CQ WEEKLY – COVER STORY
June 4, 2011 – 9:16 a.m.
Cashing In on the Clunkers
By Joseph J. Schatz, CQ Staff
Holding a pep rally at a Chrysler plant would have been politically ill-advised in 2008. The hobbled and almost bankrupt maker of gas-guzzlers, shrinking rapidly and begging for government help, was an example of everything wrong with the U.S. auto industry. Chrysler was hardly “winning the future,” as President Obama might say.
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But not this year. Last Friday, there Obama was at a Chrysler plant in Toledo, alongside Ohio Democrat
Two years ago, Obama followed the lead of his predecessor, George W. Bush, and undertook the rescue of American automakers as one of his first acts. Acting on his own, months after Congress had declined to do so, Obama forced General Motors Corp. and Chrysler into government-aided bankruptcy. Today, the two companies are back on their feet and paying back much of the money they owe to the government.
The White House National Economic Council says the $81 billion auto bailout will end up costing just $16 billion, about a fifth of what was committed. Moreover, the two rescued companies — plus Ford Motor Co., which didn’t take government assistance — are expanding, creating jobs in Ohio, Michigan and Indiana and across the industrial heartland. These states will be crucial next year to the president’s re-election chances and to which party wins control of the Senate.
Democrats are watching the automobile industry’s resurgence with barely restrained glee. That’s particularly the case after two years of increasing skepticism about the government’s activist role in the economy, a skepticism that has come not only from the tea party conservatives currently battling the White House over spending but also from independent voters.
Rust Belt Democrats such as Brown, who is up for re-election in 2012, are working alongside the administration and the national Democratic Party apparatus to turn the former liability of the auto bailout into an asset — and a political problem for any Republican seeking votes in the industrial Midwest, from Wisconsin to Pennsylvania. Brown contends that the newfound strength of the auto industry “way more than neutralizes” the opposition that conservatives put up in 2008 and 2009. “Republicans are going to have to explain why they’ve been against it,” he says.
The question is whether voters will agree. The government’s assistance to automakers hasn’t all been paid back. The employment outlook in auto-dependent towns and cities is generally on the rise — but with localized differences, because the restructuring of GM and Chrysler forced wrenching layoffs and resulted in lower wages for new jobs. And the reality is that Democrats can’t claim sole credit for what’s happening in the industry. Republicans such as Tennessee Sen.
Plus, lawmakers rarely get credit for disasters that are averted — such as the potential failure of both GM and Chrysler and the several hundred thousand jobs that might have cost.
In fact, the 2008 financial industry bailout haunts many Republicans, even though most economists assert that it prevented a replay of the Great Depression and that the government is on track to recover most of the money it sank into banks and credit markets in 2008 and 2009.
Late last month, the Treasury Department even put shares of the bailed-out insurance giant American International Group (AIG) on the market, the latest step in disentangling the government’s relationship with that now-salvaged company. (AIG rebound, p. 1205)
The bailout of the banks will never be popular. But the auto industry rescue may be a different matter, according to Herb Asher, a professor emeritus of political science at Ohio State University. It was “one of those things that are very, very unpopular until it works,” Asher says. “And then it works, and the taxpayer dollars are being paid back, and jobs are not only saved, they’re actually growing.”
Selling It as a Success
Cashing In on the Clunkers
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All three automakers have a major presence in Ohio, a political bellwether state that Obama won in 2008. “I think when you look at the battleground states, I’d be amazed if the Democrats don’t take advantage of that,” he says. “It should be a positive thing if they message it properly.”
To sell their message to voters, Democrats are weaving a story of bold presidential leadership in the face of tremendous risk, and vigorous, unwarranted opposition from conservatives. In addition to speeches, newspaper op-ed articles, and a traveling roadshow with the president and administration officials, the Democratic National Committee is holding conference calls and events with state and local elected officials to tell the tale.
In particular, the administration and its surrogates are busy reminding voters that when the president decided to commit tens of billions of taxpayer dollars to GM and Chrysler, many observers were predicting that the two companies would fail regardless of the help. Indeed, even before the worst of the recession, the shrinking Big Three were closing plants in such places as Shreveport, La., and along the East and West coasts, and concentrating their operations in the Midwest.
