• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • The Auto Bailout: What’s Behind the Wheel?

    As discussed in Senior Research Fellow in Regulatory Policy James L. Gattuso’s recent blog post, the House this week approved a new $25 billion loan program for Detroit automakers, and the Senate is expected to soon follow suit. The loans are to develop alternatives to conventional fossil fuel powered vehicles as well as more fuel-efficient cars.

    The Congressional Budget Office (CBO) estimates that the loans would cost the federal government $7.5 billion – double what the initial estimates were. CBO’s blog explains the reason:

    Several recent press reports have incorrectly suggested that CBO has estimated a 15 percent subsidy cost for loans to the automakers, so that $25 billion in loans would cost $3.75 billion. CBO’s analysis, however, suggests a 30 percent subsidy cost for such loans under the conditions specified in the authorizing legislation. The resulting subsidy cost would imply a budget cost of $7.5 billion for $25 billion in loans. (Early this year, CBO had informally suggested a 15 percent subsidy cost. Since then, however, credit conditions for the auto manufacturers have deteriorated markedly — the market interest rates on their outstanding debt, for example, have risen dramatically.)”

    But as Gattuso and I asked a few weeks back, is it really on the taxpayer to pay for Detroit’s change in business model. Detroit’s dependence on big, non-fuel efficient vehicles was its own doing. The strategy, not shared by rivals such as Toyota, was long a profitable one; for many years SUVs and minivans were a golden goose for the Big Three. But now this strategy is proving costly.

    Moreover, not all of Detroit’s current woes are due to the lack of energy-efficient cars; high retirement and other labor costs may be more to blame. Lawrence Reed and Burton Folsom write that maybe complacency played a role:

    In free markets, competition is a dynamic, never-ending, leap-frog process; the leader today can become tomorrow’s follower. If the leader has a 50 percent market share, as GM did at its peak, it must behave as if it is surrounded by competition or it soon will be. GM, and Ford and Chrysler too, should have seen it coming but didn’t, and now are incurring colossal losses while seeking help from a deficit-ridden federal government. GM’s market share is down by half. UAW membership is off by two-thirds.”

    In any case, there is no reason taxpayers should bear the cost of the Big Three’s business decisions. And if the federal government bails out Detroit’s Big Three, who will be next in line claiming that they cannot fail and are in need of taxpayer help? Where does it end?

    Posted in Economics [slideshow_deploy]

    9 Responses to The Auto Bailout: What’s Behind the Wheel?

    1. Pingback: Did you know that Detroit is on the bailout boat too? « Lumineux

    2. getalifeagain says:

      The bailout is really a loan. And if the Big 3 were to fail it would have dire circumstances for the economy. Millions rely on them. Retirees, workers, and indirectly millions of people in related industries.

    3. Pingback: Detroit: Mazda Taiki Concept

    4. Pingback: Betting On Autos » Battery-Powered Tesla Sedan Will Be Made In USA

    5. Pingback: Access Your Auto » TheAutoBailout: What s Behind the Wheel?

    6. Read This says:

      Chrysler just announced (this week) $30 million for executive retention bonuses while lobbying in Washington for $25 Billion of our hard earned money.

    7. New Green Economy, N says:

      The U.S. Government should be supporting the new "GREEN ECONOMY", such as companies like BG Automotive.

      For USD $25 Billion, BG could put 1.5 million Electric Cars on the road while creating jobs, saving U.S. consumers USD $2.5 Billion/yr on gasoline, and also reducing CO2 emissions by 7.5 million net tons per year.

      First legitimate electric car coming to the market.

      Safe, reliable and affordable.

      Check it out…………


      Video-You Tube:


      BeGreen Advocate

    8. Joseph Hare says:

      'The 15% Solution"

      One possible approach to dealing with the auto crisis — The federal government could give any one who buys a fuel efficient car from the Big 3 a 15% instant rebate back on the selling price. This program could have an 18 month time limit.

      The total of the rebate dollars might then constitute a loan the auto makers would have to pay back.

      If effective, this solution would immediately jump start US auto makers by giving them a huge advantage over the competition while they work on the remaining legacy issues. Auto makers would stay employed and no money would go directly to the car makers.

      The feds might also think about underwriting an extended car warranty program for this period. Again, the total dollars to do so, could constitute a loan to the auto makers.

      If the dollars don't proof out, the concept still might we worth exploring.

      Joseph Hare

      Hingham, MA.


      A quick direct "15%" instant government rebate (say averaging around $3,000) from the Dept of Treasury paid to consumer with purchase of a US auto maker lower mileage car might make these cars especially attractive,

      The problem with the fed using IRS tax return deductions is you only get indirect value (a lower tax payment) and but once a year (April 15)…. and higher wage earners get more real dollar benefit.

      I thinkt this rebate program would get consumer attention/visibility. Hey, If you could buy a Camry priced today at $20,000 for $20,000 versus a Malibu priced today for $20,000 for $17,000 (plus get a10 year warranty), which would you buy?

      Such a program, if it worked, would give auto makers an instant dramatic jump start while they work on getting

      more cars that would sell (without rebate program) developed and while they deal with worker legacy issues.

      Giving a bailout just keeps them from going bankrupt while they try to get a higher % of americans to buy their cars. They have not suceeded in doing that over the last 20 years. Assuming Americans were motivated to buy fuel efficient Gm-Ford-Chrysler cars, the biggest stumbling blocks might be that the auto makers could not retool fast enough to produce enough low mpg cars to get profitable, that they could not get rid of their gas guzzlers, and that the union entitlement are still choking them..

    9. The Smalleys, Georgi says:

      I sold every bit of my furniture and, until about a month ago, slept on the floor (4 mos. total). I don't eat out more than once a week at lunch time, and it's usually a $2.50 veg taco at Willy's. I keep my heat at 65degrees and don't go out to nightclubs, movies, or any entertainment that costs money. I don't have anyone over because there is no place to sit,except on the floor. Last year, I took in 40 dogs from various people who had abandoned them due to being "inconvenienced".

      And then I see the CEO's of these auto companies flying in to meetings at $20k a pop?!!!

      I bet they haven't sold all of their furniture, or ANY of it, for that matter.

      WHY in the world should 'I' bail THEM out? Let the CEO's all get together and bail each other out!

      They won't do it, because they're used to a lifestyle they won't give up. Well, I'm tired of making sure every gets to have the lifestyle of luxury to which they're accustomed while I live like a refugee.

      I'm mad and getting madder. If they get bailed out, I say we arrange a boycott of their cars.

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.