President Obama and the Auto Industry
Back from vacation, I’m catching up on things I missed last week. Dan Ikenson did a fine job on President Obama’s boasting about how he saved the automobile industry. But a few days later Glenn Kessler, the Washington Post‘s “Fact Checker,” was more brutal:
We take no view on whether the administration’s efforts on behalf of the automobile industry were a good or bad thing; that’s a matter for the editorial pages and eventually the historians. But we are interested in the facts the president cited to make his case.
What we found is one of the most misleading collections of assertions we have seen in a short presidential speech. Virtually every claim by the president regarding the auto industry needs an asterisk, just like the fine print in that too-good-to-be-true car loan.
Here’s a sample of the specific analyses:
“GM plans to hire back all of the workers they had to lay off during the recession.”
This is another impressive-sounding but misleading figure. In the five years since 2006, General Motors announced that it would reduce its workforce by nearly 68,000 hourly and salary workers, creating a much smaller company. Those are the figures that generated the headlines.
Obama is only talking about a sliver of workers — the 9,600 workers who were laid off in the fourth quarter of 2008.
And that’s why President Obama’s speech was awarded Three Pinocchios.
Monday Links
- It is false to assume that GM’s earnings report means the auto bailout was a success.
- It is false that, among other things, failing to raise the debt limit means defaulting on our obligations.
- It is false that Osama bin Laden’s death means torture is a good idea.
- It is false that international institutions can deliver what they say they can deliver.
- It is false that oil speculators are to blame for fluctuating oil prices:
Obama’s GM Quagmire
Media are reporting this morning that the Treasury has decided to hold off on selling any of its remaining 500 million shares of General Motors stock until at least July. The Obama administration had hoped to divest as soon as possible after May 22, but GM’s stock price hasn’t been cooperating.
As much as the president doesn’t want the odor of nationalization following him on the campaign trail, the administration is equally concerned about having to explain why it took a $10 billion to $20 billion direct loss by divesting when it did. By deferring sales until July, the administration presumably is hoping for a stock price boost from second quarter earnings. But that is unlikely for several reasons, which I explained in the Daily Caller yesterday. Here’s the gist in a few passages from that op-ed:
The soonest the U.S. Treasury can sell the remaining 500 million shares (according to terms of the initial public offering) is May 22, but the administration would also like to “make the taxpayers whole.” The problem for the president on that score is that the stock price — even in the wake of this week’s earnings report — isn’t cooperating. As of this morning’s opening bell, GM stock was valued at $31.07 per share. If all of the 500 million remaining publicly-owned shares could be sold at that price, the Treasury would net less than $16 billion. Add that to the $23 billion raised from the initial public offering last November, and the “direct” public loss on GM is about $11 billion — calculated as a $50 billion outlay minus a $39 billion return.
To net $50 billion, those 500 million public shares must be sold at an average price of just over $53 — a virtual impossibility anytime soon. Why? The most significant factor suppressing the stock value is the market’s knowledge that the largest single holder of GM stock wants to unload about 500 million shares in the short term. That fact will continue to trump any positive news about GM and its profit potential, not that such news should be expected.
Projections about gasoline prices vary, but as long as prices at the pump remain in the $4 range, GM is going to suffer. Among major automakers, GM is most exposed to the downside of high gasoline prices. Despite all of the subsidies and all of the hoopla over the Chevy Volt (only 1,700 units have been sold through April 2011) and the Chevy Cruse (now subject to a steering column recall that won’t help repair negative quality perceptions), GM does not have much of a competitive presence in the small car market. Though GM held the largest overall U.S. market share in 2010, it had the smallest share (8.4%) of the small car market, which is where the demand will be if high gas prices persist. GM will certainly have to do better in that segment once the federally mandated average fleet fuel efficiency standards rise to 35.5 miles per gallon in 2016.
Deservedly reaping what it sowed, the administration finds itself in an unenviable position. It can entirely divest of GM in the short term at what would likely be a $10-to-$15 billion taxpayer loss (the stock price will drop if 500 million shares are put up for sale in a short period) and face the ire of an increasingly cost- and budget-conscious electorate. Or the administration can hold onto the stock, hoping against hope that GM experiences economic fortunes good enough to more than compensate for the stock price-suppressing effect of the market’s knowledge of an imminent massive sale, while contending with accusations of market meddling and industrial policy.
