpayer dollars to the United Autoworkers labor union.

When Obama entered office, GM and Chrysler were racing fast toward bankruptcy. As the Obama campaign spins it, that would have been the end of the road for auto manufacturing in the United States. But that's simply not the way it works. Were it true, then there would no longer be companies like Macy's, 7-Eleven and most of the major airlines, which have all gone through Chapter 11 reorganizations, emerging as stronger competitors with sound long-term finances.

Chapter 11 bankruptcy gives hard-up companies the chance to make a fresh start. It lets them overcome obstacles to success, such as unreasonable contracts, unsustainable debt loads and poor management. Chapter 11 is a sensible choice for potentially profitable businesses that must adjust quickly to new economic realities -- just as Chrysler and GM were in 2009.

There's no reason to believe that it would have been any different for GM and Chrysler. Both would have kept producing cars in bankruptcy while reorganizing and preserving jobs in their long-term competitive interests.

The Obama administration agreed that Chapter 11 was the right choice for the ailing automakers, but it decided to insert itself into the reorganization process. It directed all major decisions and injected $80 billion in taxpayer funds from the Troubled Asset Relief Program (which Congress had limited to stabilizing the banking sector) into the companies.

The result was a reorganization that superficially resembled bankruptcy but was driven as much by politics as economic realities. The Obama administration's "Auto Task Force" decided which nameplates to shutter and how the automakers should invest in product going forward. Many of these decisions had a political basis -- consider, for example, GM's ongoing billion-dollar investment in the electric plug-in Volt, a white-elephant project that will likely never turn a profit.

By the numbers, the real beneficiary of the bailout was not GM or Chrysler, but to the United Auto Workers, whose PAC gave 99 percent of its federal contributions in 2008 to Democratic candidates. As James Sherk and Todd Zywicki explain in a recent report for the Heritage Foundation, the Obama administration directed $26.5 billion more to the UAW than it would have received in a normal bankruptcy in which similarly situated creditors are treated equally. That figure exceeds taxpayers' $23 billion in expected losses for the auto bailouts.

The labor union's special treatment has left the automakers at a long-term competitive disadvantage. In a normal Chapter 11 case, everything is on the table to make reorganization successful, and that includes collective bargaining agreements. But rather than push UAW members to accept prevailing market wages and benefits, the Obama administration accepted serious concessions only for future hires, while trimming at the margins for existing workers. The result is that GM still pays above-market compensation, averaging $56 per hour.

This uncompetitive compensation structure, combined with still-rigid work rules mandated by the collective bargaining agreement, leaves GM in particular at a disadvantage to its rivals, threatening its future success.

The only unknown -- and the point that the Obama administration cites as justifying its intervention -- is whether the automakers could have obtained financing to complete their reorganizations at a time when the credit markets were in turmoil. But the government could have ensured financing was available through limited guarantees to lenders. That would have provided greater protection to taxpayers and allowed the bankruptcy process to go forward in an orderly and fair fashion, without letting politics supersede the business's best interests.

The auto bailout was not inevitable, and it was certainly not necessary to rescue the industry. A typical bankruptcy, without the Obama administration calling the shots, would have given Chrysler and GM breathing room to reorganize. The result would have been a resurgent industry, likely on sounder financial and competitive footing than it is today. And it wouldn't have put taxpayers on the hook for a $25 billion handout to a politically connected labor union.

Andrew M. Grossman is a visiting fellow at the Buckeye Institute for Public Policy Solutions, and is a litigator in the Washington office of BakerHostetler LLP.

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