June 26, 2012

America's Taxpayers Lost Big in UAW Bailout

Todd Zywicki

George Mason University Foundation Professor of Law, Antonin Scalia Law School, George Mason University

James Sherk

Summary

The president did not need to lose billions to keep the automakers — and Michigan's economy — going. If he had given them only bankruptcy loans, the taxpayers would have broken even.

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The Treasury Department estimates the taxpayers will lose enormous sums in the auto bailout — more than $20 billion. That is more than Michigan spends on public education, more than the federal government spends on NASA, and more than America gives in foreign aid.

None of these losses were necessary to keep General Motors and Chrysler in business. The entire net cost of the bailout came from subsidizing the United Auto Workers' pay and benefits.

President Barack Obama argues that the bailout's losses were a price worth paying to save the Michigan economy. He calls concerns that "paying back the unions" motivated his decision "a load of you know what." But his administration ignored the principles of bankruptcy law to give the UAW special treatment.

General Motors had much higher labor costs than its foreign "transplant" competitors. Bankruptcy courts typically reduce wages and benefits to competitive rates, as happened at many airlines. That did not happen in Detroit.

While the UAW accepted huge cuts for new hires, the administration largely kept the compensation structure of existing members intact. As a result, GM still has higher labor costs than all the transplants. Even Steven Rattner, the president's "car czar" admitted: "We should have asked the UAW to do a bit more. We did not ask any UAW member to take a cut in their pay."

Bankruptcy law also calls for similarly-situated creditors to receive equal treatment. If, for instance, a person files for bankruptcy owing thousands on five credit cards, they cannot pay off one card and pay nothing on the others. The creditors must recover at the same rate. The same principle applies to bankrupt corporations, but the administration ignored it.

General Motors and Chrysler owed tens of billions of dollars to bondholders and trade suppliers. They also owed tens of billions to the UAW's Retiree Medical Benefit Trust. These debts were unsecured and all the creditors should have collected at the same rate. Instead, the UAW recovered most of its claims while the others got just a fraction of theirs — or got wiped out entirely. If the UAW had been treated equally, the bailout would have cost tens of billions less.

General Motors also inexplicably topped up the pensions of UAW retirees at Delphi, its bankrupt former parts subsidiary. GM had no legal obligation to these retirees, but spent $1 billion in bailout funds on them anyway. Nonunion employees were not so fortunate; they got nothing extra. Former members of the President's Auto Task Force are refusing to speak with the Trouble Asset Relief Program's inspector general about whether they influenced this decision.

The special treatment for the United Auto Workers did not extend to members of rival unions. GM did not top up the pensions of Delphi's United Steelworkers retirees. The Task Force also barred laid-off members of the International Union of Electrical Workers from being re-hired at other GM plants.

In total, the extra-legal subsidies to the UAW increased the cost of the bailout by $26.5 billion. They account for the program's entire net cost. None of that money was necessary to keep GM or Chrysler operating, to keep their suppliers in business, or to prevent layoffs. The taxpayer losses came solely from propping up UAW pay and benefits.

Most UAW members are grateful for this spending, and understandably so. But this was still poor stewardship of public funds. UAW members in Detroit make twice what the average worker does. Few Americans can retire at 56.

No one should begrudge UAW members this success. High pay and generous benefits are good — but they must be earned. The government should not require less well-paid Americans to subsidize UAW compensation. Especially not when Social Security and Medicare are running out of money and the national debt is skyrocketing.

The president did not need to lose billions to keep the automakers — and Michigan's economy — going. If he had given them only bankruptcy loans, the taxpayers would have broken even. Instead the president gave over $26 billion to one union. That hardly served the public good. The president did not bail out Michigan or the auto industry. He bailed out the United Auto Workers.