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Auto Industry: Is Government's Loan Actually a Bailout, Payback, or Investment?

by: Diane Rogers October 13, 2008    

Diane Lim Rogers

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Fortune magazine’s Alex Taylor argues that the $25 billion federal loan to the auto industry (approved a couple weeks ago as part of Congress’ continuing resolution to keep the federal government funded for the next few months) shouldn’t be viewed as a “bailout” or “handout”–but rather as “payback” for past, misguided policy strategies that the federal government took toward the auto industry.  I like where Alex goes with that “bad parenting” sort of argument (my emphasis added):

The loans have been denounced by certain apostles of free markets, who believe the industry - given its history of ineptitude - should fend for itself without government aid.

Nonsense! Consider this a down payment on vast sums that are due the industry because of cowardly, boneheaded regulation by the federal government that has both greased the skids of the Detroit Three on the way to insolvency as well as given aid and comfort to our “friends” in OPEC. By fighting against the irresistible flow of the markets, as well as trying to legislate technology, government has done an enormous disservice to automakers and consumers alike.

Here’s why: If Congress sincerely wanted to reduce gasoline consumption and give consumers an incentive to switch to small cars, it has had 35 years since the last gas crisis in which to impose higher gasoline taxes. The taxes would have required consumers to make an economic choice: Continue to drive big, overpowered vehicles and pay at the pump for their excessive fuel consumption, or switch to small cars and reap the proportionate economic rewards. For those who complain that such higher taxes would be regressive and present an undue burden on lower-income drivers, a portion of the revenue could have been rebated to them.

Instead, a Congress fearful of being labeled as favoring higher taxes has chosen the easy way out: ordering the auto industry through CAFÉ regulations to make more fuel-efficient cars. Since consumers were all too happy to keep driving pickup trucks and SUVs as long as gas prices stayed low, CAFÉ forced automakers to sell small cars at a loss in order to boost their fuel-economy ratings. Ten Chevy Cobalts equaled one Chevy Corvette.

In the latest iteration of CAFÉ laws, automakers are being told to make cars that average 35 miles per gallon by 2020. Nowhere, of course, does it mandate that customers have to buy them. Anyone who is willing to pay $60 or more every time he fills his tank can drive anything he likes. And, of course, all the revenue from higher gasoline prices goes to the oil companies and the oil-producing countries. Were the federal taxes in place, the revenue would be replenishing the government budget deficit…

So perhaps the federal government has engaged in a bit of ”bad parenting” of Detroit’s auto industry.  Even though even real parents can never be totally responsible for the bad decisions their children make, they can certainly try to encourage their children to make wiser choices by setting up the right incentives and setting the right example, and they can certainly try to avoid enabling their children’s bad or at least misguided behavior. 

The auto industry (the child) has thus far not been adequately encouraged to lay out longer-term business plans that anticipate the inevitable shift away from fossil fuels, because the federal government (the parent) continues to support policies that try to keep the price of fossil fuels low by encouraging supply (which has its limits) rather than discouraging demand (which is essentially unlimited).  It is a policy strategy that is doomed to fail, because we cannot defy the laws of supply and demand.

Whatever you think about the $25 billion “bailout” or “handout,” the auto industry certainly could use it now as a form of immediate “life support.”  And as Alex says, it may be justified as “payback” for past federal missteps and misguided policies. 

But if Detroit manages to survive this immediate economic crisis, it will need more than life-support policies to thrive going forward:  the auto industry will need to transform, and the federal government will need to encourage that transformation. 

That transformation has to involve moving away from fossil fuel technologies and into processes and products that use cleaner, more plentiful forms of energy.  And the government needs to allow the market to send the right price signals, and maybe even help amplify those signals, so Detroit can find its new way and become profitable (once again) on its own.

For the federal government to become a ”good parent” or at least a “better parent” of the auto industry it will need to encourage Detroit’s transformation (perhaps including investing in/subsidizing the movement to new technologies), but it will need to also avoid merely trading off an overextended industry for an even more overextended government.  (As I’ve said before, the Bush Administration’s tax-cuts-for-the-rich, so-called “pro-growth” agenda has failed Detroit even more than the rest of the U.S. economy.) 

That suggests that beyond our immediate “life-support” response, the federal government should look to policy options that tax bad behavior, and it certainly argues that the government should move toward eliminating those policies that subsidize bad behavior while spending taxpayer (or future taxpayer) money. 

That seems like a bit of a “tough love” approach–after all, calling for higher taxes on gasoline isn’t exactly a popular prescription, even (or even especially) among Detroit auto workers.  But together with some positive reinforcement in the form of a thoughtfully-prioritized, sensible degree of federal government investment in Detroit’s new way (yes, subsidies, but smart ones that magnify the right incentives), that’s exactly the good-parenting approach that will best encourage Detroit to thrive (on its own) for many years to come.

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