The Spectacle Blog

Biden’s Low Bar for GM

By on 8.24.10 | 10:40AM

Biden is pleased with the results of the administration's bail-out of GM.

The vice president said the recession that started in 2008 could have destroyed 100s of thousands of jobs in the automobile industry if the government hadn't extended emergency loans to keep the companies afloat.

He said 431,300 auto industry jobs were lost in 2008, but that since GM and Chrysler emerged from bankruptcy last year, employment has rebounded by 76,300 jobs.

"It's a huge reversal and one we'd never have seen had we listened to those who told us to walk away," Mr. Biden said.

But Cato's Daniel Griswold is not sold, and notes "the horrible injustice of stiffing the taxpayers of Indiana and others who bought GM bonds and should have been in line ahead of the more politically connected United Auto Workers union." Griswold adds:

To curry favor with organized labor, President Obama put $50 billion of taxpayer resources at risk. A post-bankruptcy GM turned a profit last quarter, along with most other automakers, but it is doubtful its anticipated IPO in the next few months will raise anything like the $80 billion or more needed to return the "investment" to taxpayers.

On top of that, the bailout of GM went far beyond any valid power granted to the federal government by the U.S. Constitution, and it blatantly favored two companies over a multitude of others in the very competitive automobile market.

And the the folks at Economics21 are also skeptical:

As many have pointed out since the auto bailouts took place, a fatal flaw in the GM restructuring was that the deal failed to address the crippling weight of pension obligations GM was subject to. Without massive reform of the largest private pension plan in the world, many worried that the restructuring would do little toward the long-term health of the company.

And they list some of the frightening details:

  • GM has $100 billion in unfunded, long-term liabilities in its pension fund.
  • Currently there are six retirees poised to draw pensions for every current worker at GM. Roughly speaking, this means that 87,500 workers must support 531,500 pensioners.
  • The amount of the unfunded pension liability is calculated assuming a long-term rate of return of 8.5%, an extremely optimistic number bordering on the absurd.. In contrast, most analysts would assume a rate equal to Treasury bonds for such assets, closer to 2.6%.

The larger issue is that, as with so many other of the Obama administration's interventions during the financial crisis, the GM bailout can only be justified if you assert the absolute worst-case effects of non-intervention ("destroyed 100s of thousands of jobs") as the alternative. Once you start talking about other actions that were available to the administration, arguments like Biden's fall apart.

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