June 3, 2011

June 3, 2011 | Commentary on Bailouts, Economy

Credit Bankruptcy, Not Bailout, for Chrysler's Turnaround

"We received confirmation this morning . . . that Chrysler Group repaid, with interest, by wire transfer to the United States Treasury and by bank transfer to the Canadian government, every penny that had been loaned less than two years ago."

The claim by Chrysler (and Fiat) CEO Sergio Marchionne that the company had paid off its taxpayer loans sparked a victory dance among supporters of the automaker bailout that would have made Snoopy proud. President Obama issued a statement from Europe lauding the "tough decisions" he made to help the firm and made plans to visit a Chrysler plant in Ohio for a congratulatory photo op.

Taking a more pointed approach, the Democratic National Committee launched an ad campaign attacking opponents of the bailout. If the critics had succeeded, it contended, Detroit would have gone bankrupt.

But the pro-bailout jig is a bit misplaced.

First, despite the congratulatory statements, Chrysler had hardly paid back its debt to the American taxpayer. Notice the careful wording in the Marchionne statement: Every penny that had been lent "less than two years ago" has been repaid. That conveniently leaves out $3.5 billion lent to Chrysler more than two years ago. That includes $1.9 billion the automaker was provided on May 1, 2009, on top of an additional $1.6 billion in late 2008.

Some of this will be recouped when the government sells its remaining 6.6 percent interest in the automaker (soon, it is hoped). But even the Treasury Department acknowledges that the income will not put taxpayers in the black.

And this doesn't even count other subsidies provided to Chrysler, as well as other automakers, including a request for a new $3.5 billion loan from the Department of Energy to fund retooling of plants for more energy-efficient cars.

Second, it's wrong to claim that the bailouts prevented Detroit from going bankrupt for the simple reason that Detroit (or at least General Motors and Chrysler) did go bankrupt. And it was those bankruptcies — more than an infusion of federal cash — that allowed the two firms to survive.

The two automakers certainly did not have bankruptcy in their plans when they first came to Washington, D.C., asking for a bailout in late 2008.

Labeling bankruptcy as unthinkable, they saw federal aid as a way of avoiding bankruptcy court. And the first dollops of federal cash were given to them (during the last days of the Bush administration) with that in mind.

But that approach only extended Detroit's woes. It allowed GM and Chrysler to put off the painful cuts, and creditors to evade the painful losses, that were necessary to get the automakers back on course.

Obama should get credit for finally forcing the two into bankruptcy in early 2009. Unfortunately, however, it was accompanied by a massive inflow of taxpayer cash, government ownership of the two firms, and a manipulation of the bankruptcy process to help politically favored interests (notably the unions) at the expense of shareholders.

Going forward, the danger is that this intervention will become a precedent, legitimizing bailouts as a standard tool of economic policy.

Such a result would be disastrous not just to taxpayers' wallets but to the economy as a whole, as firms (and investors) evade the consequences of their own decisions.

So far, the American people, to their credit, have refused to board any such bailout bandwagon. The public's views toward the bailouts — outside of Michigan, at least — have been largely negative.

Bailout supporters, in doing their victory dance, are trying to change that public perception and clear the way for future bailouts. If they succeed in eroding the public's justified skepticism of such interventions by Washington, the economy could be in for a bumpy ride.

James Gattuso is the senior research fellow in regulatory policy at the Heritage Foundation.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Bailouts, Economy

First appeared in The Wichita Eagle