Auto Bailouts Incurred Extra $26 Billion in Unnecessary Expenses Due to Political Favoritism by Obama Administration

In a new report, labor economist James Sherk and bankruptcy-law professor Todd Zywicki found that taxpayers lost billions in the auto bailouts due to favoritism towards the powerful UAW union by the Obama administration. Taxpayers lost tons of money

because the administration paid some $26 billion to subsidize the pay and benefit of UAW members. Before the bankruptcy, UAW members in Detroit made more than $70 an hour in wages and benefits — a major reason GM and Chrysler went under. The automakers also owed tens of billions to a UAW trust fund that provided gold-plated health benefits to the union’s retirees. In a normal bankruptcy, the UAW would be required to bring this compensation down to competitive rates. Bankruptcy law also calls for all unsecured creditors to receive equal treatment. That did not happen in Detroit.

In the bankruptcy, the union gave only minor concessions for existing workers. . . as the president’s former Car Czar admitted, “We did not ask any UAW member to take a cut in their pay.” As a result, GM still pays $56 an hour in wages and benefits, more than any of its foreign “transplant” competitors. Not adjusting labor costs to market rates costs taxpayers more than $4 billion.

The UAW’s trust fund also recovered far more of the money owed to it than other unsecured creditors did. At GM the UAW Trust collected $12.2 billion more than it would have had it been treated like the other unsecured creditors. At Chrysler the administration gave the UAW assets worth $9.2 billion. That was a much greater recovery than the secured creditors got — and the reason the UAW wound up with half of Chrysler.

General Motors further spent $1 billion to restore the pensions of UAW retirees at Delphi, a bankrupt former GM subsidiary, to their former levels. GM had no legal obligation to do so, and did not do the same for the pensions . . . of non-union employees. Former administration officials have refused to co-operate with the inspector general’s investigation into whether the administration played a role in this decision.

Add these handouts up, and you find that the taxpayers spent $26.5 billion subsidizing the pay and benefits of UAW members. Obama gave the UAW more than the U.S. spends on foreign aid.

Zywicki and Sherk discuss how the Obama administration incurred billions in entirely avoidable losses in this Wall Street Journal op-ed. The Obama administration’s coddling of the UAW threatens GM with billions in future losses and accrued liabilities.  Zywicki and Sherk’s estimate of the cost of the bailouts is very conservative, and does not include billions spent on other programs designed to prop up the automakers like the incredibly wasteful Cash for Clunkers (which cost taxpayers and used-car and car-parts businesses billions), and the separate bailout received by GM’s finance arm, GMAC.  GM also would not have needed such a costly bailout if the Obama Administration had been willing to reduce the burden of government regulations, such as CAFE rules that cost autoworkers at least 50,000 jobs.

Despite their enormous (and largely-unnecessary) cost, the auto bailouts might not even have succeeded in propping up the bailed-out automakers had it not been for huge natural disasters that harmed their Japanese competitors and enabled companies like GM to regain market share despite the fact that the Obama administration left their inefficient work rules and high labor costs largely intact. General Motors was aided not only by the massive Japanese earthquake and Tsunami that devastated its rivals, like Toyota, but also the massive Thai floods in 2011, which shut down Japanese car-parts factories in Thailand, crippling Japanese automakers’ global supply chains. On December 8, Toyota “cut its profit forecast by more than half after Thailand’s worst floods in almost 70 years disrupted output of Camry and Prius vehicles.” Later, the economic damage from the floods proved to be even higher than people initially estimated. The World Bank estimated that the floods did $45 billion in damage, and inundated half of Thailand’s factories. By harming Japanese automakers, the Thai floods gave a huge boost to their competitor, General Motors.