What Mitt Romney should have said about the auto bailout

The 2012 presidential election is now two months in the past. Pundits of all stripes agree that Governor Mitt Romney’s opposition to the 2008 auto bailout cost him the state of Ohio, which he lost narrowly, and any chance he might have had in Michigan, which he lost by a wider margin.

But Romney’s problem was not his opposition to the bailout. He erred by not defending his position forcefully enough. When hit with criticism from the left for his now-famous “Let Detroit Go Bankrupt” op-ed, the campaign’s muted response conveyed a sense that Romney would rather run from the issue than vigorously uphold his economic convictions. This reaction played directly to the critics who had loudly accused him of shifting positions on social issues since the days of his Massachusetts governorship.

Throughout the campaign, Mitt Romney was at his best when he waived the flag of fiscal conservatism. These were the issues his supporters were most passionate about. Romney should have keenly argued any or all of the following five points, in defense of his prescient 2008 article.

The auto bailout was a temporary life raft, not a long-term fix. Although the U.S. Treasury’s allocation of $80 billion in assistance to GM and Chrysler, including a $49.5 billion direct investment in GM, prevented large-scale layoffs, both companies’ long-term health remain very much in question. GM is now “too big to fail,” and is burning through cash because it knows it can request more support in the future. The company has registered two years of negative post-bankruptcy cash flow, losing $2 billion in 2010 and $5.5 billion in 2011, mostly due to large capital investments that may take years to pay off. A company without government backing would have behaved more conservatively under the circumstances.

Large capital expenditures can portend high returns in the future, but GM’s dismal track record inspires little confidence. After emerging from bankruptcy in 2009, GM spent much of 2010 developing and marketing the Chevy Volt, a vehicle whose costs are so high, and demand so low, that the company is reported to lose about $49,000 per car. Meanwhile GM has been forced to idle a Kansas plant because of oversupply of its signature sedan, Chevy Malibu, whose inventory levels are now at 164 days on hand, far above the industry average. The government remains a 26% shareholder of GM, and would need the stock price to rise to $53 from $29, as of publication, to recoup the remaining $26.1 billion it gave GM during its restructuring. In December 2012, GM finally pushed the Treasury to accept a share buy-back agreement that would result in taxpayer losses of about $14 billion, at current prices. Meanwhile, unfunded pension liabilities rose slightly to $32.7 billion from 2010 to 2011.

Supporters of the bailout point to the fact that GM received a two-notch rating upgrade from S&P in 2011, and an $11 billion credit line from private investors in 2012. While these events are positive, they happened not because of any strategic success, but because GM happened to have $24 billion in cash at the time, courtesy of the U.S. taxpayer.

Problems in the auto industry did not present an existential threat to the U.S. economy. A legitimate economic crisis can justify a large-scale bailout. For example, while there were many, many problems with the bank bailout, there is one argument that its advocates can still claim: the troubles facing banks in 2008 affected the entire financial industry, and may have posed an existential threat to the U.S. economy (“may,” because we don’t know what would have happened without the bailout). It was a moment without precedent that started with the bad decisions of a few banks, but soon became absolute due to the universality of the banking industry, and due to plummeting investor confidence.

The same cannot be said of the auto industry. The struggles of a single industrial sector did not, and do not, come close to the systemic importance of the banking industry. Any suggestion otherwise, or to an equivalence of the urgency of the two bailouts, is disingenuous. The struggles of the Big Three long predated 2008, and were common knowledge to any American who read business news. Detroit’s continued problems were hardly a panic-inducing circumstance.

We don’t need a bailout when we already have a very successful auto industry in the U.S. The media and public officials tend to identify the U.S. auto industry solely with the Big Three automakers in the industrial Midwest. In fact, foreign automakers have been responsible for nearly all of the recent investments in the U.S. auto industry, and most of those investments are occurring in southern states: Volkswagen opened a plant in Chattanooga in 2010, as did Kia in West Point, Ga. Toyota’s Blue Springs, Miss., facility came online in 2011, joining the company’s seven other U.S. plants. Mercedes and BMW have made their North American homes in Alabama and South Carolina. These firms are not struggling. Foreign automakers have multiplied in the U.S. in the last decade, creating hundreds of thousands of new jobs. When was the last time we heard of GM expanding? Or, for that matter, Michigan or Ohio “competing” for a new plant, rather than taking the Big Three’s presence for granted?

