Free Markets, Free People


“Obama saved the car industry with bailout” narrative begins to form

Ron Klain, former Chief of Staff for Joe Biden (and a Bloomberg View columnist) gives you a peek at the plan.  Klain has a piece in Bloomberg where he puts the outline of what the administration needs to do to spin the car bailout properly if it hopes to make it a campaign positive.  Klain’s suggestions are offered to form the basis of a narrative which will be polished and become a center-piece of the record of Barack Obama.   The reason for beginning now is obviously an attempt to condition the public, which was very much against the bailout (and mostly remain so), to the supposed positive aspects of the takeover by government.

Of all the policy challenges I saw Obama tackle in my two years in the White House, none was more complex than turning around the U.S. auto industry. When the president took office, the industry was in free fall. Sales of cars and trucks, which had topped 17 million in 2006, fell to 10.6 million in 2009. Two of America’s three major automakers were insolvent, kept alive by weekly inflows of federal cash. U.S. automakers had an unsustainable cost structure, were badly trailing their foreign competitors in the production of fuel-efficient and electric vehicles, and seemed unable to make the hard choices needed to arrest their downward spiral.

The course the president chose was unexpected and risky. Most Americans remember that the administration decided to "bail out" the car companies — and indeed, the president did extend more loans and support to the industry. But he attached to the aid a series of controversial and painful conditions that ended business as usual in Detroit.

Call it “gutsy call II” if you will, but in reality, it is far from the picture that Klain ends up painting.  Both the car companies were headed toward bankruptcy – a financial condition they had earned by their poor practices and sellouts to unions.   Obama’s bailouts certainly ended “business as usual” for those two companies but not in a positive way.

One of the consistent memes is that had Obama not acted, GM and Chrysler would have gotten the equivalent of a death sentence by having to go into bankruptcy.  By death sentence I mean the administration and its bailout supporters imply millions would have been thrown out of work and those two companies would have forever disappeared.

Uh, no.  As Jim Manzi at NRO explains:

First, in the event of a bankruptcy, you don’t burn down the factories, erase all the source code on all the hard disks, make it illegal to use the brand name Chevrolet, and execute all of the employees. Others take ownership of the assets, and the employees go on with their lives. Some of these assets will be put to use generating revenues, profits, and taxes, and some of these former employees will get jobs or start businesses, and generate revenues, profits, and taxes. In order to measure the effect of the bailout over, say, five or ten years, you have to compare the actual taxes collected to what would happened over this same period in the counterfactual case where the bankruptcy was allowed to proceed. What owners would have bought the factories and IP assets, and what would they have done with them? What businesses would the former employees have started? Who would have moved to Arizona and retired? What new industry clusters will evolve in Arizona because of this transfer of people?

And what would have come out of the bankruptcy?  Leaner companies better equipped to address the market and turn a profit.  What wouldn’t have come out of the bankruptcy are the level of union pensions and benefits the administration preserved.  Obama, through his bailout and modified bankruptcy made sure those were weren’t destroyed.  Consequently you have pretty much the same conditions that existed prior to the bailout still in existence today with the added twist of more union control. 

GM, for instance, just before it announced it had “paid off” its government loans, lost 3.4 billion dollars.  Hans Bader, of the Competitive Enterprise Institute destroys the myth of GM’s loan payback with an extensive investigation into the real story.  It is a story of known falsehoods being tacitly approved by the White House and the Treasury Department because the administration was desperate for some good news at the time.  The Chrysler loan payback, as I noted recently, is of the same stripe.  More smoke and mirrors from the “transparent” administration.

But back to the bailouts and the reasons.  The defense offered for the bailout is this:

The White House report said the money invested in GM and Chrysler ultimately saved the government tens of billions of dollars in direct and indirect costs, including the cost of unemployment insurance and lost tax receipts that the government would have incurred had the big Detroit auto makers collapsed.

