Are Detroit Car Companies Blackmailing Washington?

By Brendan Moore

09.08.2008

There is an interesting editorial (Detroit’s Blackmail Attempt Is Beyond Shameless) by Paul Ingrassia in today’s Wall Street Journal regarding the $50 billion USD in loans that the Detroit automakers are currently lobbying Washington for; loans the automakers say they will use for the euphemistic “retooling” in order to produce smaller, more efficient cars.

The reference to blackmailing concerns that fact, as we noted last week, that its an election year, and a great many jobs in swing states like Michigan and Ohio are at stake. This may make the loans irresistible to politicians on both sides of the aisle.

Mr. Ingrassia is an accomplished writer and an astute observer of the auto industry and therefore the piece is chock-a-block with good observations about why the American taxpayer shouldn’t stand for this federal bailout.

It’s not that I disagree with a lot of what Mr. Igrassia wrote:

“The Detroit Three got into their current quandary by making decades of bad decisions, with some help from the United Auto Workers union. Yet despite the current crisis, General Motors is still paying dividends to shareholders, the car companies are paying bonuses to executives, and the private-equity billionaires at Cerberus who bought Chrysler are trying to reap enormous rewards from their risky investment. Meanwhile the UAW’s Jobs Bank — which pays laid-off workers for doing nothing — remains in place.

Of course, we can all hope that shareholders do well, that executives reap handsome rewards for work well done, that the Cerberus billionaires make more billions on Chrysler, and that workers get paid on whatever terms the car companies agree. But we taxpayers shouldn’t subsidize any of this.

The only reason we should bail out any private company is the risk that its demise would wreak havoc on the entire economy. Bear Stearns conceivably passed the test; its collapse could have threatened the U.S. financial system, and the government didn’t make the mistake of bailing out shareholders or management.

But just what calamity are we trying to avoid by subsidizing loans to Detroit? That we’ll all be sentenced to the indignities of driving Hondas, Mazdas or BMWs? Toyota and Honda, the current leaders in hybrids and alternative-fuel technology, did their research and development on their own dimes.

Even if Ford, GM and Chrysler were to go out of business — and it’s highly unlikely that all three will simply cease to exist — there will be plenty of good cars for Americans to buy. And many will be made in America, even if they carry foreign nameplates. Toyota, Nissan, Honda, Hyundai and other foreign car companies have expanded greatly their U.S. manufacturing operations in recent years. They’re doing so because Americans are buying their cars.

As a practical matter, Americans could choose to buy more Detroit cars. Frankly, they should — considering such outstanding products as the Ford Focus, a fuel-efficient and comfortable compact, and the Chevrolet Malibu, a terrific new mid-sized sedan. But they’re not. Americans are voting with their dollars, which is their right.

And what about the precedent the government would set? If we bail out Detroit, where do we stop? The newspaper industry is in financial trouble because more readers and advertisers are turning to the Internet. Newspapers are good for democracy — Thomas Jefferson said he would choose newspapers over government, after all — so shouldn’t they get low-interest government loans to help them adjust to the Internet? Of course not, and ditto for Detroit.”

All fair observations, to be certain. But, in the interest of even more fairness, the piece does make certain omissions which might be relevant to the discussions.

The extract above mentions the Bear Stearns bailout and elsewhere in the editorial the Fannie Mae and Freddie Mac bailout is referenced, with a comment that “taxpayers likely will pay billions to keep Fannie and Freddie solvent — with the exact amount uncertain”. The exact amount is uncertain, but the ripple effects over the years probably won’t be delineated in tens of billions of dollars, but hundreds of billions, and possibly trillions. Fannie and Freddie together own or guarantee about $5 trillion in mortgages in the United States, which is about half of all mortgages in the U.S. The scope of the bailout depends on the carnage in the housing sector going forward – its contingent on just how bad will things get, frankly. Basically, the mortgage industry has been nationalized.

I’m not pointing this out to make you feel anger towards the government or the mortgage companies for what happened; I’m merely pointing out any loans that go to the auto industry will be absolutely dwarfed by the money the taxpayers will spend on the housing crisis.

The second omission is the federal government’s onerous regulation of the auto industry called CAFE. CAFE was so badly designed that it served to push people out of cars and towards trucks and SUVs.

The third omission is the federal government’s tax policy that provided tax credits for buyers of vehicles over 6000 pounds. This also served to push a lot of people into trucks and SUVs.

Now, these “incentives” from the federal government to buy trucks and SUVs were not the primary reasons for Detroit’s litany of bad decisions, but they sure didn’t help. To my way of thinking, it is important that the government’s role in goosing the market for thirsty pickups and SUVs at least be acknowledged in the discussion about loans for Detroit.

It’s probably also worth noting that the federal government could have promoted fuel-efficient (or alternative energy) cars years ago just by simply raising the gas tax a little bit every year. This would have provided incentives to NOT buy a truck or an SUV, which would have resulted in the Detroit automakers making a whole lot less of them, and a whole lot more fuel-sipping cars.

We’re not for or against the loans to the auto industry here at 100 Autosavant Plaza, but we are interested in full disclosure when discussing the loans. It’s true that the Detroit automakers have made some bad decisions in previous decades regarding the emphasis on (very) thirsty vehicles in their product mix. But it is disingenuous for media pundits, and the federal government as well, to ignore the fact that government policy (or lack thereof) also played a part in the domestic auto industry’s slide towards their current unenviable predicament.

