Government's role in marketplace on trial in Michigan

ByRichard Wolf and Tim Mullaney, USA TODAY
February 27, 2012, 11:54 PM

STERLING HEIGHTS, Mich. -- Charles Bell believes in free enterprise — up to a point.

When his job at Chrysler's assembly plant here was in jeopardy, along with the jobs and economic security of thousands of colleagues — not to mention the entire industry — he welcomed a government rescue.

"Free enterprise can't mean the end of manufacturing," Bell, 48, says. "There's a human side to it."

As voters here go to the polls Tuesday to choose a Republican presidential candidate and President Obama addresses a United Auto Workers conference, Michigan and its auto industry are climbing back from a near-death experience — and the state is a multibillion-dollar national laboratory for government intervention in the marketplace.

Obama's decision to bail out General Motors and Chrysler with $62.5 billion, along with his promotion of favored emerging industries and billions in fiscal stimulus, has earned him kudos from workers like Bell. But Republicans such as Mitt Romney call him a "crony capitalist" for favoring labor unions loyal to Democrats and accuse him of being a European-style socialist.

"There is a theme of economic issues running through the campaign that's beyond the usual discussion about how's the economy doing," says Michigan Democratic Party Chairman Mark Brewer. "It goes to what is the proper role of government."

While the candidates debate how much federal intervention is too much, Americans appear to be losing their faith in free enterprise. Only 50% viewed capitalism favorably in a Pew Research Center poll in December. Two years earlier, Gallup counted 61% on capitalism's side.

Among the possible reasons:

•The Occupy Wall Street movement has focused attention on the gap between rich and poor. From 1979 to 2007, inflation-adjusted average income for the top 1% grew 275%; income for those at the bottom grew just 18%.

•More Americans have become reliant on the government. More than 46 million receive food stamps, nearly a 50% increase since Obama became president. His health care law is projected to add at least 16 million to Medicaid, an increase of 27%.

•The tax code is under renewed scrutiny, fueled by evidence that many of the nation's wealthiest individuals pay lower tax rates than their employees. Romney, accused by Newt Gingrich of being a "vulture capitalist" during his private-equity career, earned more than $20 million in each of the past two years but paid only 14% in taxes.

Obama brings up the auto rescue almost daily. "Even when some politicians said we should just let Detroit go bankrupt, we stepped up," he told campaign donors in Miami last week, recalling Romney's opposition to the deal. That same day, his campaign unveiled a TV ad about it in Michigan.

"People who accuse this government of socialism haven't seen socialism in action," says Nigel Gault, the British-born chief economist of consulting firm IHS Global Insight. "I know what socialism is. The British government put huge parts of the economy under government control. We had British Airways, we had British Telecom, we had British Steel and (carmaker) British Leyland. And most of them were complete disasters. That's socialism."

Even here, Republican frontrunners Romney and Rick Santorum stand by their insistence that the auto bailout was the wrong thing to do, a position Romney took publicly in 2008 with a column in The New York Times headlined, "Let Detroit Go Bankrupt." Their alternative is a mix of tax cuts and deregulation, and a vow to keep the government out of troubled companies. The auto companies should have gone through a managed bankruptcy with private financing, they say.

"I'm someone who believes in free enterprise," Romney said during a debate last month. "I'm going to stand and defend capitalism across this country, throughout this campaign."

The debate is reflected in the polls. A Gallup poll this month showed 51% of Americans disapprove of the auto bailout, but a Pew poll found 56% say it was mostly good for the economy. An NBC News/Marist Poll found 63% of registered Michigan voters approve of the bailout. Yet among likely GOP primary voters, only 42% approved.

As the Republicans battle, Michigan still looks like Obama country. He won here by nearly 17 points in 2008 and has even bigger leads in polls this year. Both sides say the president must win Michigan to capture a second term.

"If people here don't think Obama did the right thing," says Bill Ballenger, editor and publisher of Inside Michigan Politics, "where else are they going to feel he did the right thing?"

The Michigan experiment

The federal government's intervention here began under George W. Bush and grew under Obama. Not a single U.S. bank was interested in financing the reorganization of GM, says Steven Rattner, who led the president's auto task force. Chrysler came close to liquidation before Italian automaker Fiat took it over following a government-aided bankruptcy reorganization.

But Obama's multiprong Michigan campaign didn't end there. His package was a huge dose of bailout money for too-big-to-fail companies, more than a pinch of Keynesian stimulus spending — at least $8.8 billion in the state — and a dash of industrial policy, in the form of stimulus targeted to the administration's pet sector: clean energy.

The GM and Chrysler bailouts saved as many as 1.3 million jobs, an analysis by the Center for Automotive Research in Ann Arbor showed. Ford got a $5.9 billion loan to retrofit 11 factories in five states, including Michigan, and build so-called EcoBoost versions of its cars and trucks that boost mileage by blending smaller engines with cutting-edge turbocharging tech. Companies such as start-up A123 Systems, GM, the South Korean conglomerate LG, auto-battery and energy-conservation giant Johnson Controls, and a joint venture including Dow Chemical got grants to build advanced car battery factories.

