An analysis of
the federal government’s rescue of Michigan’s all-important auto industry,
which ended Monday with the government’s sale of its final shares of General
Motors stock, says the emergency funding to GM and Chrysler saved millions of
jobs and increased domestic spending if the companies had been allowed to
At one point, the government owned 912 million GM shares, 60.8 percent of the company, received in exchange for a $49.5 billion bailout during the financial crisis in 2008 and 2009, Bloomberg BusinessWeek said. With Monday’s final sales of its remaining 31.1 million shares, Treasury Department has recouped all but about $10 billion of that.
Had GM and rival Chrysler, which repaid the last of its loan in 2011, been allowed to fail, the United States would have lost another 4.1 millions jobs in 2009-2010, an analysis by the Center for Automotive Research in Ann Arbor cited in a Detroit Free Press report.
That study, which was not supported by GM or Chrysler, also showed that the government “saved or avoided the loss of another $105 billion” in the loss of taxes and increased costs for food stamps and other social services programs, the newspaper said.
GM North America President Mark Reuss said the government’s historic intervention was necessary and meant “tens of thousands of people” were able to keep food on their families’ tables.
But the company and its employees glad to be free of the yoke of government ownership, which it said has resulted in flat sales from previously loyal customers who didn’t want to buy cars from a company known as “Government Motors.”
The Treasury Department’s sale of its last remaining stock is “a big deal” among GM employees and has boosted pride and morale, he said.
“I’m not talking about internally,” Reuss said. “This has been a long, hard road with no repeat customers and the label of ‘Government Motors.’ “
GM CEO Dan Akerson said in a statement that the company “will always be grateful for the second chance extended to us, and we are doing the best to make the most of it.”
Worth the Cost?
The government’s exit from public ownership doesn’t end the debate over the cost and benefits of the emergency funding.
In a White House statement, President Obama said that “when things looked darkest for our most iconic industry,” the government’s bet on the “ingenuity and resilience of the proud, hardworking men and women who make this country strong” was well placed.
“When I took office, the American auto industry was on the verge of collapse,” the president said. “GM and Chrysler were on the brink of failure, threatening to take suppliers, distributors and entire communities down with them. In the midst of what was already the worst recession since the Great Depression, another one million Americans were in danger of losing their jobs.
“As president, I refused to walk away from American workers and an iconic American industry. But in exchange for rescuing and retooling GM and Chrysler with taxpayer dollars, we demanded responsibility and results.”
And David E. Cole, the former chairman of the Center for Automotive Research, also defended the government’s intervention. The entire automotive industry was in depression, and without the bailout, “it could have dragged the whole country into one,” he told The New York Times.
Critics said the $10 billion cost of the bailout shouldn’t be casually dismissed or ignore that recovery would have occurred more quickly in the South.
“Those people who are getting bailed out are not getting bailed out by Monopoly money,” said Michael LaFaive, director of fiscal policy for the conservative Mackinac Center for Public Policy. “It’s you and I.’
LaFaive argues that if Chrysler and GM had been allowed to collapse, “other companies, be they Ford or Honda, (would) swoop in and pick up assets at a discount, which they re-employ elsewhere.
“Taxpayers aren’t on the hook, and cars get made more efficiently and inexpensively,” he said.
Sean McAlinden, a senior economist at the Center for Automotive Research and the study’s co-author, said jobs would have returned without government intervention – just not to Michigan and other states in the Upper Midwest.
Manufacturing jobs would have shifted to the South and R&D jobs would have gone overseas, crippling big automotive states like Michigan, Ohio and Indiana under double-digit unemployment rates would persist today, McAlinden said
He said the ripple effects of GM and Chrysler’s failures would have been felt throughout the supply chain and created layoffs at automakers that didn’t seek government aid. The report estimates that in addition to the job losses at GM and Chrysler, 90 percent of the U.S. employees of Ford, Toyota, Honda, Nissan, Mercedes and BMW would have been idled for at least a year.
The sale has seen positive results on the U.S. stock markets, where GM stock rose 1.8 percent to close at $40.90 on Monday, the day the government sold its shares. Shares were trading at around $40.60 a share on the New York Stock Exchange at noon Tuesday, after opening $40.55.
Double Down or Diversify Economy?
GM stock has risen nearly 43 percent this year, another signal that the automotive industry – Michigan’s core industry – is in recovery.
Economic Development Corp. Vice President Doug Smith said in September the auto industry is running at its strongest since 2007, but “can’t be complacent” and risk losing investment opportunities to overseas competitors.
Rather than reduce its dependence on the auto industry, Michigan needs to “double down and say, ‘Let’s do it well,’ “ Michigan Gov. Rick Snyder said.
Smith and Snyder were speakers at the Michigan Automotive Summit, the first gathering of its kind focused on the state’s commitment to the automotive industry.
Snyder said he’s advocated diversification in the past, but said at the summit “that’s backward thinking.”
Such optimism about the auto industry and reliance on a dominant sector may be misplaced, the Grand Rapids business Journal reports, citing a study from Michigan Future Inc.
In “The New Path to Prosperity: Lessons for Michigan from Two Decades of Economic Change,” the Ann Arbor-based think tank reviewed two decades of changing employment patterns and private sector income.
From 1990-2011, the most dramatic changes – both in job numbers and in pay – were in five sectors: manufacturing; other goods producing (construction and natural resources); knowledge-based services (private health care and social services; finance and insurance; information; professional services; and management of companies); other private services; and government.
Getting Michigan’s economy “back to where it used to be is not going to be factory-driven anymore,” Lou Glazer, Michigan Future Inc.’s president, told the Business Journal.
Glazer co-authored the study with Don Grimes, senior research specialist at the University of Michigan’s Institute for Research on Labor, Employment and the Economy.
“We do not know if the coming decade or two will be more like 1990-2001 or 2001-2011 or someplace in between,” the authors concluded. “What we are confident of is that, primarily due to the ongoing force of globalization and technology, the American economy will become more and more service-, rather than goods-producing, based.
“And in that economy, knowledge-based services are almost certain to be where job growth is the strongest and average wages are the highest.”