I am a sucker for a philosophical debate on the role and scope of government. That is why when I came across a blog post describing the Obama administration as “hell-bent on outsourcing jobs to China,” I couldn’t resist digging a little to see what fundamental support might exist for such an inflammatory accusation.
The blogger’s allegation was apparently based on a comment made by GM’s CEO that 7 out of 10 vehicles produced by GM are created outside of the United States. The offended blogger (we will call her Patty Patriot) was outraged that a government-rescued company could create jobs outside of America, especially at a time when so many Americans are without gainful employment, a valid concern.
However, after confirming Ms. Patriot’s conservative political ideology—based on her plea for readers to “vote for the American in November”— I wanted to see if she could hold to the right-wing political philosophy talking points.
I asked if she would prefer government regulations against GM’s expansion efforts. Ms. Patriot tactfully dodged this trap by pointing out that GM should not be treated like a private company if the federal government was a stakeholder.
So far, I was impressed.
But Patty Patriot then went on to say that Obama should have never gotten involved, and that the federal government should have let the company go bankrupt. Ms. Patriot was obviously stuck at this point between an inconvenient fact [the initial government bailout was authorized by President Bush] and a more convenient hypothetical [the job-slashing bankruptcy option of Mitt Romney].
Like many conservatives who now find their former demigod George W. Bush to be expendable, Ms. Patriot sided with the hind-sighted Romney proposal and concluded that GM should have gone to bankruptcy court because a $25 billion price tag is too high for the American auto industry.
And this is where the real debate should begin.
When Obama chose to rescue the auto industry with an infusion of stimulus money, it was quite literally a calculated decision. At the time, losses from the government’s investment were projected to reach $44 billion.
So why would Obama approve a $44 billion loss of taxpayer’s money? Easy, to save jobs.
As Commander in Chief of an imploding economy, Obama did not have much opportunity in 2009 to be a “job creator,” but he did seize the opportunity to be a “job saver,” albeit at the taxpayer’s expense. According to The Center for Automotive Research, the rescue of the GM and Chrysler saved 1.5 million jobs.
Now, it may be morally questionable to put a dollar figure on one family’s livelihood, but in order to truly assess the economic strategy of the auto bailouts, it is necessary. By dividing $44 billion (the treasury department’s originally anticipated cost of the auto bailout) by the 1.5 million jobs the bailout would save, Obama likely concluded that each job saved would initially cost America about $30,000.
$30,000 is a great deal of money to spend to save one job, but that figure is greatly reduced when one considers two things:
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.)
So in reality the net cost per job saved was originally more like $13,400. Still no small change for a country in the midst of a recession, but that is the price Obama was willing to pay to keep one auto worker employed. Also, it is worth noting that in addition to the unemployment savings and preservation of tax revenue, there were other major economic advantages to saving 1.5 million jobs which are more difficult to calculate statistically. One in particular was keeping those workers from defaulting on mortgages, certainly a critical measure following the burst of the housing market bubble.
This week, the revised estimates of the auto bailout’s federal cost were reduced to $25 billion from the original $44 billion. This brings the net cost per job saved down even further—to a paltry $66. Of course that number will continue to fluctuate (maybe even to the point of eliminating any cost to the taxpayers), but the point is that the true cost of saving GM and Chrysler wasn’t about the giant companies themselves; it was about the individual lives of 1.5 million people who, thanks to the big government monster, still have a job.
So before answering whether or not the bailout was worth $25 billion, maybe we need to ask each other if it was worth $66 instead. I am willing to bet Patty Patriot and her contingent would still say no.
scorp3j said:
As usual people think it’s all about jobs and Taxes, or when GM will pay back the rest of the stimulus money. But that’s all a smoke and mirrors. It’s all about power and Obama’s union base. Obama’s re-election depends on Unions, Government employes, people on welfare, and pandering to Hispanics for their votes. Who do you think really owns GM right now..The UAW owns 50% of GM and Chrysler. GM will only survive if they can get away from the UAW, that’s why they are going to China..
J. Palmer said:
Scorp:
I think there is some merit to what you mention about securing the union vote, but that does nothing to mitigate the fact that 1.5 million jobs were saved. Sometimes politics actually have good side effects, and I think many people fail to realize that because they are blinded by their hatred toward the current administration. Sometimes you just have to give credit where credit is due if you want to be credible yourself.
