Every so often, we ought to celebrate our victories. The auto bailout is a case in point. Six years ago, it was wildly controversial, with the fate of General Motors and Chrysler hanging in the balance. Now, it’s clear that the bailout was a solid success.
The revitalized auto industry has been a pocket of strength in a lackluster economic recovery. Motor vehicles and parts have provided 25 percent of the recovery’s gain in manufacturing, despite representing only 6 percent of manufacturing’s value added. Since mid-2009, the number of manufacturing jobs increased by 256,000, up 41 percent from the low of 623,300. Dealerships and parts stores added another 225,000. (All gains are as of mid-2014.)
GM and Chrysler are also more competitive. As conditions for government aid, the companies closed several dozen plants, pared billions of debt, adopted lower wages for new workers and slashed the number of dealerships. The companies returned to profitability in 2010 and recouped some of their lost market share. In mid-2014, the Big Three (Ford avoided federal aid) had a market share of 45.1 percent, up from its 2009 low of 43.7 percent but below the pre-crisis 50.5 percent.
Even some bailout supporters profess surprise at how well it worked. In a new essay (from which most of the numbers here are drawn), economists Austan Goolsbee of the University of Chicago and Alan Krueger of Princeton University — both worked for the Obama administration in early 2009 — admit that the "industry's outsized contribution to the economic recovery [was] . . . unexpected." At one meeting, they were polled about whether Chrysler would survive five years even if it received aid. Both voted no.
With hindsight, the rescue was fairly cheap. All told, GM, Chrysler and GM’s financing arm received $80.7 billion in federal assistance. But $70.5 billion was recovered. Although the $10.2 billion net cost is a lot, the benefit — a crucial industry stabilized in midcrisis — was worth far more.
Goolsbee and Krueger recall that Chrysler almost didn’t receive aid. Its estimated job loss was much lower than GM’s; its mix of vehicles overlapped with GM’s and Ford’s, meaning that lost sales at a shuttered Chrysler might have helped GM and Ford; and, finally, two previous efforts at streamlining the company had failed.
But other considerations prevailed. One was the impact on suppliers. Two-thirds of Chrysler’s suppliers were also suppliers to GM; half were suppliers to Ford. Without Chrysler, some of these firms might have collapsed, further disrupting the industry. “We feared a chain reaction,” write Goolsbee and Krueger in a working paper for the National Bureau of Economic Research. Probably more important was raw politics. It would have been hard for President Obama to justify saving GM while sacrificing Chrysler.
The bailout’s success suggests three lessons.
First, desperate times justify desperate measures that otherwise might seem indefensible. “No one involved [in the rescue] . . . wanted to be in the position of bailing out failed companies or having the government own a majority stake in a major private company,” write Goolsbee and Krueger.
But the alternative was worse. The Obama administration estimated a job loss approaching 1 million, with 300,000 attributed to Chrysler. There would also have been a psychological jolt. If GM — America’s most storied industrial firm — had collapsed, it would have deepened the fear that was causing consumers and companies to cut spending and hoard cash.
Second, “tough love” is necessary when government rescues private firms. The plant closures, bondholder losses and wage reductions (not enough, to some critics) were essential. Without them, the companies might have required continual government aid to survive, say Goolsbee and Krueger. Japan went down that path for years by propping up “zombie firms that were not viable companies.”
Finally, fear is a great motivator. When Sergio Marchionne, chief executive of Fiat, which now owns Chrysler, was asked how the company had changed so quickly, he replied: “When you’re broke, you change your ways a lot faster.”
All this is now history. GM and Chrysler got a second chance. But if “they are mismanaged in the future,” warn the economists, there may not be a third.
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FAQs
Eventually, however, the bailout allowed both GM and Chrysler to become successful and hire tens of thousands of workers. It also saved suppliers' jobs. Allowing the companies to fail would have been far more expensive for taxpayers.
Why did auto industry need bailout? ›
“It could have been a domino-effect collapse of the domestic auto industry.” He adds that the bailout decision made sense partly to avoid a much deeper crisis, but also to make GM and Chrysler more competitive in the future. It was true that U.S. auto companies were “badly managed for a long time.