Again, that assumes nothing comes out of any bankruptcy proceedings.  Nothing.  And, as Jim Manzi of NRO explains above, that’s simply not how it works.   It is an assumption without any real world foundation.   We’re talking a zero sum assumption by the administration where no assets are bought, no one goes back to work, everyone is unemployed and no one can find a job.   That’s just not the way bankruptcies (or the real world) work.

Also:

Second, some of the profit GM makes today would have been made by other companies that picked up some of the slack if the company lost market share after a bankruptcy. They would pay taxes on these profits, and as far as government receipts are concerned, money is money. How would auto industry structure evolve over time given whatever changes happened to the assets currently owned by the legal entity GM, or the employees currently paid by it?

Anybody who tells you they can answer all of these questions reliably is full of it.

Indeed.  Again, the White House and its cronies must push the black and white version of this to make it saleable.  If they can’t make you believe in their “either/or” scenario, then they can’t sell the lie.   They’re banking on a large degree of economic ignorance to sell this.  But they know that if they rely on the fact and figures they’re going to end up on the wrong side of the argument.  So Klain says, break out the smoke and mirrors once again – sell it on emotion:

First, tell the story with fewer numbers and more emotion; less prose and more poetry. Rescuing the auto industry isn’t just a matter of saving jobs and factories — it means preserving a uniquely American manufacturing tradition. Cars are more American than apple pie or hot dogs (which, unlike the automobile, were both invented in Europe). We couldn’t have won World War II without this "arsenal of democracy"; as Walter Reuther famously said, "England’s battles were won on the playing fields of Eton, but America’s were won on the assembly lines of Detroit." The president needs to jujitsu Republican critics who accuse him of failing to understand American exceptionalism by pointing out his success in saving this exceptionally American industry.

You have to love the fact that even Klain doesn’t believe his own nonsense, but has no problem advising the president to use it.  Note too that Klain seems not to remember that one of the reasons that GM and Chrysler were on the ropes had to do with the American public choosing competitive foreign cars over the American cars from those two companies (and with the VOLT, we see GM again in the same condition.   But he feels if he wraps it all in emotions and not facts (a variation on “hope an change” that worked so well in 2008), they can fool enough voters into accepting the narrative or at least, not caring about it.

Second, equally emphasize the pain that was imposed as a condition of support, and the hard and unpopular choices the president made. It was a plan of “shared sacrifice,” in which executives were fired, workers lost jobs, benefits and pay were cut, and dealers were shut down. The story of the tough choices the president made along the way must be told to convince the public that this wasn’t a handout.

Of course, this plays into the part of the narrative in which you must believe their “either/or” scenario – that is had the government not acted, millions of jobs would have just vaporized.   Of course, what Klain describes above would most likely have been the result of normal bankruptcy proceedings minus the $50 plus billion government money injected into GM.  They don’t what that known though.  And, naturally, they don’t want any speculation about what would have emerged, how many jobs would that would have entailed, etc.

If you start down that road and use the history of bankruptcies and the emergence of companies from that situation as a basis, you’ll have a very difficult time swallowing the administration’s story.  So avoid those facts at all costs and concentrate on “emotion” and “pain”.

Finally – Klain advises the White House to crank up the propaganda:

Third, let the people of the auto communities tell their own stories — encouraging homegrown viral videos and other uses of social and new media. This is a lesson I learned the hard way during the 18 months I was part of the White House team that struggled to explain the benefits of the Recovery Act. We used visits by the president and vice president, videos posted on WhiteHouse.gov, as well as endless statistics and charts and maps and graphics on Recovery.gov — and yet nothing got the job done. Finally, two ice-cream shop owners made an iPhone video that told the story better than we ever had, by showing how a single small business loan rippled across their area to create jobs in countless other businesses.

The White House needs a similar personal narrative to tell the auto rescue story, or it will risk being denied a return to Victory Lane in 2012.