Raunak said:
when the federal government bailed out GM, did it pick an ownership stake in it or was it purely debt or a mix? If it did, bail out is a great investment opportunity for the government. is it not?
scorp3j said:
Most of those 1.5 million jobs will be lost, GM is already scaling back and moving around some of its parts, and engine debt to China. All batteries for the Volt are made in China..GM already has started laying off employees.
.I do give credit to Obama for killing the economy and jobs. How else can you transform a country to Socialism? The Food Stamp and welfare president is working very hard to make sure keeps the handouts going, so he can enlarge his voting dependent base….
http://www.nytimes.com/2006/03/29/business/29motors.html.
http://business.financialpost.com/2012/06/01/gm-to-close-oshawa-plant-lay-off-up-to-2000-union/
J. Palmer said:
Scorp:
I appreciate your insightful prognostications regarding the future of GM’s employees, but most people put more stock in analysis of what actually did happen, rather than speculation about what will happen.
As far as the battery production in China, it is not incredibly surprising considering the resistance Obama has faced when it comes to anything related to alternative/sustainable energy.
If Obama’s “Socialism” means +200,000 jobs per month rather than the -800,000 jobs per month that Bush’s system (capitalism?) gave us, I suppose I will take the socialism.
philebersole said:
I agree with your general point, although at this point we don’t know for sure how many jobs will be saved and we also don’t know what the cost will be.
The basic problem is that the world auto industry has greater capacity to produce vehicles than there is a market for those vehicles. So at some point there is bound to be a shakeout. The question is whether it will be GM, Ford or Chrysler or Toyota, Volkswagen, Hyundai, Nissan or some other company. I think the governments of other countries would protect their manufacturing base, and I don’t think it is wrong for the U.S. government to do the same.
Another aspect of this is that much of the opposition to the GM and Chrysler rescue came from Southern states which are homes to German and Japanese transplant factories, who were induced to locate through subsidies and incentives. It is good that the U.S. is home to Toyota and BMW branch plants, but I want the United States to have its own auto industry.
J. Palmer said:
Phil:
Great points. I wonder…even if GM ends up laying off all the workers whose jobs were originally “saved,” was it still worth $66 per person to keep them employed for three years? I think that economically speaking, it is hard to say no–but I could accept the kicking the can down the road argument if someone could show me clearly how much more it cost the taxpayers.
Biodiesel said:
Scorp made a good point of the batteries being outsourced to China. I personally know an individual who was affected by that. When GM was bailed out, small suppliers were left to fail; because, they were not on the secured creditors list. How many other businesses suffered this same fate that we will never read about?
novemberdeath said:
Couple things…average salary does not mean average income. Incomes for auto workers is higher due to regular o bedtime and other benefits. Also, Honda and Toyota didn’t get bailouts. GM and Chrysler did. They have much higher average incomes than their foreign based counterparts (which was part of the problem).
Second, as a bankruptcy attorney, I can tell you that people do not automatically lose their jobs when a corporation goes into chapter 11, as GM and Chrysler both did. Chapter 11 gives the company an opportunity to restructure debt and contracts with vendors and employees. The employees would likely have come out making less than they were, but most likely would have kept there jobs.
Youth arguments are based on incorrect facts and generalizations.
novemberdeath said:
O bedtime should be overtime…Damn autocorrect. And youth should be your.
J. Palmer said:
Thanks for your comments. I am just citing the best sources I can find for information I am presenting. The salary information was from the bureau of labor statistics and the 1.5 million jobs saved number was from a non-partisan automobile research group. You could certainly argue that the group who came up with the jobs saved number had an agenda, but even the most conservative estimates say that the bailout saved 500,000 jobs–and this does account for your restructuring scenario. So going by those more conservative estimates–and factoring in the overtime which you do not think is part of the bls salary figure–my figure of $66 per job could be quadrupled to $264 per job. Still, in my opinion at least, not a very steep price to pay for a family’s livelihood.
If you can calculate it differently, please do. As I hope this reply shows, I am open to other interpretations.
Phillip Lyle said:
No person who makes $40,000/year pays a 15% federal tax rate. They pay between 0 and 5% after deductions, typically.
