Even the most casual viewer of the Democratic convention would get the point: President Barack Obama saved the American auto industry.
Massachusetts governor Deval Patrick called him the president "who saved the American auto industry from extinction." The former CEO of the super-sized used car dealership CarMax, Austin Ligon, said the president’s decisive action to restructure General Motors and Chrysler "helped prevent a domino effect that would have taken down everything in the auto industry, from the factories that manufactured auto parts to the dealers who sold the cars." And Michelle Obama talked about how her husband "fought to get the auto industry back on its feet."
One should make allowances for the exuberance of political speech. But when a party shines a spotlight on a particular claim during the week when it trots out its best and brightest, we should take a closer look.
We ask, did President Obama really save American auto makers? This is more a matter of opinion, and not an item for the Truth-O-Meter, but we can still shine some light on the question.
In broad strokes, the answer is yes, but with some help from the other party and with one huge unknown -- no one can say what would have happened without massive government intervention. We spoke with a number of analysts and read many independent reports. There is no question that General Motors and Chrysler are profitable today. But so is Ford, a company that received no financial aid at all. The jobs have returned -- although not nearly at the level they were before the industry began its steep decline in 2007.
Without a doubt, the American auto industry emerged smaller and more competitive.
In the words of the bipartisan Congressional Oversight Panel that assessed the impact of the government's efforts: "The industry’s improved efficiency has allowed automakers to become more flexible and better able to meet changing consumer demands, while still remaining profitable."
Barack Obama, however, cannot claim full credit for this outcome. According to several experts, he needs to share it with his predecessor, President George W. Bush. Dr. James Rubenstein at Miami University co-wrote a post-bankruptcy assessment for the Federal Reserve Bank of Chicago. Rubenstein said no one should overlook the importance of Bush’s decision to use $17.6 billion in TARP money in December 2008 to keep General Motors and Chrysler afloat.
"The Bush Administration provided short-term bridge loans," Rubenstein said. "That allowed the Obama Administration to take a couple of months to assess the situation."
Aaron Bragman, the lead American automotive analyst for the financial forecasting group IHS Automotive, echoed the point. "The Bush administration is the one that actually acted to save them from an uncontrolled bankruptcy and shutdown," Bragman said. "The Obama administration's role was to fix them."
Layoffs in 2008
In 2008, the entire auto industry was in very bad shape. Layoffs at auto plants and among auto parts suppliers were on track to reach 250,000 workers. Gasoline prices were up and buying power was down. General Motors was virtually out of cash to pay its bills and Chrysler was not far behind. In November 2008, the New York Times ran the headline "GM teetering on bankruptcy, pleads for federal bailout".
The Center for Automotive Research, an independent research group that gets some funding from automakers, predicted harsh outcomes if GM and Chrysler went belly up. Beyond the immediate jobs lost, there would be a partial collapse of the supplier industry that would lead to a 50 percent drop in production at Ford and the American-based foreign car plants. Imports would replace 70 percent of the lost GM and Chrysler production, the group predicted.
When President Obama took office, he created a task force with a sweeping mandate to determine the fate of GM and Chrysler. The companies’ first proposals to the task force included downsizing, but the task force wanted deeper changes. In March 2009, Obama rejected those plans and said if the firms wanted federal money, they had to go through bankruptcy. That happened quickly. The car companies filed for bankruptcy in June and emerged in July.
Between 2008 and 2010, carmakers closed or scheduled the closure of 16 plants and cut their ties with about 2,500 dealerships. Stockholders were wiped out and creditors such as banks and pension funds wrote off about two-thirds of the value of their claims. The companies shed their entire obligation to pay for the health care of retired autoworkers and that burden shifted to an independent trust fund in which the United Auto Workers union appoints five out of 11 board members.
Under new ownership
What emerged was a smaller American auto industry with a very different set of owners.
The Italian car company Fiat became the majority stockholder of Chrysler. The second largest owner of Chrysler now is that retiree trust fund. For GM, the U.S. government now owns about 32 percent of the company. Private shareholders account for about 35 percent. The retiree trust fund owns about 10 percent.
The union gave up the right to strike through 2015 and ended automatic pay raises. Back in 2007, it had agreed to a two-tiered wage scale that allowed the companies to hire new workers at much lower pay. Between the new wage rates and the savings from taking over retiree health costs, labor costs fell by about a third and are now on par with those of the foreign carmakers.
The entire deal was financed with about $80 billion in taxpayer money. That included a special $5 billion set aside to keep cash flowing to car part suppliers when they found that their normal lines of credit had vanished.
Today, total employment for carmakers and parts suppliers is up about 250,000 from 2009. In 2011, sales rose 10 percent for GM, 13 percent for Ford and 14 percent for Chrysler.
"Both Chrysler and General Motors are not just profitable," said Bragman. "They are significantly profitable, earning more now than they have in years."
The benefits have not flowed simply to GM and Chrysler. In a speech this June, Ford’s CEO Alan Mulally said the bailouts were the right medicine for his company as well.
"If GM and Chrysler would've gone into free-fall," Mulally said, "they could've taken the entire supply base into free-fall also, and taken the U.S. from a recession into a depression."
There is no guarantee that these gains are permanent. The auto industry is on firmer ground because it can sell far fewer cars than it once did and still be profitable. However, making the cars and trucks that people want at the right price is a moving target.
Still, the present success leaves critics asking whether it came at too high a price. The Treasury Department estimates that about $23 billion will never be repaid. For James Sherk, an analyst at the conservative Heritage Foundation, much of that is due to "incredibly generous treatment of the unions." Sherk says the union’s retiree health benefit fund got about $21 billion more than it deserved compared to other creditors.
Mitt Romney has taken up that claim, saying the bailout was flawed by "crony capitalism." The union counters that the trust fund does not belong to the union and the fund took on the substantial risk of providing healthcare for retirees for all the decades to come. According to the Center for Automotive Research, that shift alone accounted for two-thirds of the labor savings that have made the carmakers competitive.
At the libertarian Cato Institute, Dan Ikenson says no one can know for sure, but he thinks disaster would not have occurred if the companies had been allowed to go through a normal bankruptcy.
"I suspect some assets of both companies would have been sold off to other auto producers," Ikenson said. "And some assets and brands would have remained under the GM and Chrysler names."
A key question for advocates of a conventional bankruptcy is whether private lenders would have come forward to finance any such deal. The view of most analysts is that the private money would not have been there.
The Economist, one of the bastions of free-market thinking, came around to that view. Originally, it favored no government intervention. In April 2010, it offered an apology to President Obama.
"Given the panic that gripped private purse-strings," the magazine wrote in an editorial. "It is more likely that GM would have been liquidated, sending a cascade of destruction through the supply chain on which its rivals, too, depended."
Even Sherk at the Heritage Foundation gives Obama credit for forcing the carmakers to go through bankruptcy and the necessary restructuring that followed. The Economist concludes "by and large Mr Obama has not used his stakes in GM and Chrysler for political ends. On the contrary, his goal has been to restore both firms to health and then get out as quickly as possible."
As we said in the beginning, it is impossible to know if the American auto industry would have fared better without government money, without government ownership, and without strong government intervention. Most likely, that debate would be more robust if the industry were not doing well.
But for the moment, it is. The massive loss of jobs and the disruption to the network of auto parts suppliers did not happen. The shock that might have hit all car makers and the overall economy is not staring lawmakers in the face. Given the tangible reality of today, the view among most analysts is that President Bush kept the carmakers afloat long enough for President Obama to put them on solid footing moving forward. If that matches the definition of a rescue, then both presidents saved the auto industry.