Nothing gathers a crowd in Washington like the sight of money
being handed out. Thus, in the wake of this weekend's federal
takeover of Freddie Mac and Fannie Mae, automobile manufacturers in
the United States were requesting help from the government as well.
The Big Three-General Motors, Ford and Chrysler-are asking for $50
billion in low-interest federal loans to develop alternatives to
conventional fossil fuel powered vehicles.
The idea has garnered surprisingly broad support: Both Barack
Obama and John McCain have both expressed their support for federal
assistance 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 the move.)
Detroit is unlikely to get the full $50 billion they want. But
congressional leaders are moving quickly to get $25 billion-the
amount provided for, but not finalized, in energy legislation last
year-out the door. The most likely vehicle is the economic stimulus
bill now being crafted by Congress.
The proposed bailout, however, would do little to solve the very
real long-term problems of the U.S. automobile industry, which
include not just fuel inefficiency but large retirement, health,
and other costs. Meanwhile, American taxpayers would be left to pay
the tab for years of bad business decisions by Detroit. And the
cost is unlikely to end there. If Detroit receives a federal
handout, more industries would come for their own dollop of
aid.
More Fuel Efficient Cars
The Energy Independence and Security Act of 2007, signed into
law by President Bush last December, provided for $25 billion in
federal loans for automobile manufacturers to develop more
efficient and cleaner vehicles,[1] as well as loan guarantees
and direct grants. Priority would be given to investments in older
plants in the U.S., in effect ensuring that the aid goes to Ford,
General Motors, and Chrysler rather than foreign-based firms that
also build cars in the U.S., such as Toyota. Congress, however, did
not appropriate the $3.75 billion necessary to implement the loan
program.
Supporters of federal aid say that the aid is necessary for them
to finance a shift to more efficient vehicles. High gasoline prices
have driven consumers away from purchasing trucks, sport utility
vehicles (SUVs), and minivans.
But why should taxpayers be asked to pay for this change of
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. In any case, there is no reason taxpayers should
bear the cost of the Big Three's business decisions.
Not a Subsidy?
But, say the automakers, the loans are not a subsidy, since the
manufacturers would be expected to pay the money back. This is
nonsense: Such loans come at a cost to taxpayers, both explicitly
and implicitly, to cover the risk of default. The auto industry's
claim to the contrary, in fact, is disturbingly similar to claims
long made by Fannie Mae and Freddie Mac that their implicit federal
guarantee did not impose costs on the federal treasury. That
implicit guarantee is now costing taxpayers billions in very
explicit dollars.
The proposed deal for taxpayers, in fact, is in one sense worse
than that shouldered by the taxpayers 25 years ago when the federal
government bailed out the Chrysler Corporation. At that time, the
federal government assumed ownership of Chrysler shares, providing
them with a benefit if the firm did well. This time around, there
is no upside potential for gain for taxpayers but only a downside
risk of loss.
But, some say, the auto firms are "too big to fail." Like
Freddie and Fannie, they argue, their bankruptcy would throw the
U.S. economy into chaos.
Regardless of whether such an assertion holds true for Freddie
Mac and Fannie Mae,[2] that argument simply does not hold water
for the auto industry. Simply put, the U.S. economy is not
dependent upon the success or failure of the auto industry,
especially not solely the Big Three. Not only are the Big Three a
smaller portion of the auto market than a generation ago, but even
in the event of bankruptcy, their assets would not simply
disappear. Manufacturing-and jobs-would largely continue, while the
affairs of the companies were reordered to make the firms once
again viable. In fact, in many cases, such a process is necessary
to the revival of an industry. Short-term aid could end up merely
delaying such restructuring, prolonging the troubles of the
industry.
A Slippery Slope
A bailout would also set a disturbing precedent, resulting in
even more private companies clamoring for government
sponsorships.
A number of companies today could make the case that their
respective industry is vital for the economy and begin requesting
billions of dollars in bailout subsidies. There has already been
talk of bailout requests from the airline industry. More will
surely follow.[3]
Having the government, and ultimately the taxpayer, finance a
transition to more fuel efficient cars is simply bad policy rooted
in election-year politics. Policymakers should slam on the brakes
to avoid this hazard.
James L. Gattuso is Senior
Research Fellow in Regulatory Policy and Nicolas D. Loris is a
Research Assistant in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.