J. Palmer said:
Phillip,
Thanks for reading. I don’t know what your source is on that, but here is what I was using:
http://www.forbes.com/sites/moneybuilder/2011/09/30/2012-federal-income-tax-brackets-irs-tax-rates/
L cook said:
Enjoyed your article. You have done your homework. Breath of fresh air to see a good, solid back and forth without too many inflammatory remarks. Not sure why the Obama admin. doesn’t shout from the mountaintops that it’s working.
J. Palmer said:
LC,
It is strange that Obama’s campaign hasn’t focused more on this and the turnaround in job creation over the last three years. It has not been a campaign which has run on Obama’s strengths.
Phillip Lyle said:
J. Palmer,
Yes, that’s what I assumed. Two problems, actually:
1) It’s a sliding scale. In that link, the first 17,400 is taxed at 10%, not 15%, so you have to account for that. Makes your number turn into $3,946 over 40 weeks, not $4,800.
2) That assumes no deductions. The standard individual deduction is $5,950. So, a $40,000 income with no other deductions will pay taxes as if they made $34,050. Apply the same 40 week logic, with 10% for the first 17,400 and now your 40 weeks is at $3,259. This is THE MOST a single individual making $40,000 can ever pay, regardless of their life situation, unless they lived with their mom and didn’t qualify for the standard deduction.
Add a home, kids, wife, etc. and the effective tax rate trends towards 0% at this level.
You can see in the below article that for this bracket, the effective tax rate was 12%. But this includes the payroll (Social Security) tax, which is not money that would be “saved”, because the government can’t use it – it gets paid back to the employee when they retire. So subtract 6.2% and you get an effective tax rate of 5.2% for this group, well below your calculations.
http://thecaucus.blogs.nytimes.com/2012/09/21/romneys-taxes-compared-with-everyone-elses/
J. Palmer said:
PL,
Your points are all valid, but I will still defend my 15% number because as you can see from the Forbes source, 15% was for “married filing jointly.” A non-married auto worker making 40K+ would actually be in the 25% bracket. I chose the 15% rate for arguments sake, and I think (considering the single rate of 25% which I purposefully disregarded) it is a conservative estimate.
To prove my overall point, let’s assume a collected tax rate of 0%. The cost per job saved would certainly grow, maybe even double from my original calculation of $66 per job, but what price do we put on a person’s/family’s livelihood? Is $132 too high?
Phillip Lyle said:
J. Palmer,
Unfortunately, even with the standard deduction, an individual would still be in the 15% bracket – and as I mentioned, continue to trend lower. Search “effective tax rate” and you’ll see that most pay between 5 and 7%, but nobody pays the rate in your table. You even use the word “modest” which is silly; it’s too high!
Your jobs numbers are based on fantasy numbers. The first fantasy number is the 1.5 million jobs. As others have pointed out, nowhere near that number would have been lost; you are using an ultimate worst case example that assumes that all the other car manufacturers would have gone out of business at the same time.
ANother problem with your estimate is that unemployment costs are born by the government. They are actually paid by the employers into a fund managed by each state. Sure, the government is picking up some of the tab, but primary payment is by the employers and local states.
Finally, another problem is the assumption of 40 weeks as an average unemployment duration. The duration was 20-30 weeks at the time of the bailout.
So let’s do some new numbers:
500,000 jobs lost
$50,000/job
30 weeks average unemployment at your $295/week = $8,850
Net: $41,150
Taxes Lost:
$40,000 x 10% rate (I’m being generous) = $4,000; 30 weeks is $2307
Final tally: $38,843 per job.
Or $41,150 when you realize that the government doesn’t primarily fund unemployment insurance.
Let’s stop waving the $132 number around, please. There’s a reason Obama never used this argument; because he’d get torn up.
Phillip Lyle said:
Another angle – how many people did GM and Chrysler employ at the time of the crisis?
GM: 110,000 in the US
Chysler – Can’t find the US number, but 71,000 globally
So about 180,000 jobs. So where do the other 1.3 million job losses come from?
novemberdeath said:
Check out my post here: http://bastiatlives.wordpress.com/2012/08/12/mitt-romney-and-taxes/ for actual numbers on tax rates paid.
J. Palmer said:
PL,
Thanks for providing some numbers and arithmetic. I am easily able to follow your logic.
I would like to respond to some of your points before I accept your conclusion.