Michigan's unemployment rate, which peaked at 14.1% in September 2009, has fallen faster than any other state's, hitting 9.3% in December. "If there hadn't been intervention, our unemployment rate would have been 20%," says former Democratic governor Jennifer Granholm.

The state has added 103,000 jobs over two years, nearly 60,000 in manufacturing, out of a national gain of 2.9 million. The Sterling Heights Chrysler plant added a second shift a year ago. A state-of-the-art paint shop is being built; a new body shop is coming soon.

"They've taken that money, and they've changed this company," says Sterling Heights auto worker Matt Kinloch, 50. Obama "has got to pat himself on the back. I mean, he took a risk."

Half of the new six-cylinder Ford F-150 trucks hitting the road now have the Obama-backed green engine, beating Ford's projections and providing work for assembly workers in Kansas City. Ford estimates EcoBoost will eventually create or save 33,000 jobs.

Granholm's predecessor, Republican governor John Engler, says the reason for the auto industry's resurgence is "people buying cars." Sales by U.S. automakers have surged from below 10 million to more than 13 million annually. He doesn't knock the president for touting the comeback: "In a political campaign, it's rule No. 1: If something's good, take credit for it."

Yet Obama's record has misfires. The $250 million federal grant to build a factory in Livonia for A123 is looking shaky: The company's shares are down about 90% since its 2009 initial public offering. GM's bailout, at the company's current stock price, has Washington $16 billion in the hole, says Sean McAlinden, chief economist at the Center for Automotive Research. And sales of GM's Chevy Volt have trailed forecasts.

"Capitalism is getting this bad rap," says former Michigan state treasurer Gary Wolfram, a professor of economics at Hillsdale College. "The Occupy Wall Street guys ought to be occupying Pennsylvania Avenue."

'A very necessary bailout'

Michigan's late-2000s recession was tougher than the rest of America's, in part because it started a lot sooner.

Jobs began to disappear back in 2000, says Sophia Koropeckyj, an economist at Moody's Analytics — more than 900,000 in all by 2010, including 462,000 in manufacturing. The biggest culprit: a decline in the U.S. market share of the Big 3 U.S. automakers to about 42% in 2009, from 62% in 2001. The causes were mostly self-imposed: Poor quality drove customers to Japanese and South Korean brands, while generous U.S. union contracts gave Japanese rivals a cost edge Romney estimated in 2008 at $2,000 per car..

That was the economy Obama inherited, Granholm says. When carmakers were staggered by a 45% drop in auto sales after the 2008 collapse of Lehman Bros., the abyss was at hand.

Absent the auto bailout, GM and Chrysler would have been liquidated, and parts suppliers would have been too cash-strapped to properly supply Ford or the U.S. plants of Japanese carmakers, forcing them to shut down, too, McAlinden says. It would have taken as long as three years for rivals to rebuild the industry, he estimates.

Seeing the federal money becoming available in 2009, Michigan accelerated plans to give hundreds of millions to companies to build batteries for hybrid or electric cars in the state. The federal program required companies to come up with matching funds — and much of the matching money came from the state, Granholm says.

Wisconsin-based Johnson Controls got $299 million of stimulus, put up $299 million of its own and got $168 million from the state to build a 320-job plant in Holland, Mich. The deal created 1,500 construction jobs and 600 for suppliers, the company says. A second U.S. plant is planned, financed by still-unspent stimulus.

That money persuaded Johnson to move production of batteries for Mercedes S-Class hybrids to Michigan from France, says Alex Molinaroli, president of Johnson Controls' power solutions business. "This money helped make North America rather than Europe the center of our manufacturing," says Molinaroli.

The results of this flood of cash have been dramatic. Gallup rated Michigan the fastest-improving state for employment prospects the past two years. Even hotels are feeling the buzz: Detroit posted the biggest gain in room occupancy of any top-25 U.S. market last year, says Smith Travel Research.

Chrysler repaid its loans early and has hired 9,500 North American workers since 2009, spokesman Gualberto Ranieri says. GM went public in 2010, earned $7.6 billion last year, and has regained enough value that the government will make money on GM, including tax revenue that was preserved by the rescue, McAlinden says.

Still, Michigan's economy isn't fixed.

Only about one-fourth of the state's drop in unemployment represents new jobs, Koropeckyj says. Most of the rest comes from a sharp fall in the percentage of Michigan residents looking for jobs and people leaving the state.

And no one knows if the bailouts set precedents that will haunt Michigan.

Obama's decision to make Chrysler bondholders take a 71% loss to win UAW backing for the bailout and hand the union 55% of the company signaled that businesses deemed too big to fail may get away with cheating future partners, McAlinden says. The industry also went along with expensive Obama-backed fuel-economy standards to curry favor with Washington, he says.

"When the government butts in, it's like having an elephant for dinner in a very small dining room," McAlinden says. "That's the fallout from a very necessary bailout."

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