The bailouts of General Motors and Chrysler

Bad, very bad, for both the economy and the rule of law. Todd Zywicki, who is in the George Mason University School of Law, writes on The Auto Bailout and the Rule of Law in National Affairs.

The bailouts of General Motors and Chrysler have been held up by President Obama and his supporters as a great success story — proof that, by working together, government and business can save jobs and strengthen the economy. But this popular narrative is dangerously misleading. Far from a success story, the events surrounding the bailouts offer a cautionary tale of executive overreach. And their example clarifies the Obama administration's broader approach to economic policy — an approach that is both harmful to economic growth and dangerous to the rule of law.

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Of course, this "success narrative" is based on a particular reading of the events surrounding the bailout. According to that reading, the nature of the '08 financial crisis — as well as the economic importance of the auto industry — meant that the government simply could not let GM and Chrysler go under. But at least the unprecedented cooperation between the government and the automakers was undertaken in a deliberate, careful way — using the government's special authority to contend with the economic crisis in order to guide the companies through an orderly re-organization (rather than the dreaded chaotic collapse). As a result, the companies were saved, and now they have a chance to thrive again.

Unfortunately, every part of this reading of events is wrong.

Zywicki contiues

Every piece of the "success story" of the auto bailout would thus seem to be in error. The bailout was not absolutely necessary and was pursued by means of dubious legality; the bankruptcies were highly irregular and inefficient; and the companies that have emerged from bankruptcy are far from lean and fit. They are certainly in no position to repay taxpayers for the generous loans they were given.

But as bad as the facts of the story are, the implications are much worse. Through their actions, both the Bush and Obama administrations have set dangerous precedents — and made it much more difficult to reverse the trends of executive overreach and excessive government entanglement with private business.

As a matter of policy, the Bush interventions early in the process were more ad hoc affairs, motivated largely by panic in the midst of the economic crisis. This was particularly true of Treasury Secretary Henry Paulson, whose performance in the final months of the Bush administration was disgraceful. But it is hard to avoid the conclusion that, at its core, the Bush approach was also influenced by the imperious view of executive power that had developed in the course of the war on terror and had been supported by some conservative thinkers for much of Bush's presidency. The notion that the president simply must do whatever he judges necessary in an emergency — regardless of whether he has the formal legal authority to do it — is among Bush's foremost legacies. The concluding months of his presidency should offer a cautionary tale to conservatives inclined to adopt that view of executive power.

The Obama administration's role in this story, however, is far more troubling. One cannot explain away Obama's overreach as a panicked response to an emergency; rather, his actions toward GM and Chrysler were part of a considered, coherent approach to the relationship between government and private industry. And this approach — defined by broad government power unchecked by legal constraints and possessing sweeping authority to pick winners and losers — has guided the administration's policies well beyond the auto bailout. The aim of this approach is to rejuvenate the New Deal vision of the regulatory state, in which regulators are seen as disinterested experts with the factual knowledge, practical wisdom, and unwavering integrity to manage the economy. They alone are presumed to be capable of steering the nation toward prosperity.

It was this approach that clearly animated, for instance, the financial-reform legislation enacted by President Obama and the Democratic Congress last year. Just as the government was seen as having the wisdom to micromanage the restructuring of Chrysler and General Motors, so the new financial-reform law creates a vast web of regulatory bodies and presumes that they will have the know-how to successfully reshape America's entire financial system. The same basic pattern can be seen in several of the Obama administration's other legislative achievements — from the massive 2009 stimulus package to the health-care reform bill to a host of environmental regulatory initiatives.

Taken together, these laws have dramatically worsened the entanglement of government and the private sector, and have thereby led to an increase in lobbying activity by special interests seeking government favors or protection. The financial-reform law, for instance, is littered with special-interest provisions intended to entice major corporations into supporting the administration's new approach to economic policy. Auto-finance lenders are inexplicably exempted from the jurisdiction of one of the law's new creations, the Consumer Financial Protection Bureau, thereby sparing them (and the influential auto dealers they work with) from the regulatory costs and hassles caused by the CFPB. The nation's biggest banks, too, ultimately came to support the creation of the CFPB, as they recognized that its heavy regulatory burdens would be borne much more easily by large institutions — which can more readily afford to hire lobbyists and lawyers to help navigate the law's complexities — than by their smaller competitors.

Other examples abound; among them, the most outrageous is probably the sweeping health-care law enacted last year. The legislation had the support of America's major health insurers — likely because the law made them the first suppliers in American history to see the federal government mandate the purchase of their product by every single citizen. The opposition of pharmaceutical manufacturers, too, was significantly dampened; presumably this had something to do with the administration's promises of increased market demand for their products. Even the American Medical Association — which should have been representing the interests of doctors, who will face enormous difficulties under the law — rolled over, partly to obtain a repeal of rules that had limited certain Medicare reimbursements. Again and again, large corporate actors and other organizations have been willing to sell some freedom of action in return for a competitive advantage provided by the government.

Zywicki ends by noting,

The Obama administration's economic policy, therefore, returns us to the thinking of the 1950s and '60s — to an economy in which big business, big labor, and big government are tied together in a relationship of mutual succor and support.

The auto bailouts exemplify this new reality. Sold as a means of revitalizing the economy, they are in fact a means of transforming the relationship between the state and the market in a way that empowers large players at the cost of economic growth. The overall effect of such state capitalism is a kind of controlled stasis, in which the preservation of old jobs takes priority over the creation of new ones. Managed decline, rather than dynamic growth, is the defining feature of the Obama economy.

There are good reasons why you want a separation of Church business and State. Business backed by the power of the state may be good for business, but its hard to believe it will be good for growth, entrepreneurship or the consumer. This is something worth keeping in mind given the way the current New Zealand government seems to want to intervene in business.