First, the 1.5 million jobs number is not one I just came up with or heard on the news. It is from the Center for Automotive Research:
“The Center for Automotive Research, a well-respected Michigan think tank estimates that the bailout therefore saved 1.5 million U.S. jobs by keeping GM, Chrysler and the companies that depended on them in business.”
http://money.cnn.com/2012/09/06/autos/auto-bailout/index.html
Note the key phrase “the companies that depended on them.” This should answer your question about the non-GM/Chrysler jobs that were saved.
Next, the unemployment burden of the government vs. the employer. You state that the employer is primarily responsible for paying unemployment to laid off workers, and you are right–BUT, if an employer goes out of business, they do not pay unemployment anymore, we the people do. My argument is based on the likelihood that the auto companies would have gone out of business, an argument we can debate, but one that most experts support. So I believe the unemployment costs are accurate.
Lastly, you cite that average unemployment at the time was 20-30 weeks, not 40. I chose a nationwide average and I think the 40 week estimate is low-balling it anyway. Here’s why: if the major auto companies went out of business and laid off 1.5 million workers (or even 500,000), those are skilled workers with a skill set that would then be obsolete–because there is no industry left for them in which to find gainful employment. Honestly, we could expect most of those workers to collect unemployment for the maximum duration, not the average–and we could also start tallying up the costs (often carried by tax-payer funded programs) to retrain these workers.
Phillip Lyle said:
First, here is the actual study:
http://www.cargroup.org/assets/files/bankruptcy.pdf
You can see that the 1.5 million figure is the “worst-case” estimate. Why are you using the absolute worst case? Even if you took an average, it would be much closer to my estimate than yours.
The study is clear that their worst-case estimate is a complete liquidation and 100% job loss in Detroit. This was never going to happen. Even if the government had not stepped in, it’s not as if all of these factories would suddenly have gone idle.
If you read the study, essentially what they did to come up with this number is estimate the total economic output of the automotive industry to the USA, then assume it would disappear, then extrapolate the number of jobs lost. It’s a fantasy.
As for the unemployment costs born by the employer – they are paid into the system ahead of time, not after an employee is laid off. When a corporation goes out of business, the company has previously paid the insurance while they were in operation.
J. Palmer said:
PL,
With the economy in free-fall in 2008, a worst case scenario wasn’t fantasy, it was highly likely, without action anyway. It is easy to forget just how bad things were, but even Mitt Romney acknowledged the likelihood of losing the entire American auto industry, so I feel comfortable with CAR’s figures.
Thanks for the clarification on how unemployment is funded. But it is worth noting that although states collect taxes from businesses to fund unemployment, more than half of the states have exhausted their unemployment funds and borrowed money from the federal government to pay out unemployment benefits. If the 1.5 mil/500k auto workers would have lost their jobs in 2008, this would have happened almost immediately in the affected states, so I believe my point that the federal government saved paying those workers their benefits is valid.
Frank Provasek said:
Also note that pensions are ultimately guaranted by the government. Had GM liquidated, even if those plants were eventually sold to other, the pension liabilities would fall on the taxpayers. That is why so many Bain-style takeovers to “harvest hidden value” are so costly to society.
1. Target a well-run company with lots of assets ahd low debt..
2. Take control of the company.
3. Borrow as much as you can on the company’s good reputation, sell assets and lease them back.
4. Declare a special bonus dividend to the investors.
5. Company, stripped of its “free and clear” assets, loaded up with debt which it cannot repay, struggles for a few years, eventually declares bankruptcy. The new owners don’t CARE because they got their return on the investment already.
6. Laid off employees collect unemployment, food stamps, federal, state and local governments lose tax base, retirees will collect pensions from Pension Benefit Guaranty Corporation with taxpayers ultimately on the hook.
Texas governor Rick Perry was correct calling this “vulture capitalism” rather than “venture capitalism.” Of course, once the spoke the TRUTH, he went from GOP frontrunner to laughingstock in the right wing Fox News/Talk Radio world of “dittoheads.”
Phillip Lyle said:
Frank – While there is a government agency that partially insures pensions, they are not 100% guaranteed by the government and taxpayers. Bankruptcy restructuring can cause a restructuring and reduced payments for pensions (ask my father, who was a Teamster).
Your definition of what Bain Capital did is 100% a joke. It starts with #1 – “Well-run company” – uhhh they only worked with companies that were in TROUBLE. LOL.
http://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation#Maximum_guaranteed_benefit