Economics: Government Motors No More

Unlike, say, France's President Nicolas Sarkozy, who used public funds to support Renault and Peugeot-Citroën on condition that they did not close factories in France, Mr Obama has been tough from the start. GM had to promise to slim down dramatically—cutting jobs, shuttering factories and shedding brands—to win its lifeline. The firm was forced to declare bankruptcy. Shareholders were wiped out. Top managers were swept aside. Unions did win some special favours: when Chrysler was divided among its creditors, for example, a union health fund did far better than secured bondholders whose claims should have been senior. Congress has put pressure on GM to build new models in America rather than Asia, and to keep open dealerships in certain electoral districts. But by and large Mr Obama has not used his stakes in GM and Chrysler for political ends. On the contrary, his goal has been to restore both firms to health and then get out as quickly as possible. GM is now profitable again and Chrysler, managed by Fiat, is making progress. Taxpayers might even turn a profit when GM is sold.

So was the auto bail-out a success? It is hard to be sure. Had the government not stepped in, GM might have restructured under normal bankruptcy procedures, without putting public money at risk. Many observers think this unlikely, however. Given the panic that gripped private purse-strings last year, it is more likely that GM would have been liquidated, sending a cascade of destruction through the supply chain on which its rivals, too, depended. As for moral hazard, the expectation of future bail-outs may prompt managers and unions in other industries to behave rashly. But all the stakeholders suffered during GM's bankruptcy, so this effect may be small.

For more, see Government Motors No More, August 19, 2010, at The Economist.