Archive for February 27th, 2009

Auto Bailout: Politics v. Economics

Friday, February 27th, 2009

Just as General Motors announced that it lost a staggering $9.6 billion in the fourth quarter of 2008, the company’s top brass was at the White House yesterday asking President Obama’s newly formed auto task force for as much as $16.6 billion more in federal aid. In a case of bad timing for GM, a Gallup poll also out yesterday showed that 72 percent of Americans oppose giving more taxpayer dollars to Detroit automakers.

Whether Washington will give in to public sentiment or offer further assistance to GM remains to be seen, but, if history is any indicator, the politics of job loss and reelection concerns will likely weigh more heavily in the decision than hard economic data. In his 2005 paper “Saving Chrysler: The Use and Nonuse of Accounting Information by the U.S. Congress,” Smeal’s Mark Dirsmith examined the 1979 Chrysler bailout and found that accounting evidence in that decision was mostly used politically as rationale for a decision or as ammunition for an argument.

In the end, despite the huge economic risk, Congress agreed to the bailout and saved Chrysler from bankruptcy. Dirsmith and his coauthor Timothy Fogarty speculate that had more of the accounting analysis been considered, however, Congress may have been dissuaded from making such a leap-of-faith decision.

They write:

The worst possible scenario that was not faced was a bailout that did not work. If Chrysler was given loan guarantees yet failed despite them, a large transfer of public money to private parties would have had to occur. In addition, all the adversity the government sought to prevent, would have been visited upon the economy. Despite a substantial possibility that this downside could materialize, very little attention to it was commanded in the debate. Much depended upon that which could not be known at the time. Perhaps the accounting information that was used, or that could have been used, would have not sustained such a leap of faith. That might be why we have politics. 

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