The right eloquence needs no bell to call the people together and no constable to keep them. ~ Emerson

Wednesday, September 22, 2010

Still Some Gas Left in This Old Clunker

Obama’s Stimulus and Auto Bailouts Were Expensive, They Also Successfully Saved Us From a Far Worse Economy

The pendulum of political momentum is swinging hard toward the right in my home state of Ohio. Polls show incumbent one-term Democratic Governor Ted Strickland likely to go down to his Republican challenger. In the race to fill the Senate seat vacated by George Voinovich, former Democratic Attorney General and current Lieutenant Governor Lee Fisher once enjoyed a commanding lead in the polls. Today, Republican candidate Rob Portman, a former Bush Administration official, commands a similar advantage.

Democratic voters in Ohio’s big cities are unenthusiastic. Republican voters in suburbs, small towns, and farms are angry and animated. Independents are flocking back into the GOP’s tent. Portman explains why, using a popular talking point employed by Democrats since the early days of President Obama’s tenure.

“Independent voters in Ohio always make a difference,” said Portman. “They gave the [Obama] Administration a chance and saw all their hopes disappointed . . . A stimulus package that not only didn’t work, it didn’t work and spent too much.”

The idea of the stimulus as a failure resonates well with voters in a state with unemployment running above the national average. Plenty of economists at conservative think tanks pronounce it a fiasco. Other economists call such charges patently false.

The latter got some validation this Monday, when the National Bureau of Economic Research (NBER) announced the recession, which officially began in December 2007, officially ended in June 2009 with the beginning of an expansion. "The recession lasted eighteen months, which makes it the longest of any recession since World War II,” according to the bureau.

Alan S. Blinder, a Princeton professor and former Vice-Chairman of the Federal Reserve, and Mark Zandi, chief economist at Moody’s Analytics, published a paper in July entitled, How the Great Recession Was Brought to an End. Using quantitative models, they empirically prove the turnaround was a direct result of the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama Administration’s fiscal stimulus program.

Blinder and Zandi demonstrated the nation’s gross domestic product would be about 6.5 percent lower this year lacking these programs. What is more, job losses would run over sixteen million as compared to the eight and a half million actually experienced. Finally, the economy would experience ruinous deflation instead of low inflation.

Republicans were also quick to criticize bailouts of General Motors and Chrysler, calling them unjustifiable and rewards to labor unions for supporting Obama in the 2008 election. Others bewailed the program as propping up out-of-touch management’s greed and incompetence. Detractors were equally derisive regarding the Administration’s “Cash for Clunkers” program, incenting Americans to trade in old cars for newer, more fuel efficient and environmentally friendly models.

Obama defended bailouts at the time, arguing U.S. auto designers were still capable of creative innovation and autoworkers still hard working and quality conscious. Of course, that seemed hard to reconcile with the concurrent program encouraging us to cast off their old products and characterizing them as “clunkers.”

Two years later, it appears Obama’s faith in the domestic auto industry is paying dividends – literally. This week, GM CEO Daniel Akerson announced plans to issue shares of preferred stock that will pay dividends and convert to common shares in 2013. Likewise, Chrysler and Fiat CEO Sergio Marchionne said last week he expects an IPO by his company in the second half of next year.

After receiving bailout money, GM underwent an aggressive reorganization. The new General Motors is selling cars, making money, and repaid $6.7 billion of the $50 billion loaned to it. Its less valuable assets, including dilapidated Detroit factories, became a separate subsidiary, named the Motors Liquidation Company. This company has filed a bankruptcy reorganization plan detailing how it will sell off these assets.

As a result, GM will announce on Friday it is recalling four hundred laid-off workers to make four-cylinder engines at a plant in Spring Hill Tennessee. This is in addition to nearly seven thousand jobs restored by the company since the bailouts, including twelve hundred at a plant making small cars in Lordstown Ohio, near Cleveland. Even two of the closed assembly plants have found buyers and a third in Shreveport Louisiana will continue making cars until its shutdown in 2012.

AutoPacific, an automotive research firm based in Tustin California, just issued its 2010 New Vehicle Satisfaction Survey, which rates how satisfied owners are with forty-five aspects of their cars as well as what they would like to see improved. The best car overall was the Suzuki Kizashi. However, some interesting and highly encouraging results emerged when AutoPacific founder and president, George Peterson, crunched the numbers to determine which vehicles have most improved and most declined over the past five years.

The five most improved vehicles were all American models. The Ford Taurus moved to 4th position in 2010 from 192nd position in 2006, the Ford Escape moved to 31st from 191st, the Ford F-150 moved to 11th from 163rd, the Chevrolet Suburban moved to 39th from 147th, and the Chevrolet Equinox moved to 36th from 133rd. In all cases, the improvements resulted from Detroit listening to customers and retooling to create more desirable interiors/exterior as well as improved fuel economy/engine performance.

At the other end of spectrum, the five vehicles with the greatest decline were all Japanese. The Toyota Tacoma dropped to 221st position in 2010 from 63rd position in 2006, the Suzuki Grand Vitara dropped to 179th from 58th, the Subaru Tribeca dropped to 183rd from 70th, the Honda Element dropped to 199th from 94th, and the Nissan Quest dropped to 164th from 59th. All suffered from quirky designs that eschewed customer input for gimmickry and reliance upon brand reputation.

Love him or hate him, while Obama’s economic policies might have been more effective, less costly, shown quicker results, or just simply different, there is no question they had a significant positive impact on an economy teetering at the brink of disaster when he entered office. Dissatisfaction over the slowness of the recovery is understandable and perhaps justified but without the stimulus, we might have had no recovery at all.

Even impatience with the recovery’s pace may be unrealistic. “Economic activity is typically below normal in the early stages of an expansion and it sometimes remains so well into the expansion,” the NBER noted in its announcement. Furthermore, unemployment usually continues rising after a recession ends. For example, it took no less than nineteen months for unemployment to peak after the 2001 recession, which was far less severe than the most recent one.

Portman and other Republicans are currently riding the voting public’s frustration with Democrats’ inability to handle the economy, much as Obama rode to victory two years earlier from voters’ displeasure with the GOP on the same topic. Their seeming fickleness is only human – unemployment lends itself to impatience with big plans and long cycles. However, some of the tales Portman and his cohorts are telling voters to convince them their anger is not only reasonable but also fact-based are just not true.

Voters may well give up on Obama just as many Republicans insisted it was finally time to give up on Detroit two years ago. Obama’s faith proved justified in the latter case. Maybe voters will come to see the same about him over the next two years if a Republican Congressional majority proves equally unable to jumpstart the economy.

Perhaps Americans will find there is still some gas left in this old clunker after all.

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