Mackenzie Patterson
2008 U.S. Automaker Crisis: The Detroit Bailout
At the end of 2008, two of the three largest domestic automakers in the U.S. received significant financial assistance from the federal government and President Bush’s administration. General Motors and Chrysler were burning through their cash reserves and heading quickly towards insolvency and potential bankruptcy, endangering not only themselves and their workers, but also the large domestic auto parts supplier industry as well. Insolvency had the potential to permanently alter and possibly destroy a large segment of the U.S. industrial economy. In an effort to avoid this, the federal government stepped in with highly controversial assistance in what is now generally referred to as the Detroit Bailout. The question then, as continues to be debated to today, is should the federal government have stepped in and provided help, or should they have left the free trade market alone? There are many opinions and multiple ideologies in the U.S., but which ideas are going to work? These were very difficult decisions that needed to be thoroughly analyzed and debated, however, the urgency of the situation, along with a general collapse in world financial markets led to events quickly overtaking prudence. In the United States, the country is roughly divided into too ideologies, free-market liberalism (conservatives), and social liberalism (liberals). This led to both free-market liberals and social liberals having opinions and making decisions that did not necessarily fit neatly within the general platforms of the Democratic and Republican parties.
After dominating the world for much of the 20th century, General Motors, Chrysler and Ford were on a long, downwards decline; their cars were not competitive with foreign manufacturers as they cost too much, the quality was lower, they were too large, and their fuel efficiency was entirely too low (Meyerson 2008). These companies are typically referred to as The Big Three and are all based out of Detroit, Michigan. As the housing market peaked in 2006 and the economy headed into recession, the pressure on The Big Three intensified. Ford was the first of The Big Three to recognize their perils and restructured their corporate leadership early on. However, General Motors and Chrysler were slow to change their ways and when the recession deepened and the financial crisis hit in full force in 2008, both Chrysler and General Motors began burning through huge amounts of cash as the losses piled up(Sanger 2008). Near the end of 2008, there was a very real fear prevalent across the country that the recession could turn into a depression and the debates were filled with differences in opinions as to how to avoid that. The possibility of a crash of one of America’s largest industries weighed very heavily on the debate and eventually led to what was described by the media as an “emergency bailout.”
In December of 2008, the Bush Administration used their executive power to provide financial assistance to the automakers. President Bush conceded that he had been forced by the severity of the economic downturn to ignore many of the free-market principles he came to office embracing(Sanger 2008). Under their plan, G.M. and Chrysler each had immediate access to $4 billion upon the signing of the emergency loan agreements with the Treasury. General Motors drew on the first installment of its loans at the end of December 2008 to pay its suppliers and workers. The company then began a drastic downsizing plan which included eliminating more than 30,000 jobs, shutting factories, shedding dealerships and determining the future of its other brands(Sanger 2008). GM was then to have access to an additional $5.4 billion in January 2009 and another $4 billion in February provided that Congress had released the remaining $350 billion for the Treasury’s rescue program(Sanger 2008).
Following President Bush’s program and the inauguration of President Obama in January 2009, the debate on further assistance continued to intensify. A critical debating point was forcing the automakers to change how they did business. President Obama took the liberal standpoint on the issue, as did many of his fellow democrats, and insisted that the automakers increase the fuel efficiency of their products, reduce carbon emissions and save the maximum number of jobs possible(Sanger 2008). The majority of social liberals were wanting to preserve the automakers business. They wanted to preserve the jobs of all the workers, suppliers, and dealers. Their plan was that if taxpayers help the automakers and bail them out, it would do more good than harm. The amount of devastation that could potentially hit the country if the U.S. automakers were to go under would ruin so many people’s life. The liberal ideology in this event concluded the idea that we need to use the tax payers money to help everyone else. There was no guarantee that the automakers in Detroit would be able to turn things around, but the social liberals were willing to gamble with that chance to save the jobs of Americans. The total number of The Big Three employees, parts-supplier employees, and car-dealer employees comes to 1.59 million people. With all of the other businesses in North America that depend on the existence of these companies, there is a substantial amount of jobs that would be in jeopardy should any one of The Big Three become insolvent or go into bankruptcy, let alone more than one (Meyerson 2008).
Already very distrustful of corporate America, many social liberals in the country became very angry at Detroit automakers for dire straits that they had gotten themselves as they had been using large price discounts and cheap financing incentives to artificially bolster sales instead of making tough choices necessary for a sustainable business model of making quality cars at a profit. This discontent was further fueled when all three of The Big Three chief executive officers flew from Detroit to Washington, D.C. in their private luxury aircraft to ask for public assistance before Congress. However, many social liberals recognized that the industry’s problems were not entirely The Big Three’s fault, as the economy was crashing to a halt, demand for cars at decades low points, and the banking industry collapse made car financing scarce. (Lehigh 2008, Zandi 2012).
Perhaps more importantly, social liberals were concerned with the jobs represented by the industry. In 2008, The Big Three employed about 250,000 workers, but when all of the other support industries in the economy are considered, almost 2.5 million well-paying jobs were at risk(Lehigh 2008). At a time with the U.S. was already losing millions of jobs to the recession and globalization, analysts speculated that a bankruptcy within The Big Three without government support would cost as many as another million jobs. A blow that large would have devastated not only Michigan, but Indiana, Ohio and many southern states that helped support The Big Three(Herszenhorn 2008). The survival of The Big Three became very important to social liberals as not only were jobs for working class Americans important to them, but organized labor was the largest constituency of the Democratic Party.
On the opposite side, free-market liberals in the U.S. were in favor of letting the automakers go to bankruptcy without any government support. Their opinion was that the U.S. is a free market economy and that any government support would undermine the basic capitalism model. In addition, many free-market liberals did not believe that the American taxpayer should pay for the sins of The Big Three. The free-market liberals of Washington differed from President Bush at the time, as House Minority Leader Mitch McConnel (R) made it clear that he thought the issue was not the American taxpayers faults, and that they should not have to pay for Detroit’s mistakes(Meyerson 2008). But perhaps most importantly, many free-market liberals believed that by saving The Big Three, they would be strengthening their long-time opponents of organized labor and rewarding them for their years of what they believed to be overpriced wages that helped contribute to the automakers problems. (Herszenhorn 2008, Zandi 2012). In an effort to appease members of their conservative base, some Republicans proposed their own plan for the bailout of the automakers, in which they placed some requirements that the automakers would need to follow for the free-market liberals to be on board with the bailout. Free-market liberals wanted the automakers to reduce their debt by two thirds in a handful of months, which was be an enormous sum given that General Motors had more than $60 billion in outstanding debt (Herszenhorn 2008). Other requirements would have been that organized labor would have to cut wages and benefits to match the average wage and benefits of the foreign automakers employees based in the U.S. (Herszenhorn 2008). Free-market liberals also wanted to make sure that the automakers met the wage goal sometime in 2009, but the social liberals argued for a deadline that matched when the current collective bargaining agreements expired (Herszenhorn 2008).
There are both upsides and downsides to both ideologies in this event in history. As I identify myself as a left-wing libertarian (free-market liberal), I always want to encourage less government control whenever I can. I encourage the belief that the government should only protect against violence and coercion. However, I think not doing anything in this circumstance was a gamble, and I also think bailing out the companies was a gamble. Neither plan was completely secure and predictable in how it would turn out. The upside to bailing out The Big Three was that the domino effect of losing jobs throughout the economy by letting them go bankrupt would be avoided. Many suppliers and manufacturing jobs were saved and the blow to the economy was in one way less than it could have been. The downside to bailing out the companies was that it was rewarding failure. The automakers were allowed to spend the amount that they did, but when it came down to it, they did not take responsibility for it. They let the financial deficit in their companies get too extreme before taking the drastic measure that they needed to fix it. The downside to not bailing out the companies is obviously terrible though. If we would have let the automakers go bankrupt it would have hurt a lot of people financially because of the loss of jobs. I do not think that the country should be about who is wrong and who is right, but rather working together to make things work, and giving credit where credit is due. The automaker bailout was a success despite conservative opinions of the matter. The automakers, more than two years after the emergency bailout, are on the rise.
The question then, as continues to be debated to today, is should the federal government have stepped in and provided help? Was the financial difficulties of The Big Three automakers just another chapter of natural selection in our free trade market economy, or was it the government’s responsibility to save an industry and the jobs of so many Americans? If not for the bailouts in Detroit, the U.S. economic recovery could have been longer and more frustrating than it already had been. It was distasteful, but it was a necessary plan that needed to happen(Zandi 2012). Yes, their need for government assistance was partly their own fault. They’d used tactics to stay out of bankruptcy instead of making tough choices that were necessary for them to stay feasible for a longer amount of time. However, there were forces out of their hand that affected their downfall. The U.S. economy was failing, the demand for cars was weak, and it was hard to get car loans with the bank’s near collapse(Zandi 2012). Just this year, G.M. reported an annual profit of $7.6 billion, and Chrysler is in the black as well(Rattner 2012). Both of the companies that were bailed out have increased their sales. They are doing so well that they are hiring new workers for the first time in many years, and Michigan’s unemployment rate has dropped far faster than the national average(Rattner 2012). The automakers themselves are doing well, profiting by selling cars at $14 million a year, when before they were losing about $16 million a year(Zandi 2012). The American government made the correct decision in the automaker crisis, however I believe that it was completely admissible to second guess the process that we took to get here.