COPYRIGHT Autosavant – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

Share This Post On

9 Comments

  1. Igrassia wrote that Toyota and Honda have developed hybrid and alternative fuel vehicles on their own dime. That is not necessarily true. While those companies have invested a good chunk of their own money, the Japanese government has supplied financial incentives to their auto industry to promote alternative technology. I’m not really in favor of the government involving itself in private industry, no matter how important it is deemed to be to the economy as a whole, but the current proposal here is a loan, not a bailout, and if other governments are providing financial help, it only seems to help level the playing field in a global economy.

  2. Very good point. The Feds have a habit of standing back and saying, “my goodness, we don’t know how things go so awful” when the reality is that years of bad policy or no policy by the Feds is partly to blame. The mortgage fiasco is a great example, something that is going to cost taxpayers a tremendous amount of money, perhaps multiple trillions.

    $50 billion in LOANS to an important industry like autos seems almost laughable in terms of risk magnitude by comparison.

  3. Luke got a point there

    CAFE might be nicknamed “The Machin” by Charles DeGaulle if he was still alive. (DeGaulle once nicknamed the United Nations as “le machin”)

    Also, Toyota had developped their own “gas-guzzlers” with the Tundra, Sequoia, Lexus LX470, recent Land Cruiser….Nissan recently with the Titan, Armada (dropped to soon use the Dodge Ram chassis). Honda let grow the Accord to be “bigger, longer and wider…” is it a case of “Do as I said, Not as I do“? Or could be a set of “double standard”?

    (and there some rumors of upcoming V10 at Acura but that’s another story
    http://forums.motortrend.com/70/6962894/the-general-forum/2010-acura-rwd-sedan-the-size-of-the-tl-yay/index.html )

  4. All together now: “The government that governs the best is the government that governs the least.” It’s as true now as it ever was.

    The truth is GM, Ford and Chrysler did its damnedest to chase away generations of car buyers by offering incredibly poorly-built products. Indifferent assembly quality, “cost-controlled” engineering and poor after-sales service and support have cost them dearly and $50 billion will not change things. Divvied up equally and, what, GM keeps the lights on for a couple more years? Wow.

    If GM spent those two years wisely and killed Saturn, Buick, Pontiac, Hummer, Saab and GMC, leaving only Chevy and Caddy to take on the world, then it MIGHT be money well spent. If they continued with the status quo, then no thanks.

    Alan Mulally is doing what needs to be done. I think Ford would spend the money more wisely than GM. But I’ve been wrong before.

    As for Chrysler, I fear Cerberus execs would pocket the money, call it a day, and sell the carcass to Renault-Nissan.

  5. Car industries the world over are subsidised to the hilt via loans, tax credit deals, incentives, import tariffs and the like. The US is far from unique in this. State Governments in every country give the industry tax incentives and rebates to set up factories in their States (I point to VW as a recent example!). Federal governments subsidise research & development through things called development incentives plus they also provide support packages (cash grants) for a range of operational support ideas be it staff, tooling whatever….Japan does it, Australia does it (the Oz taxpayer contributed something like AU$20 million directly to build the G8 for example – hate to think how much indirectly), Europe does it and of course the US does it.

    The worldwide car industry is just like any other big hairy chested nation building flag waving aspirational industry such as nuclear energy, agriculture and the military…..it lives and breathes due to taxpayer support through all levels of Government and has done so throughout the modern age. Accept it and move on…or not.

  6. Politically, there will be little choice but to give loans–the bailout of the airlines, investment firms (Bear Stearns), mortgage industry (F Mae/F Mac), and anyone else with a hand to stick out, all by our small government conservative masters in DC, means that shafting Detroit will come off as favoritism. This is all the more true given that Detroit is merely asking for loans whereas all of the parties named above didn’t have to suffer the indignity of paying interest.

    In fact, going back 20 years, and you ca add the savings and loan industry to the bailouts (notably, Chrysler does not count–it received loans and paid the early). Interestingly, with the airlines, investment, mortgage and banking, the problems in those sectors were in large part caused by deregulation–the thinks that banks and investment houses have done over the past decade were illegal not all that long ago. And the S&L bailout was precipitated by the Reagan administration’s fascination with the “magic of the marketplace,” which allowed S&Ls to do things once against the law. Once again, more examples of how reasonable regulatory policies protect the public and create a better and more competitive economic environment.

  7. J.S. Smith – you are on the mark. +1.

  8. …”that Detroit is merely asking for loans”

    They are asking for “loans” at 10% below market rates, which amounts to a $5,000,000,000 gift from US tax payers.

    This to companies with incompetent management, overpaid workers, and a “jobs bank” that pays their unnecessary employees to do nothing.

    It’s nothing more than welfare.

    If you add auto manufacturing to the welfare rolls to join the steel industry, agriculture, defense, banking, medicine, and whoever else is sucking down government subsidies, we might as well all pack up and go home.

  9. So what is the point of this editorial?

    Sure, the mortgage bailout is much larger than any loan would be to Detroit. So what? You want to double-down giving even more taxpayer money to more worthless and failing businesses? You want to do that with your tax dollars, be my guest, but I can think of better uses for my money than bailing out Detroit.

    CAFE is a stupid idea only Detroit lobbyists and politicians could dream up. And tax incentives for buying large vehicles is just as bad. But last time I checked, these regulations applied to ALL car companies, not just the ones in Detroit. They were also the primary benefiaries of these regulations. I don’t recall Ford, GM, or Chrysler complaining about any of this while they were making profits.

    There is nothing you’ve mentioned in this editorial which ALL auto companies, including the foreign ones, were not subject to.

    Which begs the question why then Detroit is deserving of any special treatment.

Submit a Comment

Your email address will not be published.