April 6, 2009

April 6, 2009 | Commentary on Economy

Uncle Sam's Car Lot and Repair Shop

Government has not been able to repair our economy, but it has put taxpayers on the hook for billions to repair cars.

President Obama this week promised that the government -- i.e., taxpayers -- will make good on warranties issued by GM and Chrysler.

Three days earlier, Transportation Secretary Ray LaHood announced new mileage requirements that could raise the price on each car by $4,000 to $10,000. Way to stimulate car sales, Mr. President!

The Washington Post reports that Obama's team wants to help pick new directors for the board that runs GM. Way to take over, Mr. President!

Who knew last year's elections were all about who would become Car Czar? The Obama White House is now dictating auto-industry management (including the firing of GM CEO Rick Wagoner), designing the cars (by dictating mileage standards), honoring warranties and offering high-risk financing.

The Obama White House is resembling a full-featured car lot, including the management, repair shop, high-risk financing and high-pressure sales tactics.

The pledge to backstop auto warranties is a costly new wrinkle among government bailouts and loan guarantees. GM was quick to take advantage. The day after getting taxpayer backing for its warranties, General Motors expanded them, which also expanded the potential loss to taxpayers. Ford also announced expanded warranties, but without using taxpayer money.

Warranties are not cheap. Claims paid on U.S. auto warranties totaled $13.1 billion last year, according to Warranty Week. Financial Week reporter even higher claims for 2007. General Motors alone paid $4.46 billion in warranty claims in 2006; DaimlerChrysler paid $6.1 billion. (Chrysler models were not separated from Daimler's Mercedes-Benz in the report.)

With even more taxpayer money likely destined for auto bailouts -- possibly even after bankruptcy filings -- the billions in warranty guarantees may seem a small piece, but so do other pieces if viewed in isolation. When linked together, they are gargantuan.

Bloomberg News pegs the total cost of Washington's auto, banking and other bailouts at $12.8 trillion to date -- about $42,105 for every man, woman and child in the country. It's also 14 times the total amount of U.S. currency in circulation. And nearly as much as last year's our total gross domestic product--$14.2 trillion.

Have your and your family gotten $42,000 apiece in benefits from the bailouts? If not, who did get the benefits, and why should taxpayers continue to foot the bill?

In announcing his warranty plan, the President displayed his skills as a pitchman. "Let me say it as plainly as I can," he said. "[I]f you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, just like always. Your warranty will be safe. In fact, it will be safer than it's ever been. Because starting today, the United States government will stand behind your warranty."

People are already joking that they'll take their car to 1600 Pennsylvania Avenue for repairs. And if warranty guarantees are a stimulus, then why stop at cars? Why not have government guarantee everything from computers to refrigerators to hair dryers and electric toothbrushes? All of those are part of an important consumer industry that creates jobs.

Maybe because we couldn't afford that, either? Back to the numbers.

The president's "Warranty Commitment Program" states, "The total amount of cash to be contributed will equal to 125% of the expected cost of paying for warranty service on each covered vehicle. The manufacturer will contribute 15% of the projected cost from its own funds, and Treasury will provide additional funds to cover 110% of the projected cost."

What does that mean? Part of the fast-dissipating $700 billion bailout fund approved by Congress will be loaned to the car companies to fund their warranties. Reserve funds to pay warranty claims are set at 125% of the projected claims, and 110% will come from taxpayers as a loan. General Motors and Chrysler need only put up 15%, rather than their usual 125%.

Based on its recent $5.1 billion experience in annual warranty payments, GM would have to set aside only $765 million (15%) for warranty payments. Taxpayers would have to pony up the remaining $5.61 billion required for the warranty reserve fund.

Nobody knows what the actual cost to taxpayers might be. The per car warranty reserves depend on the number of cars actually sold. And nobody can tell how long the government warranty program will last.

The warranty guarantee program evidently will cover cars sold overseas, as well. Although the participating companies must be "domestic auto manufacturers," it covers "every car sold" without regard to geography.

Meanwhile, the new fuel mileage standard seems to have been issued without regard to cost. The Department of Transportation decreed manufacturers must field fleets that average 30.2 mpg starting with model year 2011. That's a 19% leap above the current standard and nearly 3 mpg higher than had been expected.

Rather than doing so gradually, the Obama team rapidly moved toward the 35 mpg standard Congress created for 2020. When Congress set that mark, General Motors warned lawmakers it would push car prices up by $4,000 to $10,000 per vehicle, especially for the most popular sizes. The higher price tags created by DOT's fast-forward of fuel-economy standards certainly won't help car sales recover.

As government injects itself more and more into controlling companies and the economy, it resembles the dysfunctional auto companies it claims to be rescuing. Still, there's one major difference.

Politicians don't come with warranties.

Ernest Istook is recovering from serving 14 years in Congress and is now a distinguished fellow at The Heritage Foundation.

About the Author

Ernest Istook Distinguished Fellow
Government Studies

Related Issues: Economy

First Appeared in Human Events