Work Cited

Herszenhorn, David M., & David E. Sanger. 2008. “Senate Abandons Automaker Bailout Bid.” The New York Times, December 11. http://www.nytimes.com/2008/12/12/business/12auto.html?pagewanted=all (December 11, 2008)

Lehigh, Scot. 2008. “Why we should bail out automakers.” The Boston Globe, December 17. http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/12/17/why_we_should_bail_out_automakers/ (December 17, 2008)

Meyerson, Dan. 2008. “The Case for Keeping the Big Three Out of Bankruptcy.” The American Prospect, November 24. http://prospect.org/article/case-keeping-big-three-out-bankruptcy (November 24, 2008)

Rattner, Steven. 2012. “Delusions About the Detroit Bailout” The New York Times, February 23. http://www.nytimes.com/2012/02/24/opinion/delusions-about-the-detroit-bailout.html(February 23, 2012)

Sanger, David E., David M. Herszenhorn, & Bill Vlasic. 2008. “Bush Aids Detroit, but Hard Choices Wait for Obama” The New York Times, December 29. http://www.nytimes.com/2008/12/20/business/20auto.html?_r=3&hp (December 29, 2008)

Zandi, Mark. 2012. “Bailing Out Detroit” Dismal Scientists, February 27. http://www.economy.com/dismal/blog/blog.asp?cid=228891(February 27, 2012)