Campaigning on the Auto Bailout: Is It a Good Idea?

Should Democrats also tout the bank bailout, and how might Republicans respond?

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Who could have imagined two years ago that the bailouts would have gone so well that they would be used as a campaign talking point in 2012? Some Democrats are using the auto industry bailout, in particular, as proof that they were successful in taking action to prevent a more catastrophic recession. The strategy is a little bit risky, of course, as many Americans detest the very idea of bailouts, no matter the consequences. Is this a smart tactic for Democrats?

The Wrong Bailout?

First, it's kind of puzzling that Democrats are campaigning on the success of the auto bailout -- and not the bank bailout. In fact, taxpayers fared far better through their "investment" in the banking industry than they did in the auto industry. As of the Treasury's March bailout program update (.pdf), the auto bailout is expected to cost taxpayers $15 billion. Meanwhile, the non-housing-related financial industry bailout is expected to provide the government with a net gain of $157 billion. Obviously, the taxpayers were far better off rescuing the banks than they were rescuing out the auto companies.

But what about the jobs saved? Unfortunately, these numbers are impossible to tabulate accurately. Although the Obama administration claims that the bailout of GM and Chrysler saved a million jobs, a similar estimate for the bank bailout is difficult to make. Looking at the size of the respective industries, however, could provide some idea of what might have been lost. According to the Bureau of Labor Statistics, the auto industry had 780,000 employees when it was bailed out in December 2008. The banking and insurance industries (excluding real estate), however, had 5.92 million workers at that time. Even by this measure, it seems that saving the financial sector was more worthwhile.

From a profits standpoint, the financial industry has also performed much better since its bailout than the rescued auto companies. Let's look at the net income for 2010 through the first quarter of this year. Chrysler and GM combined for $7.3 billion in profit. Two most troubled big banks, Citi and Bank of America together made $13.4 billion. Of course, this doesn't include the many billions of dollars in profit made at rescued banks like JPMorgan, Goldman Sachs, Morgan Stanley, and many, many others.

Presumably, Democrats see a stronger populist narrative for the auto bailout. Visions of Uncle Sam holding on his shoulders an assembly line made up of blue collar workers might please most Americans more than him propping up the mahogany desks where bankers sit in their Brooks Brothers' suits. But if so, this shows a fundamental misunderstanding of the purpose of the bank bailout. If the U.S. suffered the collapse of its financial infrastructure, the economic damage would have been far more catastrophic than if a few large auto manufacturing firms had failed. Moreover, it wasn't just the Wall Street high rollers who were rescued: hundreds of thousands of employees working at small banks and at big bank regional branches across Main Street America were spared.

If Democrats want to campaign on bailouts, then they might as well brag about the bank bailout as well. After all, it was far more successful by pretty much every measure.

Was the Auto Bailout Really a Success?

Does the success of the bailouts pose a problem for Republicans? Democrats appear to think so, according to a Wall Street Journal article today by Sharon Terlep and Jeff Bennett:

Ohio Democratic Sen. Sherrod Brown, who is up for re-election, said the Democrats campaigning in the Midwest would cite the auto makers' rebound to repel Republican criticism. "Clearly, our loans made a huge difference, and when you ask [the Republicans] about it, they don't have an answer."

Savvy Republicans, however, will have an answer -- a quite simple one. When Democrats tout the success of the auto bailout, they will ask how they define "success."

The fact is, you can save just about any company if you throw enough money at it. In the case of most banks, this money really just served to provide funding until the panic subsided, after which time many banks promptly repaid the government, with interest. Ultimately, the bank bailout will turn a profit for taxpayers. If there is any sort of bailout that could be called a success, it's that sort.

Meanwhile, the auto bailout is expected to cost taxpayers $15 billion. The auto companies were not on the verge of collapse due to anything having to do with the financial panic or the housing bubble. Instead, they failed due to flawed business and strategy decisions that had built up over decades. So the government threw a huge wad of cash at some companies with fundamental problems. They recovered after revamping their operations and using that cash to plug some holes. Is that really so impressive?

The question then becomes: which companies do you bail out? In the case of the bank bailout, the motivation was to remedy a temporary problem caused by panic. In the case of the auto company, the motivation was to rescue some well-connected firms that had self-created problems. If the latter is a legitimate purpose for taxpayer money, then where do you draw the line? If saving jobs is your only objective, then perhaps Circuit City should have been saved a few years ago. Indeed, perhaps failure should be entirely forbidden and no company should ever fail. That way, no one will ever lose their jobs.

Of course, that goes against a very fundamental feature of capitalism. It takes a sort of survival-of-the-fittest philosophy, wherein the companies that perform well flourish and those that perform poorly fail. The auto bailout disregarded this principle. Evaluating where the bank bailout should stand in regard to this principle, however, is a little bit more difficult. While it may have been regrettable, if merely a response to panic -- a condition under which economics has trouble coping -- then it seems a little more permissible.

So Republicans' answer can be summed up: we didn't support the auto bailout because doing would have compromised our strongly held belief in capitalism.

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