(MintPress) – Despite lackluster retail sales in 2012, the auto industry posted record-breaking numbers. Strong December sales have pushed the American auto industry to its best performance in the last five years, as reported by the Associated Press. Both General Motors and Chrysler saw dramatic improvements over recent years in which the economy bottomed out and the companies sought bankruptcy protection. While year-end sales for GM and Chrysler have not met the recent peak of 17 million in 2005, they are well above the 30-year low of 10.4 million. Even though the federal government has failed to recapture the full value of its investment, many now see the bailout of the auto industry as a qualified success.
With decreases in unemployment, increases in home sales and home sale prices, as well as lower interest rates and a greater variety of loans available to the lending banks, more buyers found themselves in a good position to purchase a new automobile. As the average age of cars in America tops 11 years old, more people have found themselves trading in their old vehicles this year than in recent history.
December — with its pickup trucks special deals and its holiday ads — is traditionally the strongest month for automotive sales, and the 9 percent jump in sales seen in the month lifted sales for the month to 1.3 million and annual sales to 15.4 million.
Toyota saw a 27 percent jump in sales in 2012, upon completion of its recovery from damage to its manufacturing plants in Japan from tsunami- and earthquake-induced damage. Honda saw a 24 percent rise in sales this year, with Nissan and Infiniti at 10 percent, Hyundai at 9 percent and Volkswagen at a staggering 35 percent.
Among American producers, Chrysler had a 21 percent jump in sales. Ford and GM lagged in full-year sales, with Ford up 5 percent and GM up 3.7 percent.
GM currently has the oldest line-up in the industry, despite a sales increase and high prices for its models. The company plans on refurbishing or replacing 70 percent of its North American models in the next 18 months. The company plans to avoid the discounts and car giveaways of the past, feeling that the update of the product catalog and the uptake in sales will carry the company alone.
The Treasury now plans to sell its 500 million shares of GM over the next year, and while the government will probably never recapture its full $50 billion investment in the company — and while $2.9 billion of the $12.5 billion investment in Chrysler is gone (this is, in part, because the Treasury sold its stake in the company at a $1.3 billion loss to Fiat) — the companies are now fiscally-stable, tax generators and employment boons for a struggling region.
Economists and political strategists are now scratching their heads and wondering if the success with the domestic automakers will embolden the federal government to intervene more in the private sector. The president once suggested that “what we did with the auto industry, we can do in manufacturing across America.”
Conservatives feel that such interventions are artificial and, ultimately, damaging to the economy. By modifying the natural ecology of the free market, the government is inflating the supply base of a business without affecting the demand for the product or by depressing the demand. This, in the worst case scenario, can create a feedback loop: The government stimulated a business, the business continues to produce for a market that has no appetite for its goods, the goods must be sold below cost or warehouse — which increases costs, creating a deeper need for future government intervention. Under a pure free market model, the business should be allowed to fail.
According to the Ludwig von Mises Institute: “Every act of government interference with business must indirectly affect consumption. As the government’s interference alters the market data, it must also alter the valuations and the conduct of the consumers. But if the aim of the government is merely to force the consumers directly to consume goods other than what they would have consumed in the absence of the government’s decree, no special problems emerge to be scrutinized by economics. It is beyond doubt that a strong and ruthless police apparatus has the power to enforce such decrees.”
This, however, introduces a new category of loss into the equation: emotional trauma. General Motors and Chrysler are two of the largest employers in the Detroit metropolitan area. Shutting down the automakers would cost thousands of manufacturing, retail and commerce jobs; millions of dollars in tax-base to Detroit and Michigan; and billions in exports and payroll tax to the nation as a whole. The loss of both of these companies would have rocked the general psyche of America and undermine American confidence.
This is the heart of the argument in regards to governmental intervention: Should consideration to human capital outweigh the realities of fiscal capital? In light of the problems with TARP (Troubled Asset Relief Program, the 2008 banking industry bailout), the answers may not be easy to find.
The problem with governmental assistance
In 2008, Chrysler and General Motors were on the brink of bankruptcy. Thousands of dealerships were closed throughout North America, and the American auto industry was thought to be on the brink of extinction. As America is commonly thought to be the birthplace of the auto industry, the possible loss was perceived as a slight and as a national tragedy.
In light of this, the automakers made the severeness of the situation known to the American public. President George W. Bush agreed to a temporary bailout to be attached to the already-planned TARP bailout that would offer up to $17.4 billion to the two companies if the companies submitted a definitive plan for fiscal recovery and long-term profitability and force concessions from the unions, dealers and suppliers. However, he left negotiating the deal through Congress (and the possible blame for the deal) to his successor, Barack Obama.