Or, the administration can do what it is going to do: First, lower expectations that the taxpayer will ever recover $50 billion. Here’s a recent statement by Tim Geithner: “We’re going to lose money in the auto industry… We didn’t do these things to maximize return. We did them to save jobs. The biggest impact of these programs was in the millions of jobs saved.” That’s a safe counterfactual, since it can never be tested or proved. (There are 225,000 fewer jobs in the auto industry as of March 2011 than there were in November 2008, when the bailout process began.)
Second, the administration will argue that the Obama administration is only on the hook for $40 billion (the first $10 billion having come from Bush). In a post-IPO, November 2010 statement revealing of a man less concerned with the nation’s finances than his own political prospects, President Obama asserted: “American taxpayers are now positioned to recover more than my administration invested in GM, and that’s a good thing.” (My emphasis).
The administration should divest as soon as possible, without regard to the stock price. Keeping the government’s tentacles around a large firm in an important industry will keep the door open wider to industrial policy and will deter market-driven decision-making throughout the industry, possibly keeping the brakes on the recovery. Yes, there will be a significant loss to taxpayers. But the right lesson to learn from this chapter in history is that government interventions carry real economic costs.
President’s Statement about GM IPO Reveals a Defensive Politician
I don’t particularly relish picking on a president who, on virtually every policy front, is showing all the markings of a man in way over his head. But the president’s actions and statements are becoming excruciating to watch—like a highly-touted Olympic figure skater who can’t complete a maneuver without falling to the ice.
President Obama’s salutary statement about GM’s IPO yesterday reveals a man so focused on defending his policies that he can no longer conceal the incongruity between his political objectives and the country’s imperatives.
American taxpayers are now positioned to recover more than my administration invested in GM, and that’s a good thing. (My emphasis)
Besides revealing the president’s preference for LIFO accounting procedures, the statement strikes me as sub-presidential. Shouldn’t the POTUS be concerned about American taxpayers getting back all of the money invested in GM? Even though former President Bush is complicit, shouldn’t the sitting president of a country that owes its wealth, freedom, and future to the endurance of the rule of law and the other long-standing, bedrock institutions that were defiled and abused to bail out two automakers issue a statement of regret and reassurance that such extreme measures will never be undertaken again?
I think President Obama missed an opportunity to make amends, build a bridge, and reassure businesses and investors that the White House will do its part to reduce the economy-stifling problem of regime uncertainty going forward. But, then again, that might have been too presidential for a politician who appears motivated more by avoiding blame than by advancing the country’s best interests.
A Successful IPO Does Not a Justifiable Bailout Make
There seems to be a lot of confusion about the meaning of GM’s IPO today. A common narrative in today’s media is that GM’s return to the stock market affirms the wisdom of the auto bailout. Some tougher customers in the media insist on a higher threshold being met—that taxpayers get back the entirety of their $50 billion investment in GM—before declaring “mission accomplished.” And then there are the rabid partisans who—in their seething animosity toward the Obama administration—reach conclusions devoid of logic and rich only in conspiratorial-mindedness. For example, yesterday I was contacted by a media outlet vetting this conclusion: “The IPO is evidence of the failure of the bailout because taxpayers were excluded from buying shares at the IPO price and, therefore, denied the opportunity to get their money back.” Huh?
All of those analyses are wrong. Let me dispense with the last one first, as it simply betrays a gross misunderstanding of how taxpayers are on the hook. By divesting of GM (i.e., selling its shares), the government is beginning to make the taxpayer whole. But just as there were no checks written directly from taxpayers to GM, there will be no checks written to taxpayers, as the Treasury liquidates the public’s share of GM. Whether main street Americans could participate in the IPO has nothing to do with making the taxpayer whole. And, by the way, IPOs typically limit sales of shares at the initial price to a chosen few. So let’s just shelve the canned indignation on this claim. It’s a distraction.
