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Do Bailouts Work?

posted Feb 27, 2012, 12:02 PM by Simon Nguyen   [ updated Feb 27, 2012, 12:06 PM ]
General Motors – one of two recipients of the auto bailout – recently announced 2011 was its most profitable year ever. Does GM’s success confirm the merit of federal bailouts?

The best determinant of whether or not bailouts work is the long-term prospect of the bailed-out company. Unfortunately, GM’s domestic situation may not be quite as rosy as its record profit would suggest. The improvement in GM’s U.S. sales the last two years might have been due to factors beyond the company’s control.

No one could have predicted that Toyota and Honda, who were usually reliable on the technical side, would face all sorts of technical troubles. Both have had to recall millions of their vehicles as a result. The two companies were also adversely affected by a tsunami that hit northern Japan and devastating floods in Thailand.

Furthermore, the weak dollar has allowed GM and other American automakers to be more competitive, in term of prices, against foreign competition. The currency situation is so serious that some Japanese automakers are considering shifting more production to the U.S. to increase competitiveness.

With unwavering government support and problems faced by its foreign competitors, GM’s turnaround is not really a big surprise. But there will come a point when Toyota and Honda will finally get their act together, the dollar will become stronger and government support will wane.

Will GM continue to be as successful as it has been post-bailout? It very much remains to be seen.

In the meantime, the Obama administration will continue to make the case that the auto bailout has worked. Consequently, one should not be surprised if there will be more federal bailouts in the future.

Simon Nguyen, M.A. Economics