GM’s profits: Nothing to gloat about

While bailout enthusiasts hail GM’s first-quarter earnings as proof that the administration saved the auto industry, President Obama should know better than to gloat. No such feat was accomplished and the imperative of extricating the government from GM’s operations has yet to be achieved.

With profits of $3.2 billion, GM recorded its best financial quarter in ten years and its fifth-consecutive profitable quarter. Predictably, those earnings have been hailed by some as a validation of government intervention. The Washington Post’s E.J. Dionne asserted: “Far too little attention has been paid to the success of the government’s rescue of the Detroit-based auto companies, and almost no attention has been paid to how completely and utterly wrong opponents of the bailout were when they insisted it was doomed to failure.”

Former Michigan governor Jennifer Granholm tweeted: “To all of you in the strangle-government crowd, who said the bailout would never work — I’m just sayin.”

But only the most gullible observers would accept GM’s profits as an appropriate measure of the wisdom of the auto bailout. Those profits speak only to the fact that politicians committed over $50 billion to the task of rescuing a single company. With debts expunged, cash infused, inefficiencies severed, ownership reconstituted, sales rebates underwritten, and political obstacles steamrolled — all in the midst of a cyclical U.S. recovery and structural global expansion in auto demand — only the most incompetent operation could fail to make big profits. To that point, it’s worth noting that more than half of GM’s reported profit — $1.8 billion of $3.2 billion — is attributable to the one-time sales of shares in Ally Financial and Delphi, which says nothing about whether GM can make and sell automobiles profitably going forward.

In any case, contrary to Dionne’s and Granholm’s assertions, opposition to the bailout wasn’t premised on the assumption that government couldn’t marshal public resources to make GM profitable. Opposition was borne out of concern that the government would do just that. And it did — opening Pandora’s Box. Any legitimate verdict on the efficacy of the intervention must account for the costs of mitigating the problems that escaped the box. Those costs relate to the facts that:

  • The intervention on GM’s (and Chrysler’s) behalf denied the spoils of competition — the market share, sales revenues, profits, and productive assets — to Ford, Honda, Hyundai, and all of the other automakers that made better products, made better operational decisions, were more efficient, or were more responsive to consumer demands than GM, thereby short-circuiting a feedback loop that is essential to the healthy functioning of competitive market economies;
  • Funds specifically earmarked for financial institutions under the Troubled Asset Relief Program (TARP) were illegally diverted to GM and Chrysler by the Bush administration in circumvention of the express wish of Congress not to bail out automakers;
  • Supposedly secured bondholders’ property was stolen in the haste of the Obama administration’s desire to accomplish preferred, post-bankruptcy ownership structures of GM and Chrysler;
  • The government’s willingness to intervene in the auto market under false pretenses to pick winners and losers is a significant cause of the regime uncertainty that has pervaded the U.S. economy, deterred business investment and job creation, and slowed the recovery ever since;
  • Foreign governments have been less reluctant to subsidize their own firms in chosen industries or to find reasons to inhibit sales of U.S. automobiles in their markets on the grounds that government-subsidized competition is unfair.

These are all real costs with real consequences that are somewhat difficult to quantify. But that doesn’t mean they should be swept under the rug. It means that we should think before engaging in politically-driven triumphalism. Furthermore, focusing merely on the direct bailout cost of $50 billion (which is really a conservative figure since it excludes funds spent on behalf of GM’s former financial arm GMAC; GM’s portion of the $25 billion slush fund to underwrite research and development in green auto technology; and the $7,500 tax credit granted for every new purchase of a Chevy Volt), it is impossible to deem the bailout a success.