Here’s the real issue. Today’s IPO is nothing more than testament to the fact that the government threw GM a lifeline, enabling the company to expunge most of its debts and firm up its balance sheet on terms more favorable than a normal bankruptcy process would have yielded. That enabled GM to partake of the cyclically growing U.S. auto market in 2010 and turn a profit through the first three quarters. So what? Did anyone really think that a chosen company so coddled and insulated from market realities couldn’t turn a short-run profit? Yes, even GM, under those favorable conditions should have been expected to turn a profit this year.
But at what cost? That answer—even the question—seems to be elusive in the public discussion of the IPO. The cost was not only $50 billion—the amount diverted to GM in the first place. Nor was it that $50 billion minus the proceeds raised in today’s IPO (and minus the proceeds raised later when the government divests entirely of GM – it will still hold 33% of GM after today). In other words, making taxpayers whole does not absolve the Bush and Obama administration’s for the auto intervention. Recouping the $50 billion only gets us partially out of the hole. (And I’m not even sure who “us” includes because the costs are so far reaching.)
Yes, GM is making sales and accounting for market share, but only at the expense of the other automakers. Had GM been forced to severely atrophy or liquidate, the other automakers would have had greater revenues, more market share, and probably higher profits). They would have been able to attract GM’s best engineers and line workers. They would have more money to invest in R&D and to lead the industry into the future. Instead, by keeping GM in the mix, some of those industry resources remain misallocated in a company that the evolutionary market process would have made smaller or extinct.
The auto industry wasn’t rescued with the GM bailout. GM was “rescued.” By rescuing GM, the government overrode market forces, and there are significant costs to assign for that. Witness the stagnant economy with 9.6 percent unemployment. Is it not plausible that businesses are sitting on their cash and not investing or hiring because of the fear inspired by the government interventions starting with the bank and auto bailouts? It’s more than plausible. The regime uncertainty that persists to this day was spawned by the GM bailout and other interventions.
What about the weakening of the rule of law? Doesn’t the diversion of TARP funds by the Bush administration, in circumvention of congress’s wishes and in contravention of the language of the law, represent a cost? How about the property right of preferred bondholders who were forced to take pennies on their investment dollars under the Obama bankruptcy plan? Any costs there? What about U.S. moral authority to dissuade other goverments from meddling in their markets or indulging industrial policy? That may be costly to U.S. enterprises. And with the government still holding a third of GM, its hard to swallow the idea that public interest will be the driver of policies affecting the auto industry. And that suggests even more costs.
But don’t mistake this blog post for an anti-IPO rant. I’m in favor of the IPO. It couldn’t have happened sooner. But I suspect the investment bankers, the administration, and the other members of GM’s Board of Directors reckoned that, with the hype over the new Chevy Volt and the recent newsleak of GM’s $43 billion in unorthodox tax deferrments on the balance sheet, now was the perfect time to go public.
“Government Motors”: NPR’s Gaffe?
NPR’s 9:00 a.m. newscast this morning included this accidentally accurate line:
Government, rather General Motors is expected to announce plans for an initial public offering of stock this week.
The comment can be heard here at about 3:10, but I assume the online hourly report is updated throughout the day.
For more on Government Motors, click here.
Grinning and Bearing GM’s Bitter Ironies
Via General Motors, American taxpayers will soon own a 61 percent stake in a Texas-based company called AmeriCredit. GM announced plans yesterday to acquire the auto finance firm for $3.5 billion, which management believes will help boost its auto sales and improve chances for an IPO later this year or next.
Thus, a greater chance for re-privatization later is the rationalization for more nationalization now.
For those who opposed the nationalization of GM for its affront to free markets and the rule of law in the first place, the acquisition presents a dilemma. On one hand, the deal means that the nationalization virus is spreading to infect another company in a different industry, ensuring that yet more business decisions are driven by political, rather than economic, considerations. (Although, to acknowledge the efforts of Messrs. Bush, Paulson, Obama, Dodd, Frank and others, politics already reigns supreme in the consumer finance industry.) One has to wonder what exemptions, loopholes, and carve-outs might be in store for AmeriCredit, as the administration crafts regulations to implement the just-passed “financial reform” legislation.
