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Obama Lies: Obama Auto Bailout Did Not Rescue Detroit

Vice presidential candidate Paul Ryan has been accused of lying when he claimed that Obama broke a promise by letting a Wisconsin auto factory close, when in fact the factory closed before Obama took office. Although that isn’t precisely what Ryan said, there is some validity to the accusation that his statement was deceptive.

But numerous Obama supporters are playing just as loose with the facts when they say that, if Obama hadn’t rescued GM and Chrysler, far more factories would have closed permanently. That is simply untrue. While news agencies have fact-checked some of the things being said at the Democratic convention, I haven’t seen any challenges of this claim.

Both GM and Chrysler were headed for bankruptcy. If they had gone bankrupt under chapter 11, most of their factories would have stayed open and they would have continued making and selling cars. Bankruptcy would have allowed the companies to avoid interest and dividend payments for a time, and to renegotiate union contracts. Under bankruptcy laws, stockholders would have lost the value of their stocks, but bond owners–who have first claim to company assets and profits – would have been paid off, if not in whole than at least in part.

Instead of letting the companies declare bankruptcy, Obama decided to “bail them out” by taking them over. Once the administration had control of the companies, it had them file for bankruptcy, just as they would have done without the government takeover. Stockholders still lost everything, but so did Chrysler’s bond holders. Instead of renegotiating union contracts, the administration gave the unions greater say over the companies. In other words, the administration didn’t bail out the companies; it bailed out the unions at the expense of (in Chrysler’s case) the bondholders.

In doing so, the administration created uncertainty in the bond market. Bonds were supposed to be safer investments than stocks. But who would want to invest in long-term bonds if the government could step in at any time and void the legal rights of the bond owners? The result is that bond sellers must be willing to pay more interest to attract buyers.

In short, the Obama auto bailout probably didn’t save many jobs (though it probably did keep worker pay uncompetitively high). Instead, it is more likely that the Obama administration’s action prolonged the recession by discouraging private investment in American industry.

A version of this article originally appeared on the Cato Institute's Cato@Liberty blog.

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