Auto Bailout or United Auto Workers Bailout?

July 5, 2012

The government bailout of General Motors (GM) and Chrysler between 2008 and 2009 will cost taxpayers approximately $23 billion, as estimated by the Treasury Department. President Barack Obama emphatically defends his decision to subsidize the automakers, arguing it was necessary to prevent massive job losses, say James Sherk and Todd Zywicki of the Heritage Foundation.

Even if one accepts this premise, the government could have executed the bailout more efficiently with no cost to taxpayers had the administration required the United Auto Workers (UAW) to accept standard bankruptcy concessions.  Instead, the Obama administration gave special treatment to the UAW above and beyond what other creditors and unions received:

  • Bankruptcy typically brings uncompetitive wages down to competitive levels, yet existing UAW members did not take pay cuts at General Motors.
  • The administration could have kept the automakers running without subsidizing the UAW's above-market pay and benefits.
  • Subsidizing UAW compensation cost $26.5 billion -- an amount that exceeds the estimated taxpayer losses on the bailout program.

When GM and Chrysler each ran out of cash, the Obama administration forced the companies into bankruptcy as a condition of receiving government support and funded them through the bankruptcy process. Even in this regard, the president shamelessly ignored standard bankruptcy protocol in order to dole additional favor upon the UAW.

  • A cornerstone of bankruptcy policy is the requirement that creditors' priorities are preserved in bankruptcy in the same order as they are preserved outside bankruptcy.
  • Specific to the auto manufacturers, priority should have been given to paying secured lenders in full before paying unsecured lenders (like the UAW).
  • Instead, the plan imposed by the government forced Chrysler's secured creditors to accept only 29 cents on the dollar, while the UAW recovered most of the value of its claims.
  • Another standard element of bankruptcy proceedings is that similarly situated lenders should be given equal priority.
  • However, the UAW's fellow unsecured lenders received no such special treatment by the government's bankruptcy process.

Thus, while the Obama administration may sell this program as being necessary to stem the hemorrhaging of jobs, the Detroit bailout was little more than a UAW bailout.

Source: James Sherk and Todd Zywicki, "Auto Bailout or UAW Bailout? Taxpayer Losses Came from Subsidizing Union Compensation," Heritage Foundation, June 13, 2012.

For text:

http://www.heritage.org/research/reports/2012/06/auto-bailout-or-uaw-bailout-taxpayer-losses-came-from-subsidizing-union-compensation

 

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