Romney Was Right, the GM Bailout Goes Bust, and Taxpayers Pay the Price

November 26, 2018

“Let Detroit go bankrupt,” former presidential candidate Mitt Romney wrote in 2008, arguing that the federal government should not bail out the failing domestic auto industry for their poor management decisions. Vilified for turning his back on America’s autoworkers, Romney lost the argument, Barack Obama won the election, General Motors got its way, and U.S. taxpayers got stuck with an $11.2 billion bill to keep the company alive.

Today’s announcement from General Motors that it will close two plants in Metro Detroit and lay off 14,700 workers helps prove Romney right, albeit ten years later. Romney wrote that with a bailout, the American automotive industry’s demise “will be virtually guaranteed” because it would not be forced to undergo radical restructuring to be competitive in the marketplace. By subsidizing failure, the federal government would be gambling with taxpayer dollars and forestalling the inevitable.

This wasn’t the first time the government had bet heavily on General Motors at citizens’ expense. In a story much like recent efforts by state and local governments to give away billions of dollars to win a new Amazon headquarters, the cities of Detroit and neighboring Hamtramck teamed up in the early 1980s to win a new General Motors factory, chasing the promise of jobs and renewal of depressed and blighted neighborhoods. The Detroit News reports:

General Motors and Detroit Mayor Coleman Young hatched a plan: If the city would get the land, the auto company would build a state-of-the-art plant, crossing the border with Hamtramck, employing 6,000 people and providing a glittering example of what the auto companies and their suppliers could do in the city of their birth.

Residents who had lived in the targeted neighborhood would be given offers to sell their homes and move to make way for “progress,” but as the Detroit News reports, not everyone wanted to sell. In the face of protests and a legal challenge, the city moved forward with the plan, and a Michigan Supreme Court decision upheld the city’s decision to raze the site for General Motors. The factory was built, and decades later the court decision was overturned, but today, some 37 years later, that factory will be closed as General Motors fights to save costs.

One Detroit-area politician is feeling particularly burned by the decision. Rashida Tlaib, a Democrat who was elected to Congress in November, decried the decision on Facebook:

“[M]ake no mistake, this is a perfect lesson illustrating that corporations are not your friend, and handing them tax breaks and incentives is a losing game. Taxpayers bailed GM out with billions just a few short years ago – and now they cut jobs to make bigger profits?

“What’s worse, Detroit tore down the vibrant Poletown neighborhood for GM, destroying a community, displacing hundreds of families, and a couple decades later this is how we’re rewarded.”

Hoping for rewards in exchange for corporate welfare can come with a high cost, and General Motors’ story should be a cautionary tale about government picking winners and losers with taxpayer dollars—and in taking private property for a supposed “public purpose.”

In a paper for the Goldwater Institute, economics professor Shirley Svorny wrote about the high costs of government subsidization of private businesses—and who pays the cost when if those companies fail:

There are limited, specific situations where local government can improve on private-sector outcomes. A political decision to redirect tax dollars so that benefits accrue to individual firms is not one of those situations…The company bears none of the costs if it fails in its effort or chooses to move elsewhere. That burden falls on taxpayers.

The thousands of autoworkers who lost their jobs today—and the homeowners who lost their property to General Motors decades ago—know that lesson all too well.