Car bailout worth it - no doubts

Posted: February 04, 2013

Social costs are why the government cannot be run like a private-sector firm.

Governments should rarely invest in private-sector companies. However, that happened at the peak of the recession when vehicle-makers GM and Chrysler were bailed out. Did the government make the right decision? To answer that you need to know not only the financial returns but also the social costs of not assisting the firms.

The U.S. Treasury invested about $49.5 billion in GM and $12.5 billion in Chrysler so they could survive the Great Recession. The completed Chrysler deal lost $1.3 billion. The GM situation, however, is more complicated. Taxpayers have received $28.7 billion back, but the 300 million shares Treasury owns are not likely to generate enough to fully recoup the remaining $21 billion. A $10 billion loss is possible.

So, was investing in GM and Chrysler a bad deal for taxpayers? Absolutely not! Indeed, it was probably a great deal. Why? Because when it comes to government accounting, you cannot evaluate an investment simply on the basis of the direct dollar cost and return. The government has to factor in public-sector costs.

Let me explain. When a private-sector company shuts down, it lays off its workers, shutters its plants, and walks away. The private costs largely disappear. But that is when public expenses arise. Unemployed workers stop paying taxes and start receiving unemployment insurance and welfare payments. Their private health insurance gets replaced by Medicaid or Medicare. Their pension costs transfer to the government's Pension Benefit Guaranty Corporation. Previously paid corporate and property taxes become lost government income.

But the impacts don't stop there. Shutdowns affect firms that did business with the bankrupt company. Whether they supplied goods, provided services, or were landlords, their revenue falls. Since unemployed workers spend less, companies that sold them goods suffer as well. Tax revenue drops as a consequence.

Given the extended web of negative effects a collapse in the vehicle sector would have created, it is no wonder the bailout was estimated to have prevented a loss of about one million jobs. The bailout saved all levels of government a massive amount of expenses the layoffs would have created.

Consider what an additional one million people receiving unemployment insurance payments would have meant. At an average of about $16,000 per year, roughly $16 billion a year - for up to 99 weeks - would have been paid out. Total cost: at least $25 billion.

The federal taxes lost from those workers, assuming an average income of $35,000, would be roughly $8 billion a year, every year. Add in a few billion dollars for health care and pension costs and the federal government alone would have had to pay out an extra $25 billion to $30 billion a year. State and local government tax losses and welfare cost increases are not even in that total.

The federal government may have an accounting loss on the GM and Chrysler investments of about $11.3 billion, but in the first year alone, at least $30 billion in social costs were saved. Over the last three-plus years, about $50 billion in additional government expenses were avoided by the bailout. Add to that the income, payroll, and property taxes that were paid by those whose jobs were saved, and you are likely looking at something closer to $60 billion. Thus, taxpayers are at least $50 billion ahead using public-sector accounting methods.

Maybe you think the jobs benefits were exaggerated. OK, even if the bailout saved only half the projected number of workers, the government still made at least $20 billion. Clearly, the government's auto bailout made money and sense.

The point of all this math is that those who argue the government's vehicle-sector investment was a loser simply don't understand the difference between public-sector accounting and private-sector accounting. The government has to consider both dollar and social safety net returns. It cannot run itself like a private-sector firm, because it has responsibilities no private company has.

Only under extreme circumstances should governments consider bailouts. The social and financial benefits from saving GM and Chrysler far outweigh any dollar costs, and that is how we must measure it.


Joel L. Naroff is a nationally recognized economist and president and chief economist of Naroff Economic Advisors, Inc., of Holland, Bucks County. Contact him at jnaroff@phillynews.com.

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