The beauty of the American federalist system is that there are 50 different laboratories for how to manage an economy. Each state is free to levy corporate taxes, promulgate labor and workplace laws, and pay for infrastructure the best ways it sees fit. Clearly some models — namely those in the southern states — have created conditions that enable automakers to flourish. Instead of bailing out Detroit and rewarding its failures, the federal government should have responded to the Big Three’s troubles by encouraging them to run themselves more like foreign automakers and pushing Michigan and Ohio to make their labor laws more competitive. No company deserves to exist in perpetuity if it refuses to evolve with changes in the market.

Fortunately for the Big Three, Michigan just passed a right-to-work law that gives workers the right to opt out of a union and prevents union dues from automatically being deducted from paychecks. This will weaken the UAW and make the U.S. automakers more competitive by enabling them to further close the compensation and benefit gap with the foreign companies, but no thanks to the federal government. Obama argued strongly against the passage of this law and for the union-friendly, loss-inducing status quo.

Heavy job losses at GM and Chrysler would have been offset by gains at foreign automakers in the U.S. Beyond the hard numbers, families and livelihoods are at stake. One cannot contemplate the auto bailout without considering the very real impact it had on saving perhaps more than one million jobs at GM, Chrysler, and their various suppliers, according to the Center for Automotive Research (CAR). However, CAR’s landmark pro-bailout 2010 study fails to account for the increase in capacity and employment that would have inevitably arisen at the foreign automakers’ plants in right-to-work states. American demand for automobiles is not in secular decline, nor even is supply — only the supply of American-branded vehicles. Since 2001, the Big Three’s U.S. market share has fallen from 63% to 45%, according to this same study, while the foreign producers have shown they are more than capable of profitable expansion, and the creation of hundreds of thousands of American jobs. Some Americans may have sentimental attachments to U.S. brands, but no companies warrant support simply for being American (leave that to the French).

In the event of mass layoffs, former GM workers could have moved their families just 350 miles south of Lordstown, Ohio, or Orion, Michigan, to the Toyota Camry’s home base in northern Kentucky. In search of more employees to compensate for the loss of GM supply, Toyota would have welcomed a ready-skilled workforce that required less training investment than local hires. The last 30 years have seen tens of millions of Americans migrate domestically in search of better job options and lower cost of living, so the dislocation that would occur in the event of a GM failure would be part of a larger trend that has underlain the rationalization of America’s economic geography. In the case of ex-GM workers, the specificity and transferability of the auto manufacturing skillset would mitigate the impact of this migration.

The “auto bailout” is better termed the “UAW bailout.” One cannot compare the Big Three to foreign automakers without acknowledging the proverbial elephant in the room — the United Auto Workers. The UAW’s powerful presence in Detroit, and absence elsewhere, is the primary reason why GM struggles under billions of dollars of unfunded pension liabilities and effective $56/hour wages (down from a high of $73/hour) while Toyota thrives in Kentucky with a workforce earning around $48/hour. Bailing out a proven failed business model when a profitable alternative exists defies common sense, and is just a thinly veiled handout to the UAW and its 500,000 members. The auto bailout’s lone success was sustaining the above-average compensation of its union employees. According to former “car czar” Steve Rattner, “We never asked any UAW member to take a pay cut” as a bailout condition. This no-strings-attached giveaway is a poor use of public funds, when UAW wages are already well above the national manufacturing average. Let’s have the courage to call the auto bailout what it truly was. There is no place in America for such blatant pandering to special interests and voter groups.

An ardent defense of his 2008 op-ed would surely not have helped Romney win Ohio. However, such refreshing straight talk could have helped tip the balance with independents in other closely contested states such as Virginia, Florida, and Colorado. Disgust at union giveaways had recently driven Wisconsin voters to resoundingly defend Scott Walker against a recall effort, so perhaps that state could have moved closer to the Romney column. Romney’s supporters were most enthused by his conservative economic message. Rather than trying to play down and disown his op-ed, Romney should have confronted and embraced the criticism he received for opposing the auto bailout.

Jay Hallen, CFA, writes on foreign and economic policy issues. He lives in New York.