So there is the plan – “emotion, pain and propaganda” – that Klain claims the administration should use to sell something that is about as un-American as the internment of Japanese/American civilians during WWII.  The most interesting part, of course, is Klain understands that if  they get into the specifics of this “deal” and the facts come out, it ends up looking like a very poor decision.  And Klain knows that the opposition, once it finally settles on a candidate and its own narrative, is going to seize on this subject as a part of their attack on the Obama record.

He instinctively knows that any chance of blunting that, or making it a non-issue, requires that the administration’s narrative be out there actively being pushed now and that it has to be spun properly for it to work.

How do you counter this?  With facts.  And the facts are aplenty.  There is no shortage of factual information that can gut these arguments and show them for what they are  – emotion and propaganda.  The opposition also has to use “American exceptionalism”  in its proper way and point to the fact that the administration misusing “exceptionalism” in its version. 

And that doesn’t even start to get to the really long-run considerations of what effects this has on rule of law and moral hazard (or if you want to make the case for the bailout, social solidarity and degradation of the working class).

One of the things America prides itself on is “rule of law”.  That is a large part of our exceptionalism.   We also founded a country that attempts to avoid the moral hazards that abound in this sort of a situation.  We are and for the most part always have been a meritocracy.  You get what you earn.  We don’t buy into exceptions because they’re “too big to fail”.  We understand that freedom means the freedom to fail and we don’t bail out –selectively- failures.  We don’t throw good money after bad, and we certainly don’t expect our government to interfere in that process.

~McQ

Twitter: @McQandO

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20 Responses to “Obama saved the car industry with bailout” narrative begins to form

  • Didn’t the FEDGOV lend Fiat something like $3.5B to take a stake in Chrysler, with Fiat putting up an additional $1.5B of it’s own? That doesn’t even count the $1.3B loss that the FEDGOV will be taking for certain regardless of what happens from here on out.

    And the latest scuttlebutt in DC is that Obama will use the Chrysler recovery as a central piece of his re-election campaign.

    Only someone with the intellectual wattage of an Obama would have: (1) sunk $6.6B into a loser venture; (2) posted a $1.3B loss from the deal; (3) lent another party (Fiat) a separate $3.5B to take the loser venture off your hands; and then (4) run a victory lap around the country.

    • “Only someone with the intellectual wattage of an Obama would have: (1) sunk $6.6B into a loser venture; (2) posted a $1.3B loss from the deal; (3) lent another party (Fiat) a separate $3.5B to take the loser venture off your hands”

      Insert: (4) all while using other people’s money and voiding centuries of contract law by giving the senior bondholder’s rights to the UAW pension fund.

  • Regardless of the narrative, the headwinds in the economy are picking up.  Should another recession take hold then weak companies like GM and Chrysler will take it on the chin.  That will leave Obama in the position of saving a pair of dead car companies.   Or, more likely, he’ll bail them out again using the excuse that it would be a waste of the previous bailout not to do so.  At which point it will be hard to explain how GM is not Government Motors.

  • “Second, equally emphasize the pain that was imposed as a condition of support, and the hard and unpopular choices the president made. It was a plan of “shared sacrifice,” in which executives were fired, workers lost jobs, benefits and pay were cut, and dealers were shut down. The story of the tough choices the president made along the way must be told to convince the public that this wasn’t a handout.”

    He forgot about the senior secured bondholders who had their property stolen and given to the UAW.

    • And of course FORD is really NOT part of the American auto industry, they are, apparently, part of the Japanese, Swedish or German auto industry because they not only didn’t REQUIRE saving, they refused to BE saved by the government.

      More steely eyed resolve by Obama in saving ‘the other 2′.

      I rather think had they entered bankruptcy proceeding, some ‘hard unpopular choices’ would have been made in which executives would have been fired, workers would lose jobs, benefits and pay would be cut and dealers would have been shut down….and the UAW would have had to renegotiate all their deals from the git go because they would have all been voided by the bankruptcy.  And if you think Traumka is pissed at the support Obama is giving to the union now, just imagine how angry the chipmunk would have been THEN!  They’d have had to support….uh…..uh….I’m drawing a blank here, help me out.

