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Bailing Out Detroit: Wrong Vehicle for Change

Posted By James Gattuso On September 10, 2008 @ 1:21 pm In Economics | Comments Disabled

Nothing gathers a crowd in Washington like the sight of money being handed out.  Thus, in the wake of last weekend’s federal takeover of Freddie Mac and Fannie Mae, lobbyists for the automobile industry could be found stalking the halls of Congress, asking for help from the government too.  Specifically, they are asking for $50 billion in federal loan guarantees to develop alternatives to conventional fossil fuel vehicles.

The idea has garnered surprisingly broad support — with both Barack Obama and John McCain both expressing support [1] for aid to the industry, which is based in the critical swing state of Michigan.  (Ralph Nader, meanwhile — who made his reputation as an anti-Detroit crusader, is opposing [2] the move).

Reports [3] out today indicate that Detroit is unlikely to get the full $50 billion it wants.  Congressional leaders, however, are moving quickly to get $25 billion out the door — the amount provided for, but not appropriated, in energy legislation last year.  The lower amount is unlikely to disappoint Detroit’s lobbyists.   Like good car salesmen, their initial offer was perhaps intentionally high, to leave room for such ‘reductions.’

No matter what size, however, the bailout would do little to solve the very real long-term problems of the U.S. automobile industry, and in fact could exacerbate them, by delaying needed industry restructuring.  Meanwhile, American taxpayers would be left to pay the tab for years of bad business decisions by Detroit.  And the costs are unlikely to end there:  if carmakers receive a federal handout, still more industries will doubtless come for their own dollop of aid.

Automakers, however — with an apparent straight face — are arguing that the loan guarantees would not be a bailout [4], since the manufacturers would be expected to pay the money back.  This is nonsense — such guarantees come at a cost to taxpayers, who bear the risk that the loans will not be repaid.  The auto industry’s claim to the contrary is disturbingly similar to claims long made by Fannie Mae and Freddie Mac that their implicit federal guarantee did not impose costs.  That implicit guarantee is now costing taxpayers billions of dollars.

The proposed deal for taxpayers, in fact, is worse than that shouldered 29 years ago, when the federal government bailed  out the Chrysler Corporation.  At that time, the federal government received Chrysler shares, providing taxpayers with a benefit if the firm did well.  This time around, there is no upside potential for gain, only a downside risk of loss.

Having goverment, and ultimately the taxpayer, finance Detroit’s transition too fuel efficient cars is simply bad policy rooted in election year politics.   Policymakers should slam on the brakes to avoid this hazard.

(Heritage Research Assistant Nicolas Loris assisted in the preparation of this post.)


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URL to article: http://blog.heritage.org/2008/09/10/bailing-out-detroit-wrong-vehicle-for-change/

URLs in this post:

[1] support: http://www.detnews.com/apps/pbcs.dll/article?AID=/20080822/AUTO01/808220439

[2] opposing: http://blogs.automobilemag.com/6278167/car-news/president-ralph-nader-won-t-give-aid-to-us-automakers/index.html

[3] Reports: http://www.detnews.com/apps/pbcs.dll/article?AID=/20080910/AUTO01/809100384

[4] bailout: http://www.usatoday.com/money/autos/2008-09-08-auto-loans-fuel-efficient_N.htm

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