Economist Krueger Offers First-Hand Look Back at GM, Chrysler Rescue

Apr 01 2015
By Michael Hotchkiss
Topics Politics
Source Office of Communications

In the midst of the financial crisis in 2009, Alan Krueger and Austan Goolsbee were two of the economists advising President Barack Obama as he considered whether and how to rescue General Motors and Chrysler from the brink of financial collapse.

In the end, Obama decided the U.S. economy couldn't risk their failure and chose to rescue both automakers, investing billions of dollars of government funds to them in exchange for major restructuring.

Now, Krueger, Princeton's Bendheim Professor of Economics and Public Affairs, and Goolsbee, the Robert P. Gwinn Professor of Economics at the University of Chicago, have written a working paper that looks back on what they call an "unusual episode of economic policymaking."

The paper, "A Retrospective Look at Rescuing and Restructuring General Motors and Chrysler," was published online by the National Bureau of Economic research in March and is forthcoming in the Journal of Economic Perspectives.

Krueger recently answered questions about the auto rescue and the look back:

Q:  Why did you decide to revisit this issue now?

Krueger: I recall very distinctly Larry Summers, who was director of the National Economic Council at the time, hosting a meeting in his office at the White House in March 2009 where he asked, "Do you think Chrysler and Fiat, if they merge, would survive for five years?" Goolsbee and I were on the side that said "no." So it seemed like we have reached a point where we could say we got one thing clearly wrong. We wanted to look back at what we got right, what we got wrong and why.

Q: What are the key takeaways from your look back?

Krueger:  At a broad level, I think the paper says that in the midst of a crisis the government has to take actions that it wouldn't otherwise take. And in this case, I think those actions helped the economy to recover. In an ordinary downturn, I think you would let failing firms fail. In the midst of a financial crisis, though, if you can take actions to put a bottom on the downward spiral, I think there are very broad benefits for the economy. But that's rare. I hope it doesn't happen again in my lifetime.

Q: What did you learn in looking back at the economic analysis that you were part of producing to help inform the president's decision?

Krueger: We got some things right, and we got some things wrong. We were right in our concern that rescuing Chrysler would make it more costly to rescue GM. On the other hand, I think Chrysler has performed a lot better in its merger with Fiat, and their market share increased much more, than we anticipated at the time. Also, auto sales in general have been a lot stronger than we anticipated at the time. That's been welcome news. Overall, I think the president was right to consider a broader set of considerations than just the narrow economic analysis that we provided.

Q: At the time of the auto rescue deliberations, you were on one of three public-service leaves you have taken from Princeton to serve in government. How have those opportunities affected the research you do at the University?

Krueger: I think my experiences have encouraged me to work on bigger issues. The government can only solve so many problems, so it's better if it solves a big one than a small one. And I think it's led me to focus more of my research effort on bigger economic problems such as unemployment. It has also made me a much more effective and knowledgeable teacher. 

Q: What does this kind of first-hand retrospective offer to other researchers?

Krueger: I think that universities in general, and Princeton in particular, are generous about giving faculty public-service leave. And I think the faculty bear some responsibility when they return to describe to the rest of the academic community what they learned, what the experience was like. That was something we were trying to achieve in this paper. Hopefully it will enrich the way others think about government policy and the type of research that they do.