It was opposition from conservatives that initially killed the two automakers’ chances for a congressional bailout in December 2008. The House had passed a $14 billion package of emergency loans for the two companies with support from Bush, who had less than two months left in office. Because it came so soon after the controversial $700 billion financial industry rescue earlier that fall, the auto loan measure was dead on arrival in the Senate. There was “bailout fatigue,” and there was opposition from Alabama Republican
“I think this is a bridge loan to nowhere” and “a down payment on many bills to come,” he said at the time. Shelby, whose state is home to a Honda SUV plant and a Hyundai engine plant, remains opposed, saying that “using taxpayer money to bail out private companies is never a success; it is failure by definition.”
But GOP lawmakers with domestic auto plants in their states felt differently then, as now. Amid predictions in December 2008 that GM and Chrysler might collapse within weeks, Corker, who was only in his second year in the Senate, shuttled between his fellow chamber Republicans and a group of negotiators from the industry and the union, plus a few lawmakers and their aides, seeking a compromise.
On Dec. 11, the negotiators, huddled in the Senate Foreign Relations Committee’s ornate reception room in the Capitol, worked into the evening trying to nail down a deal to rescue GM and Chrysler. The talks fell apart when the demands of Corker’s conservative colleagues proved to be too much for the UAW.
“I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight,” lamented Senate Democratic leader
Executive Intervention
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The following morning, rather than have a domestic auto collapse as Bush’s final legacy, the White House signaled that it might use money from the bank bailout enacted two months earlier — officially called the Troubled Asset Relief Program, or TARP — to extend emergency loans to the two automakers. The $13.4 billion in loans extended days later were designed to keep them operating through March 2009 — at which point they would be Obama’s problem.
The government’s involvement in the auto industry started with those loans but quickly grew more complicated, as the newly installed Obama administration forced both companies into government-supervised bankruptcy, and then took partial ownership of the restructured remains — also against opposition from most Republican leaders.
Cashing In on the Clunkers
In total, the Treasury Department used $81 billion from TARP to rescue GM and Chrysler and the two companies’ financial arms, and also to extend lines of credit to auto parts manufacturers.
“The outcome was anything but assured,” wrote Treasury Secretary
Helped along by a slowly recovering economy, the situation looks quite different today. More than 50 percent of the government’s financial assistance has been returned, according to Treasury. On May 24, six years ahead of schedule, Chrysler repaid $5.9 billion of the money it still owed the government, partly by borrowing from private lenders.
Fiat, which took a minority stake in the company in 2009 as the Obama administration sought to save Chrysler, said last week it would buy Treasury’s remaining interest in the company and will become its majority shareholder.
A sale of shares in a newly organized, post-bankrupcy GM last November raised a net of $13.5 billion for the government, and Treasury’s stake in the company was reduced to 32 percent from 60.8 percent two years ago.
GM, in which the government invested about $50 billion, has now been profitable for five straight quarters, and Chrysler just marked its first profitable quarter since 2006. Best of all for Democrats, both companies are hiring, even though GM has slimmed down considerably. In 2008, it employed just over 90,000 people within the United States; that figure is now 77,300, a 14 percent reduction. But the company once derided as “Government Motors” has added or retained almost 10,000 jobs since June 2009.
Brown says Ohioans “notice that a lot of their neighbors are working. I think people are recognizing that more and more. They’re seeing more supply chain jobs,” he says.
Making things as awkward as possible for Republicans who opposed the auto rescue is at the core of the Democratic strategy. That’s especially the intention when it comes to those Republicans seeking their party’s presidential nomination.
A Democratic National Committee video, broadcast on the Internet after the Chrysler repayment was announced, featured clips of former Massachusetts Gov. Mitt Romney, former Minnesota Gov. Tim Pawlenty and former House Speaker Newt Gingrich — all presidential contenders — speaking against the auto bailout. The video then segues to hopeful-sounding music, a montage of positive news about GM and Chrysler, and the words: “Detroit Bankrupt: If Republicans were in charge, this would be the headline.”
