On Tuesday, Chrysler announced it had repaid $7.5-billion in loans to the governments of the U.S., Canada, and Ontario, causing some to rethink their position on bailouts and others to declare the program a resounding win for big government.
So were the auto industry bailouts worth it?
Chrysler paid back $1.7-billion worth of loans to the federal and Ontario governments, out of a total of $3.8-billion that Canadian taxpayers sunk into the failing automaker. The two governments hope to recover another $1.45-billion from the 2% stake that taxpayers hold in the company.
The U.S. Treasury Department has a 6.6% stake and expects to lose at least $1.9-billion, not counting billions of dollars worth of loans and other favours that will likely never be recovered.
But the Chrysler bailout is chump change compared to the $60-billion in cash and $45-billion in tax breaks that the American government has pumped into GM (who I lovingly refer to as Government Motors). U.S. taxpayers could lose as much as $34-billion on the entire deal. Canadian taxpayers also sunk $9.5-billion into this losing venture.
And yet, recent media reports would have one thinking that failing auto makers were the best investments since gold. “We have good reasons to believe governments didn’t waste taxpayer money in bailing out Chrysler and GM,” writes Jeremy Cato at The Globe and Mail.
“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 bailout opponents were when they insisted it was doomed to failure,” wrote Washington Post columnist E.J. Dionne Jr.
If these bailouts are his idea of a success, I’d hate to see what a failure looks like. But the financial cost to taxpayers is just the tip of the iceberg. Even if governments had made money in the short-term, all of society will be worse off in the long-run.
Our economy is predicated on a system of profits and loss, which is used to carry an extraordinary amount of information throughout the economy.
When companies are making huge profits in an industry, it sends a signal to businesses and entrepreneurs that there is money to be made by investing in that area. The result is that resources will be moved from less productive sectors of the economy to satisfy the high demand.
Similarly, when companies lose money, it means that they are less productive — or are creating products that are of less value to society — than their competitors. The resources the company is using would be better utilized elsewhere.
It’s no coincidence that so many people have access to inexpensive, high-powered computers, while typewriters are almost nowhere to be found. When companies began making huge profits on desktop computers and losing money on typewriters, more resources were put into manufacturing computers. As a result of this increased competition, computers have increased in speed and decreased in price.
This system is incredibly efficient, but it only works when companies are free to reap the rewards of their successes and feel the sting of their failures. When the government subsidizes inefficient companies, it creates a system of privatized gains and socialized losses. If we start paying the losers, there’s no telling where this will end, or how much it will cost.
The writing was on the wall for Chrysler in 1980 when the U.S. government extended $1.5-billion in loan guarantees to prevent it from going under. It should have been clear that Chrysler was not as efficient as its foreign competitors. This fact remains true 30 years later, only now it costs exponentially more to keep the company afloat.
If Chrysler and GM were allowed to fail, not all would have been lost. The productive parts of the companies would have been sold off and continued to operate. It’s important to remember that private capital will support ventures that are likely to make money. We only need the government to support bad investments that sane people are unwilling to bet on.
When government does step in to support the losers, it takes away the incentive for companies to create better products for their customers and makes them more likely to take on excessive risk, since they come to believe that their losses will be subsidized. This is what economists refer to as moral hazard. The best examples of this can be found in the financial industry.
During a previous financial crisis, some German provinces (called Länder) set up state-owned banks, known as Landesbanken, which were extended debt guarantees from their respective governments. In 2001, the European Union ruled that the guarantees violated EU law and had to be ended by 2005. The banks promptly began issuing large amounts of debt before the deadline and became heavily invested in the U.S. sub-prime mortgage market. When the financial crisis hit, German Landesbanken were some of the first banks to fail.
North American taxpayers will experience a net loss from the auto bailouts. A 2009 Fraser Institute study estimated that the cost of corporate welfare for each Canadian taxpayer was $1,244 a year in 2007 and that was before the automotive bailouts. But the financial cost is just the beginning.The government bailouts created an artificial advantage for GM and Chrysler and took sales away from their more efficient competitors, like Ford and Toyota (both of which build cars right here in Canada). Thus, our tax dollars are given to the companies that we, the consumers, voted against by buying competing products, and resources are diverted from more productive uses.
The fact is that when government prevents the market from operating properly, everybody loses.
Photograph courtesy Denis Giles/flickr.