What car companies received bailout money? ›
Bush announced that he had approved the bailout plan, which would give loans of $17.4 billion to U.S. automakers GM and Chrysler, stating that under present economic conditions, "allowing the U.S. auto industry to collapse is not a responsible course of action." Bush provided $13.4 billion immediately, with another $4 ...
Should the US government have bailed out the US auto industry in 2009? ›
Dziczek said that without the bailout, there would still be an auto industry in the United States today. But it would be smaller and centered primarily in the lower-wage, nonunion foreign-owned assembly plants in the South. “The economy would have come back to equilibrium eventually,” Dziczek said.
How much profit did the auto bailout make? ›
Yet in the end, the Troubled Asset Relief Program and the Detroit bailout yielded $15.35 billion in profit, Treasury officials said Friday. “Effectively, today, our rescue of the auto industry is officially over,” President Obama said Friday, opening his end-of-the-year news conference.
Was the 2008 bailout paid back? ›
Mr. Obama and others who were involved often say that they were all ultimately paid back by the companies that benefited from the funds. ProPublica, the nonprofit investigative news organization, calculated in 2019 that after repayments the federal government actually made a profit of $109 billion.
What are the problems with bailout? ›
Some major reasons behind this unpopularity are the perceived unfairness of bailing out wealthy banks and that bailouts are often quite expensive for governments and taxpayers, and sometimes led to sovereign debt problems (e.g., Spain).
How many jobs did the auto bailout save? ›
The Auto Bailout Saved 1.5 Million Jobs — and Likely Made $50,000 on Each One.
What are some reasons for a bailout? ›
A company may need a bailout if it is facing severe financial difficulties that threaten its survival, such as mounting debts, declining revenue, or a sudden downturn in the market. A bailout can provide the company with the necessary funds to continue operating, restructure its operations, and pay off its debts.
What is the only two car companies not bailed out? ›
Tesla & Ford are the only American carmakers not to have gone bankrupt out of 1000's of car startups. Prototypes are easy, production is hard & being cash flow positive is excruciating.
An Industry in Crisis
In late 2008, the combination of an historic recession and financial crisis pushed the American auto industry to the brink of collapse. Access to credit for car loans dried up and auto sales plunged 40 percent. Auto manufacturers and suppliers dramatically curtailed production.
How much did the auto bailout cost taxpayers? ›
Bush and Barack Obama pumped billions into a rescue of the auto industry. That bailout ultimately cost the public about $12 billion when everything was settled and loans repaid.
Is the US auto industry in trouble? ›
Automotive Industry Slowdown in 2022
Addressing supply chain shortages has caused a clear slowdown. Automakers have been forced to increase the price of their vehicles, while soaring price inflation has driven central banks to increase base rates.
Are Americans keeping their cars longer? ›
Per a recent S&P Global Mobility report, the average age of vehicles is around 12.5 years. This is the sixth consecutive annual increase in average age and S&P predicts that the number of older vehicles will keep growing until at least 2028.
What would have happened if GM was not bailed out? ›
Apologists for the bailout assert that were it not for the federal government's emergency intervention, America would have lost one of its premier industries, along with a critical mass of skilled labor, physical plants, technology, and suppliers.
Did taxpayers lose money on GM bailout? ›
U.S. taxpayers lost more than $11.2 billion as a result of the federal bailout of General Motors, according to a government report released Wednesday. The $11.2-billion loss includes a $826-million write-off in March from government investments in the “Old GM” before the company's 2009 bankruptcy, the report said.
How much profit did the GM bailout make? ›
GM has earned a stunning $22.6 billion since the dark days of the financial crisis, when the automaker was bailed out by the U.S. government. Taxpayers didn't fare nearly as well. They'd lost $10.6 billion by the time the U.S. Treasury department closed the books on the $49.5 billion bailout in December.
How much did the US lose on GM bailout? ›
The U.S. government lost $11.2 billion on its bailout of General Motors , more than the $10.3 billion the Treasury Department estimated when it sold its remaining GM shares in December, according to a government report released on Wednesday.
