Government Intervention in the Free Market Through the Auto Industry Bailout and Healthcare Reform

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Jeremy Jackson
Simoes
Honors Critical Thinking
24 November 2012
Term Paper
Topic: Government Intervention in the Free Market through the Auto Industry Bailout and Healthcare Reform
The topic being discussed in this paper is one as widely diverse in opinions as it is in matters of implementation; should government have the ability to intervene in the free market? Two present-day examples of this include the Auto Industry Bailout and Healthcare reform, both of which are hotly debated topics in the political, social, and economical spectrums of America. There is not necessarily a line drawn immediately down the middle of the two sides of this discussion, though many may think or like others to think that. Positives and negatives, supplemental and detrimental aspects can be attributed to the topic of free market versus government intervention. And no better present day examples can be observed then today’s Auto Industry Bailout and Healthcare reform.

In December 2008, the three major U.S. auto industry companies (GM, Chrysler and Ford) asked the government for a $34 billion bailout to avoid bankruptcy. The Big 3 stated that their demise would trigger 3 million layoffs within a year, plunging the economy further into a recession. In January 2009, the Federal government used $24.9 billion of the $700 billion bank bailout fund to rescue two of the Big 3, giving $17.4 billion to General Motors and Chrysler, $6 billion to GMAC, and $1.5 billion to Chrysler Financial. The purpose of the loans was to provide operating cash for GM and Chrysler, and to keep making auto loans available for car buyers. Ford Credit decided against utilizing bailout funds, and instead planned to use funds from the Term Asset-Backed Securities Loan Facility (TALF), a government program for auto, student and other consumer loans. The auto bailout proposal from the Big 3 auto companies totaled $34 billion in government loans. In return, the companies promised to fast-track development of energy-efficient vehicles, and consolidate operations. GM and Ford agreed to streamline the number of brands they produced, and won agreements from the UAW union to delay contributions to a health trust fund for retirees and to reduce payments to laid-off workers. The three CEO's also agreed to work for only $1 a year and to sell their corporate jets (Amadeo). Many opposed the bailout, saying U.S. automakers brought their near-bankruptcy on themselves by not retooling for an energy efficient era, reducing their competitiveness in the global market. Others called reverently for the bailout, believing that a bankrupt auto market would lead directly to a collapse in the U.S. and even the worldwide economy; as to be seen, both of these opinions carry validity.

Many reasons can be given as to why the bailout can be seen as a necessity. In December 2008, auto sales had dropped 37% compared to just one year prior. This was 400,000 fewer vehicles, or the equivalent of two factories' annual output completely untouched. GM and Chrysler by far had the worst decline, while Ford's loss was comparable to industry leaders Honda and Toyota. However, many in Congress accused the auto-makers of not operating competitively for years. The companies delayed making alternative energy vehicles, instead reaping profits from sales of SUV's and Hummers. When sales declined in 2006, they launched 0% financing plans to lure in potential buyers. Union members were paid $70 per hour, on average, while new hires made $26 per hour ("Automotive Industry: Employment, Earnings, and Hours "). GM was said to have twice as many brands as needed, and twice as many dealerships, thanks to both state and federal franchise regulations. For them, the bailout was needed to restore the U.S. auto industry to global competitiveness.

GM received $6 billion through GMAC, which became a bank holding subsidiary tied directly to the company. Originally asking for $18 billion in loans, of which $4...
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