Auto Industry: Can We Get a 'Twofer'?

As the House prepares to vote on the $15 billion ”Auto Industry Financing and Restructuring Act” (latest draft of bill text here), I thought it might be a good opportunity to raise this question:

If we’ve decided: (i) we have to assist the auto industry (can’t let them fail), but that it’s important it not look like we’re just throwing money at them, to win the faith of the American public/taxpayer; and (ii) that in this recession we have to worry about somehow keeping up consumer demand / economic activity (even as we very much want people to start living within their means over the longer run) – thus making a large stimulus package inevitable for early in the Obama Administration…

…then couldn’t we start thinking of ways that we could combine these goals into a “twofer” type of fiscal policy tool? Could we consider the possibility of, just for example, including in the fiscal stimulus package a federally-financed rebate for purchases of American (Big-Three) automobiles purchased within the next (say) six months (maybe even with larger rebates for more fuel-efficient vehicles), combined with federally-financed extended warranties on such vehicles? And couldn’t we even structure this to be more of a loan program than a pure subsidy program by specifying that a certain portion of the implicit federal subsidy to each of the Big Three could be paid back to the federal government by each of the Big Three;if they return to profitability?

This is not my original idea but that of a reader of my blog (thanks, Joseph Hare), but it strikes me that when money is precious and we can’t afford to waste it, it doesn’t hurt to have ideas like this that might serve as a “twofer.” What do you think?

Comments

[Jackson Cash:]

In one word, NO.

These companies have earned nothing but failure, and therefore need to RIP. Quit trying to justify bad Congressional behavior with compromise.

2008 Dec 10 04:29 PM

[Lupin:]

Let's make it a "threefer"
How about a rebate/stimulus check for turning in old (12 model years or older) vehicles that can only be applied to the purchse of a new American made vehicle by the Big Three The newer cars get much better mileage and pollute less.
And you would be benefiting the people who drive old cars and cannot ordinarily afford new vehicles A "fourfer"!

2008 Dec 10 04:44 PM

[payroll man:]

This sounds so simple that MAYBE even the geniuses in Washington could understand it..


On Dec 10 04:44 PM Lupin wrote:

> Let's make it a "threefer"
> How about a rebate/stimulus check for turning in old (12 model years
> or older) vehicles that can only be applied to the purchse of a new
> American made vehicle by the Big Three The newer cars get much better
> mileage and pollute less.
> And you would be benefiting the people who drive old cars and cannot
> ordinarily afford new vehicles A "fourfer"!

2008 Dec 10 06:01 PM

[getting poorer:]

great... now let me see... DC takes my dollars, then they might offer to return some of it if I buy what they tell me to... what kind of plan is that? How about I keep my dollars and spend them in the economy where I want and cut out the middle man with his hands in my pockets. More of it gets to the economy too.

2008 Dec 10 06:44 PM

[geo511:]

I applaud your attempt at making lemon aid but their business model is predicated on individuals buying cars every couple of years. So if we all buy now and then hold on to them for 5-10 yrs (living within our means) they'll need another bailout to sustain all the overhead.

If congress is going to do this fine I can't stop them but it doesn't mean I have to participate in my own over taxation.

2008 Dec 10 08:36 PM

[Anthony Alfidi:]

Let's make it a "nofer." Rebates on big, costly, gas-guzzling cars are more than a waste of tax money. They will undermine the new administration's commitment to public infrastructure and green energy.

Spending for the sake of spending is part of the mentality that has prompted this economic crisis.

2008 Dec 10 10:11 PM

[gianni b:]

stimulating demand is key. as for 'hold on to them longer'...there are 100 million vehicles on the road. if everyone keeps theirs for 7 years, that's a turn of 13.5MM per year...a viable industry. now add the fact that our car-buying population is growing by 1MM people per year. even healthier. ford turned a profict (earlier than targeted) in Q1, so who's to say 'they are not viable. as for 'fuel efficient cars' the ONLY way the market will move toward these vehicles (which each of the D3 already offer...in many cases better Fuel Economy than Toyota or Honda counterpart (C cars, CD cars, Small SUV, Pickups) is if gas is taxed as it is in europe. does anyone wonder how Exxon makes $30 Billion a year in profit while the auto industry breaks even? regarding the stimulus to help people afford new D3 vehicles, let's limit it to vehicles that get better fuel economy than japanese (which would apply to D3 vehicles in every segment...excluding Prius), and make the dollar amount only equal to the advantage the transplants enjoy because their home governments pay for healthcare, pensions, R&D etc, allowing the Alabama transplants to 'pass the savings on to the american consumer' (as they send the profits back to the home country).

2008 Dec 10 10:12 PM

[Lupin:]

I figure, one way or the other, we (taxpayers) will end up paying for the autoworkers in higher taxes - increased unemployment, welfare, increased medical expenses. Even our house values will drop if they can't pay their mortgages. Sure, it's fine to say let them suffer but if your neighbor loses his house your house value drops like a stone. At least this "stimulus" would put them to work and would prop up other industries along the way. Maybe even your job.

2008 Dec 10 10:42 PM

[NickMagus:]

While it sounds appealing and logical, a federal rebate for a Big 3 purchase would be tantamount to economic protectionism. The leading world governments swore off protectionism within the last couple months, since it contributes to a downward economic spiral (see Great Depression).

