- Post 16 June 2012
- By James Sherk | Todd Zywicki | The Heritage Foundation
Abstract: The U.S. government will lose about $23 billion on the 2008-2009 bailout of General Motors and Chrysler. President Obama emphatically defends his decision to subsidize the automakers, arguing it was necessary to prevent massive job losses. But, even accepting this premise, the government could have executed the bailout with no net cost to taxpayers.
It could have—had the Administration required the United Auto Workers (UAW) to accept standard bankruptcy concessions instead of granting the union preferential treatment.The extra UAW subsidies cost $26.5 billion—more than the entire foreign aid budget in 2011. The Administration did not need to lose money to keep GM and Chrysler operating. The Detroit auto bailout was, in fact, a UAW bailout.
The government bailout of General Motors (GM) and Chrysler between 2008 and 2009 will cost taxpayers approximately $23 billion. President Barack Obama emphatically defends his decision to subsidize the automakers, arguing it was necessary to prevent massive job losses. Even if one accepts this premise, the government should—and could—have executed the bailout more efficiently, with no cost to taxpayers, had the Administration required the United Auto Workers (UAW) to accept standard bankruptcy concessions. Instead, the Obama Administration gave special treatment to the UAW above and beyond what other creditors and unions received:
- Legally, the UAW’s claims had the same status as those of other unsecured creditors, but the UAW recovered a much greater proportion of the debts thatGeneral Motors and Chrysler owed the union.
- Bankruptcy typically brings uncompetitive wages down to competitive levels. However, existing UAW members did not take pay cuts at General Motors.
- The Administration could have kept the automakers running without subsidizing the UAW’s above-market pay and benefits.
- Subsidizing UAW compensation cost $26.5 billion—more than the government spends each year on foreign aid.
- The cost of subsidizing UAW pay and benefits accounts for the entire net taxpayer losses—$23 billion—in the bailout.
UAW members at General Motors and Chrysler are among the most highly paid workers in America. High salaries are good, but they must be earned. The taxpayer losses came from the special treatment that President Obama bestowed on the UAW. The auto bailout was actually a UAW bailout.
General Motors, Chrysler, and Fordwere in serious trouble well before the recession started. Decades of mistakes by both unions and management had saddled the firms with massive debts, unsustainable labor costs, product-quality problems, and an overgrown dealer network. Yet Ford mortgaged its assets, began to restructure in 2007, and did not need a bailout. The recession brought these problems to a head at GM and Chrysler. As consumers cut back on discretionary purchases—like cars—both firms ran out of money. To become profitable again the automakers needed to restructure through bankruptcy, removing obligations they could no longer afford.
GM and Chrysler instead asked Washington for a taxpayer bailout. The Bush Administration used the Troubled Asset Relief Program (TARP) to loan GM and Chrysler enough money to stay operational for the first several months of the Obama presidency. To his credit, President Obama denied the automakers the straight-up bailout they asked for. Instead, the Obama Administration forced the companies into bankruptcy as a condition of receiving government support and funded them through the bankruptcy process. The bankrupt automakers sold their assets to new "General Motors” and new "Chrysler”—companies created, capitalized, and partially owned by the government. The taxpayers spent a total of $80 billion on Chrysler, General Motors, and General Motors’ finance arm, Ally Financial.
A substantial amount of these funds will never be repaid. The government has already written off or realized losses of over $7 billion. More losses will come as the government sells its remaining stake in GM and Ally Financial. The Congressional Budget Office estimates that the auto bailout will ultimately cost taxpayers a total of about $20 billion. The Treasury Department is even more pessimistic, projecting that, at GM’s current stock price, taxpayers will lose $23 billion.
Defending the Bailout
The Obama Administration strongly defends the auto bailout, despite its cost. The President saystthat the automakers were not able to obtain private bankruptcy funding in early 2009. He argues that without government intervention General Motors and Chrysler would have liquidated, sending the Midwest into a second depression.
Many analysts have pointed out that the United Auto Workers received particularly generous terms during the bankruptcy. President Obama calls accusations that “paying back the unions” motivated his decision “a load of you know what.” However, the Administration treated the UAW much more generously than the automakers’ other creditors and other unions, and the UAW fared much better than unions typically do in bankruptcy cases.
General Motors and Chrysler had substantial liabilities entering bankruptcy—a major reason they went bankrupt in the first place. General Motors owed $6 billion to secured creditors and $29.9 billion to unsecured creditors. Chrysler owed $6.9 billion to first-lien secured creditors and $2 billion to second-lien secured creditors. Chrysler also owed about $5 billion to unsecured trade creditors, and owed billions more in obligations to dealers and for warranties.
The United Auto Workers had also created significant liabilities for the automakers. The union raised Detroit’s labor costs 50 percent to 80 percent above that of the transplant automakers, such as Toyota and Nissan. In 2006, General Motors paid its unionized workers $70.51 an hour in wages and benefits. Chrysler paid $75.86 an hour. These costs put the Detroit automakers at a significant competitive disadvantage.
Detroit’s higher labor costs also included generous retirement and health care benefits. UAW employees at GM and Chrysler can collect pensions in their 50s. The automakers also provided UAW retirees with full health coverage until they became eligible for Medicare. At that point UAW retirees collected generous additional health coverage from the automakers on top of Medicare. While the average Medicare recipient spends $4,200 a year out of pocket, UAW retirees in 2011 had maximum out-of-pocket expenses of $285.
To reduce the financial burden of these benefits, the Detroit automakers negotiated a Voluntary Employee Beneficiary Association (VEBA) with the UAW in 2007. The VEBA—funded by the automakers and partially controlled by the UAW—assumed financial responsibility for retiree health benefits. When General Motors filed for bankruptcy in 2009 it owed $20.6 billion to the UAW Retiree Medical Benefits Trust. Chrysler owed the VEBA $8 billion. These obligations were unsecured.
By 2009, General Motors and Chrysler lacked the money to pay their creditors, including the UAW. The Obama Administration rightly required both automakers to file for bankruptcy as a condition of receiving further money from the government. ...continue reading this article at The Heritage Foundation