The words allude to a 2008 op-ed that Romney wrote for The New York Times, arguing against a taxpayer bailout under the headline: “Let Detroit Go Bankrupt.” Democrats are being particularly aggressive in targeting Romney, given his family ties to Michigan, where his father was governor in the 1960s, and the assumption that he could make the GOP competitive in a state that has long voted Democratic in presidential elections.
Bill Ballenger, a political analyst and former state politician in Michigan, says the Democrats’ arguments are going to be difficult to counter in auto country, even though voters there had mixed feelings about the bailout and weren’t sure GM and Chrysler were deserving.
“It’s going to be hard for Republican or free-market types this year, or next year, to run around campaigning and saying, ‘You know, we really don’t think this is a good thing,’” Ballenger says. “It’s just not going to wash.”
Reviving Government Motors
Cashing In on the Clunkers
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Yet Democrats cannot be assured of winning the auto bailout debate. For one, Treasury hasn’t announced its plans for selling its remaining shares in GM. Moreover, Treasury doesn’t expect Chrysler ever to repay an additional $1.3 billion in loans it received before the bankruptcy process.
In part, the Democrats’ political success will depend on continued growth of the domestic automakers and a continued rebound in the broader economy, which has slackened along with car sales in recent months.
The political benefit Democrats get from the bailout in 2012 — particularly when it comes to votes in the Midwest — will be driven in part by who, exactly, is getting hired, or re-hired.
While automakers are creating jobs, the impact of the bailout — and the comeback — on employment is complicated.
Both the Bush and Obama administrations justified the bailout on the grounds that it would save jobs. But the restructuring process mandated by the White House forced both GM and Chrysler to downsize significantly, making it easier to break even financially. That meant closing factories and ending contracts with auto dealerships, resulting in more lost jobs in the short term in several states and congressional districts that were already suffering from high unemployment.
In a May report on the Treasury’s efforts to wind down the bailout, the Government Accountability Office (GAO) noted that “while restructuring benefited GM and Chrysler, it created economic challenges for communities in which the companies closed a manufacturing plant or otherwise reduced employment.”
Two years after the rescue, some, but not all, of the hiring is happening in towns and cities hit hardest by the restructuring. Mostly, new shifts are being added and new operations started at plants, such as GM’s Detroit-Hamtramck assembly plant, making the most popular vehicles. Starting in the fall, 2,500 workers will be hired there to build the Chevrolet Malibu and the next-generation Impala, as well as the electric-drive Chevy Volt.
“Where they’re adding jobs is where they’ve got hot product,” says Kristin Dziczek, director of the labor and industry group at the Center for Automotive Research, an auto industry think tank based in Ann Arbor, Mich.
Laid-off workers have first dibs on many of the Detroit-Hamtramck jobs. GM and Chrysler have transferred and absorbed most of the workers from shuttered plants who were willing to move, and the recession led to a large number of retirements, Dziczek says. “New hires are being hired at the lower wage rate” put in place during the restructuring negotiations with the UAW, she says.
Rep.
The GAO said that while the administration brought attention to the need to help former auto workers transition to new jobs, the effectiveness of the administration’s efforts remains unclear. The director of the White House’s Automotive Communities and Workers Council, Ed Montgomery, stepped down last August and hasn’t been replaced, leaving the organization’s future in question, the GAO noted.
And while Reid and other top Democrats had pledged to take a “hands off” approach to the government’s involvement in the auto industry, Congress did push back when the restructuring of GM and Chrysler led to the closure of hundreds of auto dealerships.
Cashing In on the Clunkers
At the behest of the dealer lobby, Congress passed legislation in 2009 establishing an arbitration process for shuttered auto dealers. And in 2010, the TARP special inspector general, Neil Barofsky, said the Obama administration should have done a better job of anticipating the impact of dealer closures.
Republican Restructuring
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While conservatives are among the bailout’s biggest critics, as the administration is stressing, the auto revival is not just a Democratic story. Many auto industry observers say GM and Chrysler wouldn’t have come back as successful enterprises without significant Republican involvement. Prodded by Corker in late 2008, Bush said that in return for government loans, the two automakers should put in place restructuring plans to make them “viable” companies by reducing their borrowing through a debt-for-equity exchange, by eliminating job security provisions long enjoyed by the UAW, and by putting in place work rules and wages competitive with foreign automakers operating in the United States.
