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Factsheet #115 on Bailouts

September 13, 2012

The Auto Bailout: It's Not Something to Celebrate

General Motors Was a Failing Company

  • As a result of long-term mismanagement, flawed business strategies, and out-of-control labor costs, GM was in need of deep restructuring in 2008–2009.
  • The Obama Administration was right to send GM into bankruptcy. As Heritage argued at the time, only bankruptcy would provide the ability to make the changes and debt relief to give GM a chance to recover.
  • The accompanying taxpayer bailout and nationalization, however, led to serious abuses, putting taxpayers at undue risk and undermining the rule of law.

The White House Distorted the Bankruptcy

  • By using $80 billion in taxpayer funds as leverage, largely to protect its labor union allies, the Obama Administration acted inappropriately.
  • These union favors increased GM’s costs by $27 billion, according to Heritage Foundation estimates.
  • This is more than the total estimated loss to the taxpayer from the bailout. Without the union giveaways, taxpayers would not have lost money on the bailout.

The Bailout Was Illegal and Misguided

  • The Troubled Asset Relief Program, under which the federal government claimed authority to spend the bailout funds, was clearly limited by law to support of “financial institutions.” There is no serious legal defense of this action.
  • The nationalization of GM invited dangerous politically motivated control over business decisions. GM’s commitment to money-losing “green” technologies is one result of this interference.
  • Congress, too, has interfered, most directly by imposing limits on dealership closings.

GM

The Bailout Will Leave a Dangerous Legacy

  • GM’s recovery is still tenuous. Rhetoric touting GM as a success story is premature. Its stock price has diminished since its partial initial public offering in 2011, and it is still one-quarter owned by taxpayers. Some commentators argue that it is headed for a second bankruptcy.
  • History has shown that bailouts and government ownership of enterprise harms economic growth, pushes off private investment and leaves taxpayers with outsized debts to pay.
  • Regardless of GM’s fate, this bailout should not become a model for the future.

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