And Senator Chuck Grassley (R-IA), who questioned and brought attention to some of GM’s hyperbolic claims about its performance earlier this year, raised fresh doubts about the latest move:
If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first. After GM’s experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans.
The FTC and Those GM Ads
I’m usually in enthusiastic accord with our friends over at the Competitive Enterprise Institute, but it seems to me they’ve made a mistake by petitioning the Federal Trade Commission (FTC) to crack down on GM’s ridiculous “we repaid our federal loan” ad. Some zealous enforcers would love for the FTC to do more to regulate speech by American business on matters of public concern, and it seems to me the last thing we should do is encourage such a trend.
For those who came in late, General Motors and its CEO Ed Whitmire were widely and rightly assailed here and elsewhere for asserting (in a column whose message was repeated in much-played TV ads) that the company had repaid its bailout loan “in full, with interest, years ahead of schedule.” Actually, as the inspector general of the government’s TARP program readily acknowledged, the firm had merely used one pot of federal money to repay another. Iowa Sen. Charles Grassley helped expose the dodge, and publications ranging from FoxNews.com to the New York Times joined in with scathing coverage.
Yesterday CEI announced that it had filed a formal complaint [PDF] with the FTC urging the commission to investigate the automaker’s ad campaign as misleading. It alleges that the ad campaign “could unfairly dupe consumers into a false, renewed confidence in the company” and that “consumer purchasing decisions can easily be affected by such considerations.” Nick Gillespie at Reason, CEI general counsel Hans Bader, and Todd Zywicki at Volokh have more.
There’s a long history of businesses’ responding to public criticism of their operations or products — and getting in further legal or regulatory trouble because of that very response. In one early case, the FTC went after egg producers for asserting, in the midst of a cholesterol scare that in hindsight appears overblown, that their ovoid wares were not in fact a menace to cardiac health. Sen. Charles Schumer (D-N.Y.) and the Center to Prevent Handgun Violence have asked the FTC to prohibit ads that imply that keeping a loaded weapon on hand will make a family safer. In Nike v. Kasky, a famous case that reached the Supreme Court [Thomas Goldstein, Cato Supreme Court Review 2003, PDF], shoemaker Nike was sued under a California law over the public defense it had put forward of its labor practices in overseas factories. Environmentalists have sought to suppress ads claiming that nuclear power is nonpolluting, and so forth.
Free-market advocates have generally argued that whatever the merits of laws or regulations banning misleading advertising in garden-variety commercial contexts, there are special dangers to the First Amendment and to robust debate generally in letting agencies and courts second-guess the content of “issue ads” and speech on topics of public controversy. To begin with, it encourages advocates to turn to the law to silence disagreeable speech rather than muster their best arguments to rebut it. In one grotesque example, MoveOn.org and Common Cause actually petitioned the FTC to institute a complaint against Fox News over its use of the slogan “Fair and Balanced”, since (they said) the network was neither.
Despite its current dependence on government, GM is in every relevant legal sense a private company, so any precedents forged against it will wind up applying to every other private enterprise that might wish to advertise on matters of public controversy. Which makes it a concern that CEI’s complaint cites with seeming enthusiasm broad FTC interpretations of authority — for example, its authority to suppress speech that might not be in itself false but could leave a potentially misleading impression.
If there is a continuum extending from more or less purely commercial speech (“Our tires last 40,000 miles”) to more or less purely political speech (“Our business is badly overtaxed”), GM’s ad campaign surely falls way over toward the “political” side. CEI’s response to this is to argue that the campaign might influence consumers’ purely economic calculations (as opposed to the political reasons they have to feel angry at GM) by making them more likely to see the company as solvent and thus as capable of making good its warranty promises. The words “strained” and “makeweight” come to mind to describe this argument. Does CEI really want to establish the future principle that a company’s over-sunny talk about its financial prospects will henceforth get it in trouble with two federal agencies, the FTC and SEC, rather than the SEC alone?
It all seems a rather high price to pay in principle for keeping the GM-TARP story in the papers for another day or two.
