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June 8 2011

Sorry Geithner, the Bailouts Didn't Work

Nicole Kurokawa Neily

Treasury Secretary Tim Geithner has been making the rounds, bragging about the success of the auto bailout program. Hooray! 

As Reason’s Shikha Dalmia points out, however, GM didn’t actually pay back all of its money. Overall, it borrowed $49.5 billion from U.S. taxpayers - $6.7 billion of which was a pure loan. Of the remaining chunk, $13.4 billion went into an escrow account – and it’s this escrow account that’s being used to pay back the $6.7 billion. 

Wait a minute… they haven’t paid back the loan? Say it ain’t so! (Heck, even the Washington Post calls it “phony accounting,” so you know it has to be bad.) But why?!? 

Well, so GM can apply for a $10 billion low-interest loan from the Department of Energy, of course! The optics of borrowing more money from taxpayers when the original amount hasn’t been paid back are bad, you see, so we’ll… stretch the truth. Everyone wins! (Except you, taxpayers… sorry guys.) 

Time and again, he’s justified the bailouts to the motor industry because they “saved jobs.” Wait, what? 

The economist Joseph Schumpeter talks about a concept called “creative destruction” – essentially, that the market clears out bad products to make room for new things and new efficiencies. This process is good, and necessary for progress. Heck, we didn't bail out Kodak when digital cameras were invented! 

Using rudimentary math, sure – transferring wealth from consumers to these car companies may have kept a few jobs from being lost. How could it not have? The problem, of course, is that at some point, the money stops coming from the government. I’d love to believe that GM and Chrysler made enough internal changes to really revolutionize themselves and get their financial house in order – but I’m, um, not optimistic. 

Let’s delve a little deeper, and take into account the unseen effects that the GM/ Chrysler bailout had on the market. What messages were sent to car companies that didn’t misbehave, and had their finances in order? Putting it simply, it made them suckers. Play by the rules, and get nothing; play dirty, and make out like bandits. That’s called moral hazard. We’ve sent the message to other companies that the best use of their resources is to hire lobbyists – not to make a better product. We’ve encouraged companies to divert resources from productive to political purposes. With companies receiving these kinds of signals from the government, it’s no wonder we’re not creating jobs.

Independent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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