By Thomas D. Hopkins
During the past year, the federal government’s Troubled Asset Relief Program (TARP) distributed to the U.S. auto industry more than $80 billion of taxpayer funds – some $800 per American taxpaying family. General Motors alone received more than $50 billion; the rest went to Chrysler and to GMAC, the company that finances these two manufacturers’ sales operations. The funding included both loans and equity investments.
As a result, the federal government now is a major stockholder in each of the three firms, owning in particular more than 60 percent of GM.
It is not easy to comprehend the sheer size of such government financial transactions. One way to get some perspective involves relating the $80 billion cash bailout to the number of vehicles being produced.
Suppose by January 2011 all three firms are back on track, able from then on to make ends meet without further subsidies – but not prosperous enough to pay back the $80 billion. Suppose, more specifically, that GM regains its 2008 market share of 22 percent while Chrysler (which has been harder hit) achieves a 10 percent market share. In that event, the bailout would have amounted to a per vehicle subsidy of roughly $12,000 for GM and $7,500 for Chrysler on every car and light truck they produced during 2009 and 2010.
These amounts per vehicle overstate the subsidy if the firms’ recovery proves to be more robust. But many, including the government’s own watchdog agency (the U.S. Government Accountability Office) question whether either GM or Chrysler can survive at all in the long term. World auto production capability exceeds world consumer demand. High quality products and rigorous cost controls are essential for survival, and neither firm has an impressive record on these dimensions.
If the firms do manage to survive, most expect that the government eventually will reprivatize the auto industry, restoring private ownership of the three firms. But virtually no one expects that all of the taxpayer funds ever will be repaid. For reprivatization to occur in a way that protects at least a portion of the taxpayers’ investment will require a thoughtful exit plan. Unfortunately, no such plan yet exists.
The auto bailout has been a sobering experience whose adverse consequences cannot be corrected easily. Auto producers whose products American consumers find most appealing have been notably missing from the roster of bailout recipients. Our subsidies instead have gone to the poor performers, firms whose past management decisions proved faulty.
As a result, the bailout has created moral hazard problems, inadvertently handicapping the progress of stronger, non-subsidized producers. The problems extend beyond just the auto industry, as favored status for any one company necessarily complicates prospects for non-subsidized rivals.
Consider the case of GMAC, a firm that provides financing services to both GM and Chrysler (supporting transactions with their dealers and customers). GMAC enjoys taxpayer help well beyond the amounts disbursed through TARP. GMAC is subsidized by the Federal Deposit Insurance Corp. (FDIC). The FDIC agreed to guarantee repayment of some $7.5 billion of GMAC’s private indebtedness. Such government guarantees are not available to most private firms. Moreover, GMAC operates a taxpayer-assisted bank – Ally Bank – that competes directly with private banks that have no access to government-provided equity.
Such government guarantees do not translate into an immediate call on taxpayer funds, but neither are they without cost. Should default occur, the taxpayer would be hit twice – once as GMAC shareholder with declining equity value, and again as guarantor of GMAC debt.
TARP is not the only source of taxpayer support that has been directed to the auto industry. The “Cash for Clunkers” program provided nearly $3 billion in rebates to consumers who purchased more fuel-efficient vehicles. However, this substantial taxpayer cost appears to have provided only a modest assist to auto producers, mostly benefiting individuals who were going to purchase vehicles even without the subsidy. One estimate puts at just 18 percent the share of subsidized sales that reasonably can be regarded as attributable to the rebates.
In sum, the auto bailout is a story of the government’s directing large amounts of money to particular firms in one manufacturing industry in hopes of averting even greater economic distresses than were encountered during the recession. It is unclear whether the net effects in the long run will be positive and whether the consequences of the “no bailout” alternative would have been worse. These key questions were not asked at the outset, and answers remain elusive.
Thomas D. Hopkins is professor of economics at RIT. He served as dean of RIT’s Saunders College of Business from 1998 to 2005.
Hopkins held senior management positions in two White House agencies during the Ford, Carter and Reagan Administrations. His research on business burdens of government regulation has been sponsored by the Organization for Economic Cooperation & Development (OECD) in Paris and the U.S. Small Business Administration (SBA).
He has testified on regulatory policy issues before committees of the U.S. Senate and House and Canada’s House of Commons. He co-authored a 2001 SBA report, “The Impact of Regulatory Costs on Small Firms,” as well as National Research Council reports on marine transportation, the Exxon Valdez oil spill, and trucking/rail/barge transportation.