Originally posted by Vedubin01
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Part of the reason GM ran into problems were due to Congress interfering with the market in the first place: Section 179 of our ridiculous tax code. http://abcnews.go.com/Business/story...1#.Ua_VeUCfgfU Buy a Hummer, Get a $25,000 Tax Break
It rewarded people for buying 6000+ lb SUVs like the Hummer, Escalade, and Tahoe by allowing them it right it off under business use. GM made a lot of money off them so they focused on earning those profits instead of spending any time working on fuel efficient cars or technology that would help them if times changed. There were many, many, many problems at GM prior to the recession but Bob Lutz was trying to turn things around. Unfortunately, they didn't turn soon enough and skyrocketing gas prices turned their SUVs into poison.
How much would GM and Chrysler failing poison the overall US economy? A lot of people didn't want to find out. And $10B was less than what Bush was willing to bet on GM when he started the auto bailout:
Bush announces auto rescue
"GM will get $9.4 billion from the first allocation of federal loan money" [In then end it was $13.4 billion, so more was at stake by GM shuttering than it cost the Treasury from selling before the stock price returned to IPO-level. If they held all shares until now, they'd have a small profit like when Chrysler was bailed out with Lee Iacocca]
Bush: "Preventing disorderly bankruptcy"
During brief remarks at the White House, President Bush said in normal times he would have not been in favor of preventing a bankruptcy of the two companies. But the current state of the economy and credit markets left him no choice but to act.
"Government has a responsibility to safeguard the broader health and stability of our economy," he said. "If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers."
"In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action," Bush added.
During brief remarks at the White House, President Bush said in normal times he would have not been in favor of preventing a bankruptcy of the two companies. But the current state of the economy and credit markets left him no choice but to act.
"Government has a responsibility to safeguard the broader health and stability of our economy," he said. "If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers."
"In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action," Bush added.
While believing that marketplace and corporations had to pay for their own problems, he said “sometimes circumstances get in the way of philosophy.”
“The immediate bankruptcy of [Chrysler and GM] could cost more than a million jobs, decrease tax revenues by $150 billion and set back America’s Gross Domestic Product by hundreds of billions of dollars”, Bush wrote.
“The immediate bankruptcy of [Chrysler and GM] could cost more than a million jobs, decrease tax revenues by $150 billion and set back America’s Gross Domestic Product by hundreds of billions of dollars”, Bush wrote.
And $10B less returned than invested is much less than $150B lost.
Another way to look at it:
The Center for Automotive Research said the auto bailout saved 1.5 million jobs through the supply chain.
If it cost $40B, that would be $29K a job saved
If it was $25B, that would be $17K a job saved
At $10B, it is about $6,666 a job saved.
Now what would have been the costs to the Federal government if 1.5 million people lost their jobs when the American auto industry went under?
1. The government saves itself from paying for that same person’s unemployment check. (*The average unemployment insurance collected by an individual is $295/week, and the average unemployment duration is 40 weeks. Total: $11,800.)
2. The government continues to collect money in the form of federal taxes from that employed person. (*The average salary for an auto manufacturer around the time of the bailouts was $40,000. Assuming a very modest federal tax rate of 15%, the revenue that the government would have lost from a laid-off GM plant worker is $4,800 over that same 40 weeks of unemployment.)
2. The government continues to collect money in the form of federal taxes from that employed person. (*The average salary for an auto manufacturer around the time of the bailouts was $40,000. Assuming a very modest federal tax rate of 15%, the revenue that the government would have lost from a laid-off GM plant worker is $4,800 over that same 40 weeks of unemployment.)
So it cost the Treasury $6,666 to save the Federal government $16,600... seems like they turned out alright in the end. Certainly those people who kept their jobs and could feed themselves on their own and have a house over their head and buy products from other businesses helped the economy and in turn helped generate tax revenues for the government.
Sure, you can repeat your philosophy that bailouts suck and are evil or horrible and anti-American or anti-free market all you want... but that doesn't mean it would have been smart to have GM and Chrysler go through Mitt Romney Style.
And is America actually a free market economy in practice? Is it more anti-American to go against an assumed free market approach, or to decimate an industry and our GDP/employment/tax revenues?
I don't like bailouts either but sometimes they are necessary for the national interest. It would have been great if the Treasury got its investment back directly from the sale of shares (they would have if held out until now...) but they've benefited from not losing tax revenues from the workers. And they would have been out $3.4B more with Bush's loan if GM went under again without the larger action.
I don't think anyone is going to look at the auto bailouts as reason to not worry about risks. If anything, the recession put a flashlight on bad strategy and encouraged businesses to be more sustainable in their profits irregardless of the fact some companies got their asses saved. With the direction Bob Lutz gave GM along with current leadership from people like Mary Barra, Steve Girsky, and Mark Reuss, GM should be on a much better course. If you can't see the dramatic change in cars, maybe you should close Drudge and drive one.
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