Ford has been on the ball, and was on the road to profitability before the economy crashed. Mulally's approach since 2006 should be a model for GM and Chrysler to follow. All they need is a giant loan like Ford got two years ago. Unfortunately nobody is lending but the government.

To your final point, well, this so-called bailout IS a loan, not a subsidy. In fact, it's a pretty high interest loan. The only risk to taxpayers' dollars is if the Big 3 actually do go under. Meanwhile, the Big 3 ALREADY have loans from the U.S. Letting them go under now is a guarantee that it'll cost tax payers, for the loans they already out. Lending them more may be the best way to ensure we don't lose any money in the end.

2008 Dec 10 11:18 PM

[NickMagus:]

P.S. I love how the House bill is double spaced with giant margins. It looks like my 7th grade reports. OK OK, space for notes, but still :P

2008 Dec 10 11:29 PM

[Robert Wein...:]

The whole idea of spending (forget loaning this is money gone baby gone) on companies that have not been able to execute a plan that offers cars/trucks that people want to buy at prices people are willing to spend FOR YEARS is simply obscene. As I wrote in my blog these jobs are gone with the way management has run the companies and having the federal government step in will not only cost the taxpayers a lot of money (already has in terms of congressional resources) but will delay the ability of the auto makers to get back on solid ground and start producing a product that people want to buy.

Its too bad congress thinks they know better than the capital markets as they are bringing America to its knees a lot quicker than need be.

2008 Dec 10 11:51 PM

[Erik P:]

There is no way I would ever buy a GM or Chrysler product. Why would I want to get a rebate for something I don't want to buy ever ever ever?? This bailout, and rebate idea are ludicrous and punish small auto makers like Tesla, etc..

NO NO NO

2008 Dec 11 01:08 AM

[fortdh:]

The US auto industry output is going to contract to about 10mm cars in 2009, and probably not many more in '10. This pull down from 16mm is more than the loss of any one company. It will not destroy the auto industry
to loose any specific name brand; all the seats, windshields, tires etc that are needed to support the USA consumption will be made.
The holding hands by the Detroit 3 and the UAW sidekick, is really close to collusion. In their hearts, you know each CEO is hoping the other guy goes out of business. The surviving companies will pick up the slack, and may even see a profit someday.
Chrysler is essentially gone. The bailout should not include them, as they are privately held 80%, and Mercedes Benz holds the other 20%. We are therefore giving Mercedes a partial bailout.
If you do the labor math, take GM versus Toyota, you will find that with fully loaded labor and legacy cost, GM's cost is about $3000 per vehicle higher. Since it takes about 25 manhours to produce a car, $120 per manhour has to come out, if the legacy cost is held constant for the retirees. Witha fully loaded cost of $74, it will be difficult to accomplish!
The UAW has helped destroy the old guard USA industry. Due to absent worker rates, the Detroit 3 have to pad the rolls by 20%, in addition to the job bank which pays 95% for idled workers. That package eliminates any incentive to seek other work, or to even "work" at all. The Toyota/Gm contract in California prevented such wasteful practices, because Japan does not pay for zero contribution.
Bottom line, I hate to see the Gov trying to mandate how a public company is managed, and the impact of one of these companies going away will not be missed with the current sales projections.
Did you notice that they Volt, GM's answer to survival, will not be ready until 2010, and then will not be profitable until the second generation model is out in 2013? Volt is 10 years late, and will not save GM. Prius, hugely popular, is not selling well, and it could not save Toyota. There just is not enough demand.
Gas needs to be taxed to maintain a floor of about $3/ gallon, so that there is a more realistic reason for economy cars. A USA price of 1.50/gal, is foolish. The Mideast is playing us like a yo yo. As soon as a lot of exploring work and development is started, they can back off the oil price, thus "wasting a chunk of prep/startup costs" by making the efforts non-cost effective.
Bottom line, the market will decide how many cars we need to buy, and what brand we want. It is called captialism, and it works without Congress input.
Can anybody tell me why all three Detroit companies go under just because one goes under? The suppliers will still make the parts necessary to support vehicle sales, and it actually will be easier dealing with fewer auto companies.
Do you believe GM was merely going to close on 12/31, and only grasped that a month ago? If their management is no more astute than that, they should close.
I think what we are seeing is a scared union vote block scaring Congress. I don't think Congress cares which companies stay in business, as long as the union vote is protected. The loss of a Detroit company, will shift some production to the transplants, which scares Congress....but it has to happen. Most Americans would be happy to buy "American", but the product, the attitude, the dealer service, the designs, the quality, and the cost differential all favor the transplants.

2008 Dec 11 03:42 AM

[Trinitymaster:]

No one here gets the big picture. . .The Government is going to give Gm and Chrysler the money, appoint a Car Czar, and then force the companies to declare bankruptcy. There Billions to be made from breaking the UAW contract. Also, 100's of billions will be made from liquidating Chrysler and GM's assets. Ford, the smart one of the three, will be the only American car company left standing. The middle class is one step closer to extinction.

2008 Dec 11 03:58 AM

[Cjhies:]

Which Blagojevich aid have you been talking with? They put out inferior products, mismanage the entire supply chain, allow Unions and Government to poison their companies ethics and a bail out is not enough?? You want more mony headed their way?

2008 Dec 11 09:50 AM