Michigan: big government working

Michigan and the domestic auto industry – the two are still inextricably linked – are now deservedly receiving national recognition for their comeback from a decade of decline. No longer worse in the nation, now a symbol of hope in what is still a bad national economy.

What is not included in most of those stories – or the self-congratulatory public conversation here – is that the preeminent reason for the success of the domestic auto industry and for Michigan’s recovery is an $86 billion federal government bailout of the auto industry. No bailout, no turnaround. End of story.

Funded by the Bush Administration and implemented by the Obama Administration, the federal government rescued the domestic auto industry – and the industrial Great Lakes – from collapse. Rather than Michigan job growth in the tens of thousands, without the bailout there would today be hundreds of thousands more Michiganders out of work. General Motors and Chrysler would be gone (think Borders). And lots of the supply base would be gone as well. Not only did they receive part of the $86 billion, but many could not have survived the loss of two of their major customers. And that supply base is not just manufacturers, it includes lots of knowledge-based businesses in pre and post production work for the auto industry.

So lets celebrate. The last decade was awful and it looks like we are on track for growth again. But also lets learn the right lessons for why we are recovering. First and foremost is that government – big government, the federal government – if done right, is a positive force for economic growth. Make no mistake this is the ultimate big government intervention. Not just a huge amount of taxpayers money to allow the companies to pay their bills, continue to operate. But also intervention in decisions on how to run the companies and structure the industry. There is a reason his many critics have labelled this exhibit #1 of Obama the socialist.

From firing the high-paid, top management that led the companies into bankruptcy, to walking away from stock and bond holders, to closing dealerships, to eliminating brands, to lowering labor costs and ending uncompetitive work rules, the federal government forced changes that the companies and unions would and/or could not do on their own. This was active government at its most assertive.

The Economist magazine is one of the few critics of the bailout which has publicly admitted they were wrong. That federal government intervention worked. See their article “Government Motors no more. An apology is due to Barack Obama: his takeover of GM could have gone horribly wrong, but it has not.”

Froma Harrop, in a terrific column responding to the Economist article, wrote:

Two years ago, General Motors and Chrysler were headed for oblivion. Letting these companies reorganize under normal Chapter 11 bankruptcies, as many free-marketeers advocated, would have ended in failure. … The industrial Midwest could have utterly collapsed. The psychological blow of seeing GM — the symbol of American manufacturing might — go down amid a terrifying Wall Street meltdown would have spread economic disaster coast to coast. Thanks to the government intervention, General Motors is out of bankruptcy and again turning profits. Chrysler is stabilized. The $86-billion bailout was a gamble, all right, but it was a bet that America won. And it was won not through dumb luck but the administration’s skilled management of the bankruptcy. And the good news keeps coming.

Thanks to the federal government, Michigan has a big head start on repositioning itself for economic growth. There is a long way to go to return to our former status as one of the country’s most prosperous states. To get there we need to relearn the lesson that the bailout should have taught us: that active government has functions that it can uniquely do that are essential to long-term economic growth.

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