Reasons to Bail Out GM

Why bail out GM? I can think of quite a few reasons:

  1. As Andrew Leonard notes, it’s what Barack Obama was elected to do. "If evangelical supporters of George Bush had the right to expect conservative judge appointments and restrictions on stem cell research, then working class Midwesterners are equally justified in expecting delivery on Democratic economic promises. That’s how a democracy works." If Obama didn’t intend to bail out Detroit, he was being very slippery during his election campaign.
  2. It’s an efficient way of directing fiscal stimulus towards the rust-belt states which need it most. Up until now, Treasury’s been careful to separate the idea of bailouts as distinct from fiscal stimulus: we’re "investing" rather than "spending" the money going into the banks and AIG. But that’s a silly distinction. As Steve Waldman says, most government spending, outside of entitlement transfers, is investment.
  3. It might be cheaper than the alternative of letting GM fail and throwing its employees, and its suppliers’ employees, and its dealerships’ employees, and so on and so forth, onto the unemployment rolls at a time when it’s harder to find a new job than it has been in a very long time.
  4. It’s a great way of being able to implement the long-term strategic goals of the Obama administration when it comes to things like energy independence. Leonard, again:

A Manhattan Project-scale plan to move the U.S. into an energy-sustainable future should start with a complete restructuring of the automotive industry. It’s time to think big.

These aren’t the kind of reasons that Treasury put forward for bailing out the banks and AIG. In that case, we were worried about the collapse of the global financial system: the bailout was necessary to prevent systemic meltdown. A lot of the arguments against a GM bailout seem to say that there aren’t similar systemic reasons to bail out GM: that’s true. But it’s worth realizing that there are other reasons.

The government also has a lot more latitude about exactly whom it bails out than most commentators seem to realize. There seems to be an assumption that any bailout will, by necessity, have to be a bailout of all GM’s bondholders, and will probably leave some non-zero value for shareholders as well. But that doesn’t have to be the case: there are numerous ways of structuring a "bail-in" whereby GM’s bonds are restructured and its bondholders share some of the pain.

On the other hand, there are other reasons not to bail out GM, as well. Ryan Avent says that since the long-term future of the rust belt does not lie with the automakers, a bailout would simply stand in the way of the rust belt’s reinvention. "Political energy in the Rust Belt is geared toward maintaining the status quo at the expense of other priorities," he notes, and a bailout is much more likely to reinforce those tendencies than it is to shake them up.

That said, given the state of the economy, there is a strong case to be made, I think, for the government giving GM a helping hand in winding down slowly, maybe emerging as a smaller, leaner, sustainable carmaker, rather than simply collapsing overnight. So I disagree with Avent here:

$50bn spent propping up the Big Three is $50bn that can’t be spent on direct investments in the people and cities of the Rust Belt. That kind of money could fund early retirement for older workers and unemployment benefits and retraining for younger workers, with enough left over for infrastructure improvements, research incentives and educational grants for the region as a whole.

Ford, General Motors and Chrysler are American institutions. They have helped define the character, the shape and the economy of the nation for a century. They’re also just companies – corporate entities designed to provide goods and services at a profit. For too long, these firms have failed at that goal, and they’ve dragged down an entire region with them. We can spend that $50bn simply perpetuating, for a while longer, the names and structures of these companies. Or we can spend that $50bn helping the people and the cities of the Midwest. I don’t think we can do both.

I can envisage a bail-out which goes largely to fund the UAW’s healthcare trusts — directly helping the people of the Midwest — with a bit of extra cash to help bondholders put together a debt-for-equity swap and corporate restructuring. In other words, we can do both, especially considering the very low cost of US government funds.

So count me in on a strategically-oriented bail-in package which benefits the Midwest rather than GM’s bondholders and shareholders. And if you want to call it a bailout, that’s fine by me.

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