Obama: Detroit auto bailout was unpopular, but it worked

Obama visited Michigan Friday, responding to critics who say the government shouldn't have spent taxpayer money to rescue the Detroit auto industry.

President Obama used a visit to Michigan Friday to argue the case that despite its unpopularity, his 2009 bailout of the Detroit auto industry has worked.

Employment in the industry has risen over the past year. The carmakers are now running at or near a profit. And, more important for the economy, a feared collapse of the industry was avoided.

"This plant just hired a new shift of 1,100 workers last week," Mr. Obama told an audience of Chrysler employees after touring a factory near Detroit. "You are proving the naysayers wrong."

It was a pep talk for workers in one of the states hardest hit by the recession, but also a response to critics who say the government shouldn't have spent taxpayer money to rescue Detroit carmakers – or for broader programs designed to stimulate the economy.

The auto rescue in particular could use some public-relations help, judging by recent polls.

Some 48 percent of Americans say they are now less supportive of the auto bailouts than they were a few months ago, versus 17 percent who say they are more supportive, according to a Bloomberg poll taken early in July. And in a May CBS News poll, 6 in 10 adults said the government should not have aided the automakers.

Obama argued Friday, in appearances at a General Motors plant as well as at Chrysler, that failing to help the firms would have deepened an already severe recession.

"It's estimated that we would have lost another million jobs if we had not stepped in," he said. The shutdown of these two firms, he said, would have rippled out to bankrupt suppliers and dealerships – including adverse affects on the supply chain for Ford, the other large US-based automaker.

The Obama administration says it has committed $60 billion to help GM and Chrysler avoid liquidation, adding that much of that money could be recouped for taxpayers as the government's ownership stake is eventually sold to private investors in a stock offering.

Many economists agree with the president's basic assertion – that some form of carmaker aid was needed. Amid a financial panic late in 2008, car sales took a 40 percent plunge as consumers held back on large purchases.

Ford avoided a bailout in part because it had borrowed to create a cash cushion before the recession.

The government "had to do something," says Donald Grimes, a University of Michigan economist who follows the industry. "His bailout was good ... for the US economy."

In addition to assisting GM and Chrysler, the government subsidized a "cash for clunkers" program, designed to revive car sales by encouraging people to trade in old vehicles with poor fuel efficiency.

Mr. Grimes worries, however, that the long-run challenges for the industry aren't over and that the specific form the rescue took could make life more difficult for GM and Chrysler in the future.

The bailouts have provided the firms with bridge funding, so that they could restructure in bankruptcy rather than liquidate their operations. The companies downsized, and their stock and bond holders took losses that allowed the companies to emerge with smaller debt.

But the administration policies gave more favorable treatment to one set of creditors – trust funds representing retired union workers – than to traditional bondholders. When that framework survived in the bankruptcy proceeding, it set a precedent that could make it harder for these firms to raise funds in credit markets.

"It clearly makes it less likely that unionized companies, in particular the auto industry, going forward are going to be able to go to the bond market and say, 'Give me a loan,' " Grimes says.

The industry, Obama said, has gained 55,000 jobs in the past year. But that comes after a much sharper decline during the recession.

Michigan still has one of the nation's highest unemployment rates. The state now has 3.9 million nonfarm workers employed, down from 4.7 million in 2000.

The carmakers are not only surviving, Obama said, but are also transitioning toward new fuel-efficient technologies. While in Detroit, Obama got behind the wheel of a Chevrolet Volt, the electric car for which GM has just announced a $41,000 price tag and a 50 percent boost in production.

Michigan is also hoping to gain thousands of jobs from battery production for electric cars.

But a recovery in the car industry alone won't solve the jobs problem, Grimes says. Longer term, he says, the solutions include reforming the state's tax system, boosting education and retraining, and growing new industries in the service sector.

Similar changes may be needed nationwide as well, economists say. Obama's visit coincided with news of tepid 2.4 percent growth for the economy during the year's second quarter.

"We've got more work to do," Obama said.

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