When the Obama administration took a look at what GM and Chrysler had proposed a few months later, it deemed the plans “inadequate” and took a hard line, forcing them into government-supervised bankruptcy and restructuring processes. Obama even forced the ouster of GM chief executive G. Richard Wagoner Jr., a move that drew cries of dictatorship.
Today, Corker is happy to remind people that this was hardly a one-party effort. Noting that Detroit’s resurgence “vindicates all the things I was saying,” Corker says he “knew that without the kinds of things we were advocating, it was like throwing money in a mud puddle.”
And he is happy to claim a share of the credit. “I can’t imagine anybody in America not being glad to see a company that manufactures things in our country be successful.”
Foreign and Domestic Coexistence
Corker, like many other senators, represents a state where both foreign and domestic automakers have a presence. Tennessee is home to a Nissan factory and a recently opened Volkswagen plant, but it also features a large GM plant in Spring Hill, which was idled during the restructuring and has since been restarted. The combination of both domestic and international automakers operating in some of the same regions helped make things more difficult for GM and Chrysler two years ago than they might have been in an earlier era, when the domestic companies’ hold on political influence, among members of both parties, was unchallenged.
Many conservatives, who objected all along to the White House-led restructuring of GM and Chrysler and who charged that the deal favored the UAW over private bondholders, remain firmly opposed to the auto bailout today. They say the marketplace should have been allowed to work without government intervention. And they argue that whatever success the auto industry is enjoying came at too high a cost to the free-market system, and to GM and Chrysler’s competitors.
“We’re extremely fortunate that we have been paid back,” says Idaho Republican Sen.
Yet Ford, the principal domestic rival to GM and Chrysler, strongly supported the bailout in 2008 and 2009, fearing that the supply chains it shares with the other two automakers might have been destroyed had they failed. And concerns that the administration’s approach might put Ford at a competitive disadvantage in terms of its debt load and ability to access financing didn’t materialize.
Plus, Ford gets to say it’s the one domestic automaker that made it through the crisis without a government bailout — a big advantage in the public relations arena.
Cashing In on the Clunkers
Ford chief executive Alan Mulally, appearing before a group of House freshmen May 31, told reporters he would do the same thing again. “We believed that they would have gone into a bankruptcy and free fall that could have taken all of our supply base into bankruptcy” and deepened the U.S. recession, Mulally said. “We still believe we did the right thing by supporting our competitors.”
Still, Ford does suffer one disadvantage stemming from the bailout: The UAW signed “no strike” clauses with GM and Chrysler as part of their restructuring agreements. Ford received no such promise, and its UAW contract is up for renegotiation in September.
That situation, along with the progress that GM and Chrysler are expected to make in the coming months, will be watched closely by members of both parties, particularly those in the Rust Belt, such as Michigan Republican
As chairman of the House Ways and Means Committee, Camp is one of the fiscal point men in a party where anti-spending conservatives — like many of the freshmen Ford’s Mulally met with last week — dominate, and where “picking winners and losers” in the economy is a dirty phrase. Indeed, another government auto bailout seems unimaginable today.
But the specter of closing factories tends to motivate lawmakers to vote for local interests over party orthodoxy, regardless of which party gets credit. That’s why Camp stands by his vote to rescue the automakers in 2008.
To Camp, “there were tremendous ramifications to what was done, and costs associated with it.” But the bottom line is that GM and Chrysler are still around. “We did pick winners and losers. We did,” Camp said with a shrug. “And they’re here.”
FOR FURTHER READING: TARP’s fuzzy numbers, 2010 CQ Weekly p. 2475; TARP politics, p. 2071; auto dealer aid (PL 111-117), 2009 CQ Almanac, p. 2-27; Senate blocks automaker bailout, 2008 CQ Almanac, p. 7-20; accounting for TARP (PL 110-343), 2009 CQ Weekly, p. 394.