Are Detroit Car Companies Blackmailing Washington?
By Brendan Moore
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.
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