Don’t Be Fooled — GM Is Still Government Motors
General Motors chairman Ed Whitacre is appearing in ads on all the Sunday morning shows repeating the message of his Wall Street Journal op-ed, titled “The GM Bailout: Paid Back in Full,” and the company’s full-page newspaper ads:
We’re proud to announce: We’ve repaid our government loan. In full. With interest. Five years ahead of the original schedule.
But wait: In the Wall Street Journal, Whitacre says the company has made a $5.8 billion payment to the governments of the United States and Canada. But don’t I recall that the GM bailout was $50 billion? Shikha Dalmia of the Reason Foundation explains the whole story in Forbes: First, part of the bailout went into an “escrow fund,” and that government money is being used to pay back the small part of the bailout that was officially a loan. Second, GM is asking for another $10 billion loan to retool its plants to meet the stiffer Corporate Average Fuel Economy standards, and paying back one government loan — with other government money — will make it easier to get another government loan.
And finally, of course, most of the bailout money was transferred to GM in return for a 60 percent stake in the company. And the taxpayers will get that money back if and when GM becomes a publicly traded company again, provided that the company’s market capitalization is eventually higher than it’s ever been in history. Don’t hold your breath.
These are called GM ads, but they could just as well be called BS ads.
Raising an Eyebrow at LaHood’s Toyota Remarks
In response to the large recalls affecting several Toyota models, Transportation Secretary Ray LaHood yesterday advised Americans to “stop driving” their Toyotas. In testimony before the House Appropriations subcommittee on transportation, LaHood said:
My advice to anyone who owns one of these vehicles is stop driving it, and take it to the Toyota dealership because they believe they have the fix for it.
Later in the day, he elaborated:
I want to encourage owners of any recalled Toyota models to contact their local dealer and get their vehicles fixed as soon as possible. NHTSA will continue to hold Toyota’s feet to the fire to make sure that they are doing everything they have promised to make their vehicles safe. We will continue to investigate all possible causes of these safety issues.
As Transportation Secretary in an administration that is politically vested in the success of General Motors (recall how taxpayers were forced to take a 60% stake in GM for $50 billion+), was LaHood exploiting an opportunity to tip the scales further in GM’s favor? I guess we’ll never know for sure, but as long as GM remains nationalized, any comments by administration officials on matters affecting the auto industry should be viewed skeptically and through this prism, as they can irresponsibly move markets.
Global Markets Keep U.S. Economy Afloat
Three items in the news this week remind us why we should be glad we live in a more global economy. While American consumers remain cautious, American companies and workers are finding increasing opportunities in markets abroad:
- Sales of General Motors vehicles continue to slump in the United States, but they are surging in China. The company announced this week that sales in China of GM-branded cars and trucks were up 67 percent in 2009, to 1.8 million vehicles. If current trends continue, within a year or two GM will be selling more vehicles in China than in the United States.
- James Cameron’s 3-D movie spectacular “Avatar” just surpassed $1 billion in global box-office sales. Two-thirds of its revenue has come from abroad, with France, Germany, and Russia the leading markets. This has been a growing pattern for U.S. films. Hollywood—which loves to skewer business and capitalism—is thriving in a global market.
- Since 2003, the middle class in Brazil has grown by 32 million. As the Washington Post reports, “Once hobbled with high inflation and perennially susceptible to worldwide crises, Brazil now has a vibrant consumer market …” Brazil’s overall economy is bigger than either India or Russia, and its per-capita GDP is nearly double that of China.
As I note in my Cato book Mad about Trade, American companies and workers will find their best opportunities in the future by selling to the emerging global middle class in Brazil, China, India and elsewhere. Without access to more robust markets abroad, the Great Recession of 2008-09 would have been more like the Great Depression.
Is Trade Policy Obsolete?
That is one of the conclusions in my new paper, “Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete.”
For hundreds of years, trade policy has been premised on the assumptions that exports are good, imports are bad, and the interests of domestic producers are tantamount to the “national interest.” Though that mercantilist worldview has never been accurate, its persistence as a pillar of trade policy into the 21st century is especially confounding given the emergence and proliferation of disaggregated production processes, transnational supply chains, and cross-border investment. Those trends have blurred any meaningful distinctions between “our” producers and “their” producers and speak to a long chain of interdependent economic interests between product conception and consumption.
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