While still president-elect, Obama spoke in regards to this, “I do want to emphasize to the Big Three automakers and their executives that the American people’s patience is running out, and that they should seize on this opportunity over the next several weeks and months to come up with a plan that is sustainable. And that means that they’re going to have to make some hard choices.”
TARP is a law signed into effect by George W. Bush Oct. 3, 2008 in which the United States purchased or insured “troubled assets” — which are securities connected to the sub-prime mortgage crisis of 2008 — from the nation’s major banks. Initially, $700 billion was to be allocated, but reductions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act limited the authorization to $475 billion. Sixteen banks (Citigroup, Bank of America, American International Group, JPMorgan, Wells Fargo, GMAC Financial Services — now Ally — Goldman Sachs, Morgan Stanley, PNC Financial Services Group, U.S. Bancorp, Capital One Financial, Regions Financial, American Express, Bank of New York Mellon Corp, State Street Corporation and Discover Financial) and two automakers (General Motors and Chrysler) received direct funding via security purchase by the Treasury or direct fund distribution.
As of today, all participants repaid their obligations, except Citigroup (which paid back $20 billion out of $351 billion), GMAC (which dissolved and reformed as Ally), PNC (which promised a repayment of its $7.579 billion investment, but has yet to follow through) and AIG (which repaid $36 billion of its total obligation). Beyond these major distributees, minor banks received TARP money, too. Currently, 371 banks are outstanding on TARP repayment with most of the government’s shares in the small banks sold at a loss of $13 million on the original $75 million investment.
Problems with the way the money was spent (bank executives were given extensive bonuses and holding companies received the majority of assets over their bank components, for example), a lack of emphasis in restoring lending, use of the money to fund buyouts and mergers and outright fraud on part of the banks tainted the reputation of TARP. While the automakers received excessive legislative and governmental oversight, the banks received none (the bailout fund was managed by Bank of New York Mellon Corp, a TARP recipient). As such, the banks had a free hand to act as they chose.
Bailouts are commonly seen as capital traps and — by definition — cannot return the capital invested into them. The artificial stimulation or contraction of the market is seen as a means of social engineering, as explained by the Mises Institute. “Governments which are eager to keep up the outward appearance of freedom even when curtailing freedom disguise their direct interference with consumption under the cloak of interference with business.
“The aim of American prohibition was to prevent the individual residents of the country from drinking alcoholic beverages. But the law hypocritically did not make drinking as such illegal and did not penalize it. It merely prohibited the manufacture, the sale and the transportation of intoxicating liquors, the business transactions which precede the act of drinking. The idea was that people indulge in the vice of drinking only because unscrupulous businessmen prevail upon them. It was, however, manifest that the objective of prohibition was to encroach upon the individuals’ freedom to spend their dollars and to enjoy their lives according to their own fashion.”
According to governmental intervention opponents, interfering with a business or market serves toward the advancement of a social agenda — have it be increased employment in a particular region; the promotion or hindrance of competition; or the promotion or restriction of a particular product.
An example of this is New York City, where sugary drinks over 16 ounces are banned. While the motivation for this is to combat obesity, it does not prevent the consumer from buying two 16-ounce drinks over the banned 32-ounce drink he would have bought originally. More to the point, 32-ounce drinks exist because there was a market for them; artificially depressing the market does not eliminate the demand.
When addressing the cap-and-trade system for greenhouse emissions, the president illustrated this dichotomy. “So, if somebody wants to build a coal plant, they can — it’s just that it will bankrupt them, because they are going to be charged a huge sum for all that greenhouse gas that’s being emitted.”
However, that’s not to say that social engineering by means of intervention is wrong. Usha Haley is professor of international business at Massey University, Auckland, New Zealand, and author of the forthcoming book, “Subsidies to Chinese Industry,” which speaks about changes to the global auto industry.
In conversation with MintPress, Dr. Haley said, “The auto industry is a strategic industry for the USA and this industry needs government support, not just for cars but also for auto parts, which make up 70 percent of the costs of a car. Indeed, without continuous government support, we are likely to lose this industry and the technology behind it to China, which subsidizes its industry heavily.
“The latest profit figures are just one aspect of the variables that need to go into decision-making regarding government support for this industry – and yes, government strings that must curtail where this industry manufactures and hires after getting that support.”
The question is: Is governmental intervention worth the investment? While GM and Chrysler had rises in sales this year, GM’s North American market share slipped below 18 percent this year and Chrysler’s heavily touted car, the Dodge Dart, has a six-month unsold inventory. The money invested to AIG — $182 billion, minus the $22.7 billion the government raised from the sale of its AIG stock — is long gone, and $20.3 billion was spent to save a million jobs — at a cost of $20,300 a job.
But, since the bailout, the automakers have added 260,000 new jobs, and Detroit is rebounding.