Illegal. Illiberal. Ill-fated: why Washington shouldn't run Detroit.

• Author: Sullum, Jacob
• Position: Cover story

ON MARCH 30, 2009, the president of the United States told an anxious nation: "Let me be clear: The United States government has no interest in running G.M" If only he were telling the truth.

One way you could tell Barack Obama was being less than honest was that the day before, he had fired General Motors Chief Executive Officer Rick Wagoner. This unprecedented hostile takeover of a former American manufacturing giant signaled that the basic social contract between U.S. government and private business was being ripped up on live television. The fact that Obama followed his unpersuasive declaration of disinterest with a stern lecture about G.M.'s product lines ("They must ask themselves: have they consolidated enough unprofitable brands?") only confirmed the suspicion: Not only will this White House seize any company it deems to pose a "systemic risk" to the economy, but it will do so without regard to restraint, to the law, or to basic economic principles. All while dissembling enough to keep its most loyal political supporters distracted from the fact that robbing taxpayers to pay failed corporate executives is almost the definition of economic unfairness.

Now that the U.S. government is indeed running G.M., after having divvied up failing Chrysler between itself, Canada, the United Auto Workers, and Fiat, it's worth stepping back and taking measure of this almost unthinkable chain of events. After decades of Europe and most of the West enjoying the fruits of selling off state ownership in private industry, the U.S. is going on a nationalization bender. An inventory of the steps that led us here leads to three inescapable conclusions: This bailout is illegal, illiberal, and ill-fated.

[ILLUSTRATION OMITTED]

Illegal

The auto bailout makes a mockery of the rule of law.

Jacob Sullum

THE LAST TIME the federal government bailed out Chrysler, Jimmy Carter's administration reached a deal with the carmaker in August 1979, but the agreement did not take effect until Congress approved implementing legislation that December. The Constitution, after all, gives exclusive power of the purse to Congress. This time around, George W. Bush dispensed with the legal niceties, loaning more than $13 billion in taxpayer money to Chrysler and General Motors without any statutory authority.

Although he ran on a promise to repudiate Bush's sweeping view of executive power and respect the constitutional role of the legislative branch, Barack Obama applauded his predecessor's illegal loans. Since taking office he has followed Bush's pattern, expanding the bailout without seeking congressional approval. The president's high-handed personal involvement in the pending merger between Chrysler and Fiat, a deal that flouts well-established bankruptcy principles by forcing secured creditors to the back of the line, confirms that when it comes to industrial meddling Obama is no more committed to the rule of law than Bush was.

The new administration continues to subsidize Chrysler and G.M. (and even the companies that sell them parts) with money that Congress allocated last fall to the Troubled Asset Relief Program (TAP, P). As the program's name suggests, the Treasury Department was supposed to use that money to buy mortgage-backed securities and other "toxic" assets from financial institutions, with the aim of making them more stable and encouraging more lending. There is not a word in the Emergency Economic Stabilization Act, the law that created TARP, about automobile manufacturers.

[ILLUSTRATION OMITTED]

Some bailout supporters claim that G.M. and Chrysler qualify as financial institutions because they loan money to car buyers. The people who make this argument tend to overlook the fact that Chrysler's finance division became an independent company in 2007 and that GMAC, formerly a G.M. subsidiary, was mostly owned by Cerberus Capital Management when Bush approved the automaker loans. In any case, this rationale would make any business that extends credit, including department stores, jewelers, appliance dealers, and plastic surgeons, eligible for TARP money.

The Bush administration, recognizing what a stretch it was to describe loaning money to car manufacturers as purchasing troubled assets from financial institutions, strongly resisted using TARP to bail out automakers--right up to the moment when Congress declined to appropriate funds for that purpose. Now Obama is using loans that never should have been made as a pretext to reshape the auto industry. For those who are inclined to forget that Congress never authorized the bailout (a group that seems to include most members of Congress), here is a review of how Bush and Obama trampled the Constitution in their rush to save American automakers from the consequences of their own bad business decisions.

October 3, 2008: President Bush signs the Emergency Economic Stabilization Act of 2008, which creates TARP, allocates $700 billion for it, and authorizes the treasury secretary "to purchase ... troubled assets from any financial institution" the aim being "to restore liquidity and stability to the financial system." As examples of financial institutions, the law mentions banks, savings associations, credit unions, security brokers or dealers, and insurance companies.

[ILLUSTRATION OMITTED]

November 8, 2008: House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) send Treasury Secretary Henry Paulson a letter urging him to "review the feasibility of invoking the authority Congress provided you under the Emergency Economic Stabilization Act ... for the purpose of providing temporary assistance to the automobile industry during the current financial crisis." The Democratic leaders argue that "a healthy automobile manufacturing sector is essential to the restoration of financial market stability." The Treasury Department's response: "We continue to work on a strategy that most effectively deploys the remaining TARP funds to strengthen the financial system and get lending going again." Deputy White House Press Secretary Tony Fratto...