    • and with the VOLT, we see GM again in the same condition.

      I don’t see how the Volt is suppose to represent that.

       

      • Whoops that should have been one level up.

      • Overpriced vehicle that no one wants.

        • Why do you say no one wants it?

          • 1, I think the TOTAL sales to date are around 2000 units
            2. The government PAYS you to buy one
            3. Duh

          • 1) There are two reasons for low sales.  Low demand.  Low Supply.  Since dealers are able to charge a $20,000 dollar markup, that’s a symptom of Low Supply.  The target sales for the first year were about 12,000 units ramping to 60,000 in a couple of years.  And its never expected to be their bread and butter.  Other people project that roll for the Volt onto GM.
            2) The US government subsidized the Prius to the tune of $3,400 a piece for the first 5 years it was sold here.  Its part of a government subsidy program that’s existed for 10 years.  Speaking of the Prius, t
            3) ‘duh’ is about right for the conclusion the Volt demand is below expectations.  Its a falsehood built around a single fact that two completely different explanations.

          • And its never expected to be their bread and butter.  Other people project that roll for the Volt onto GM.

            First, damn good thing,  (If true)
            Second, you mean Obama???
            Cite to your sources, please

          • Because no one is buying it. Price is a major factor. Additionally, limited range makes it fairly unattractive.

          • @Bruce

            Again, its GM’s Prius which serves a purpose other than to make money directly from the car.  Its meant to appeal to early adopters willing to pay for it (like the people who bought HDTVs before there was any HD broadcasting to speak of).  And through them, attempt to placate the government regulators, particularly the DoE which is out of control with how they are going to screw drivers over the next 12 years.

            And it appears the early adopters are interested.  Low sales can be just as easily from low supply which explains dealers ability to markup the vehicle.

            As for range, 40 miles / day is often more than enough, especially for the eco-minded early adopters who live close to where they work to begin with.  And on those occasions they need to go beyond the 40 mile electric range, their range is unlimited.

            The Tesla one year was going to make a grande entrance to the Detroit Autoshow by driving a Telsa from California to Detroit.  At day 10 when the projected arrival time was 12-14 days, they called it off.  So the reality is that a Pure EV owner will need a gas car for any real road trip.  The Volt would get there in the same time a non-EV vehicle would get your there.  Until you live in a world where there’s a high speed car charger everywhere you park it (store, work, home), which is probably never, the Volt is a reasonable compromise.

          • There may be enough “early adopters” combined with low manufacturing numbers to create the allusion that there’s more demand than there really is. But as far as pure electric cars go, it’s is overpriced – See Nissan’s Leaf. As for sales figures – hardly awe-inspiring:

            However, the Nissan Leaf, unlike the Volt, is currently sold in countries besides the U.S. So, let’s compare the worldwide sales of both of these plug-in vehicles:

            Leaf: 3,657
            Volt: 928

            Wow – 928 as of Mar. 11, 2011. The revolution is underway, huh?

            I thought the Prius was a Toyota?

  • This from the administration that yapped about “jobs saved or created”.  It’s understandable that politicians spin, shade, and lie, but Captain Bullsh*t and his regime are into outright fantasy.

    I’m not too sure that this will work, though, no matter how hard MiniTru works to help.  People who worry about the debt will grouse about the billions lost on this boondoggle.  People without good jobs will wonder why Uncle Sugar bailed out overpaid union workers in Detroit but didn’t do anything to help them.

    O’ course, if we rely on the GOP to counter, we’re screwed: that bunch couldn’t win a dispute with Hitler over who started World War II.

  • Machiavelli live in this Klain guy.
    This is an important chapter in the banana-ization of our republic.  The rule of law was thrown out the window, and most people just watched it happen without a word.

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