The Keynesian Bailout... Economics? Politics? or Both? (Final Revision)

Imagine a mathematical equation that will have a similar outcome when you use well-defined values. Now imagine that same equation's outcome after the values have been reshaped. Different outcome right? This hypothetical equation represents a microcosm for the American economy according to local certified public accountant Michael Krell.

Back in June of 2009, General Motors Corporation, a major variable in the complex equation that is the American economy, was financially extricated by the government in an effort to keep the American economy strong.

"Money was pumped into the corporation to stimulate its recovery," said Michael during an interview.

All of us watched the events unfold on the news. The bankruptcy and resulting bailout's far-reaching effects were felt by autoworkers, bondholders and their families all across the United States. The decision to execute the bailout and save the company was made with long-term politics and economics in mind.

But why rescue GM from its own failed business practices by loaning the automaker more money? How do American consumers know that this will work? Government bailouts have been a frequent safety net for American industries throughout the last 30 years. Their purpose is to give the economy a boost.

"I'm not surprised," says Judith Kullberg, a professor of political science at Eastern Michigan University. "There have been many other bailouts of major American corporations."

In fact, an analysis by ProPublica concluded that there have been 15 government bailouts of major corporations since 1970 (Nankin, Umansky, Kjellman and Klein).

Kullberg went on to say, "The intervention in corporations by the government is in a more direct manner in the modern age."
The concept sounds good: If a major variable in the economic equation is in distress, then just increase its value. In GM's case the value was increased in the form of huge government bridge-loans and bankruptcy protection. But what about the smaller variables like the bondholders and investors? When GM went into Chapter 11 bankruptcy protection, they were hung out to dry.

In the wake of the bailout, GM's bondholders took the biggest hit financially. According to an article in Huffington Post Business, GM bondholders were "owed about $27 billion, the largest chunk of GM's roughly $58 billion in debt. They were offered the 10 percent stake to wipe out the debt; well short of the 58 percent they wanted" (Krisher and Strumpf par 7). What this means is that the GM bondholders were poised only to get 10 percent of what their investment was worth back.

Sounds slightly unfair doesn't it?

If it’s between yanking a major linchpin in the American economy, potentially affecting every consumer in the country and short-changing some bondholders then the answer is obviously the former.

Prior to GM's bailout, an economic scenario released by the Center for Automotive Research estimated that a 100% shutdown of all three of the Detroit automakers "would be a loss of nearly 3.0 million jobs in the US economy" (Cole, McAlinden, Dziczek and Menk 4). The scenario goes on to predict that a full shutdown would "reduce personal US income by over $150.7 billion in the first year, and generate a total loss of $398.2 billion over the course of three years" (5).

Take one third of the figures from this economic study and you have a rough look at what the damage to the economy would have been if GM had stopped production completely: One million jobs lost, about $50 billion lost in the first year and roughly $100 billion lost over the course of three more years.

Lawmakers, economists and political analysts alike were considering figures similar to these when weighing their options when it came to bailout or no bailout. Perchance, another important piece of the puzzle that they were bringing to bear was the theory of Keynesian Economics.

Keynesian economics is a complicated and disputed theory. According to EconomicsHelp, "Keynesian economics developed in the 1930s offering a response to the unique challenges of the Great Depression" (Pettinger). Although it is an old theory, Keynesian economics still has relevance in today's American economy. The Concise Encyclopedia of Economics explains that "If government spending increases, for example, and all other components of spending remain constant, then output will increase" (Blinder par 5). So if the government puts money in, then production will go up.

Sounds pretty simple, but Keynesian economics is not without criticism.

One of the most serious criticisms of Keynesian economics is the fact that it causes inflation. Local CPA Michael Krell agrees with this:

"Lots of money is being pumped into the system to save our economy. The problem with this is that it can make the money worth less, in that each dollar will purchase less than it did before. This is otherwise known as inflation."

So does the theory of Keynesian economics work?

Right now it’s too early to really tell. GM only re-opened as a publicly traded company in November of 2010. We will not know if the bailout strategy was successful from a nation-wide economic standpoint for another couple years. This is because GM will need substantial time in business before it can produce any quantitative results for analysis. But you can bet that the lawmakers and policy analysts who instituted GM's bailout will be quite interested in the results.

While these lawmakers had the interest of the long-term American economy in mind when they were conceptualizing the potential bailout of GM, they also had their own approval ratings and a couple of other things that the public may not have been considering in mind as well.

An underlying factor that played a large, but less publicized role in the bailout decision was war making capacity. According to professor Kullberg, "One of the oldest justifications for government intervention is national security." As many of us may know, GM plants built war materials to support our troops at battle in World War 2. CPA Michael Krell has a similar opinion. He claims that “manufacturing capability is essential to national security.”

Kullberg, a 34 year student of political science went on to say that, "A policy decision and how it will affect ratings are not mutually exclusive."

So though it may be in the country's interest, it is also in the politician's interest. American voters would be well advised to remember this when a campaigning politician makes them a promise. According to an article in the Interdisciplinary Information Sciences Journal, "A politician aiming at reelection will make an effort to make a deliberate decision so that the possibility of reelection could increase" (Matsuda 155). The politician makes their decision, but whose best interest is it in, the American people? or their own?

The United States Government bailout of the General Motors Corporation was a difficult decision. Economists and politicians did not know what the future of the American economy would hold in the wake of such a decision. In the short term, there was immediate fallout felt throughout the entire country by autoworkers and bondholders alike.

But the long-term considerations of such a decision are paramount. American economic experts and politicians relied on the information that was available at the time to choose the lesser of two evils: Dish a multi-billion dollar bridge-loan to a failing corporation instead of allowing it to fail. The course of action chosen was in the best interest of the auto industry, the consumer and the American economy at large.

1233 words