Bail out the car buyers

December 4, 2008

diana-furchtgott-roth1– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed are her own. —

As disastrous auto sales figures for November were reported this week, the Big Three auto companies–GM, Ford, and Chrysler–told Congress that they want government loans to keep from going bankrupt.

The pleas of General Motors and Chrysler were the most urgent.  Ford allowed that its cash position was better and that it might get through 2009 without tapping the federal line of credit it seeks.

The Big Three, who less than a generation ago dominated the car business, submitted business plans on Tuesday ahead of scheduled hearings before the Senate Banking Committee on Thursday and the House Financial Services Committee on Friday.

Should Congress authorize the requested loans of $18 billion to GM and $7 billion to Chrysler, and a $9 billion line of credit to Ford?  How far should taxpayers go to rescue an ailing industry?

In their business plans, the three said that they would change their model mix and drop some brands, shrink their workforces, and consolidate and retool plants.

Unfortunately, neither loans nor the companies’ promises address the basic problem:  Americans just aren’t buying cars, whether GM, Toyota, Ford, or Nissan.

Consider the November sales data, showing GM ‘s sales down 41% from a year earlier, Ford’s down 30%, and Chrysler’s down 47%.  Foreign brands were hurt, too: Toyota down 34%, Honda 32%, Nissan 42%, Hyundai 40%.

It’s not that Detroit isn’t making good cars. Although GM has offered to drop its Pontiac line in exchange for government loans, Americans like Pontiac.  It’s GM’s third best-selling brand, with U.S. sales comparable to VW, Mercedes, and Mazda.  The idea that former Pontiac consumers will just switch to Chevys doesn’t make sense.

And the Big Three are healthy abroad.  Most sales of Ford and GM cars are made overseas.  GM sold 1 million cars in China last year, including 300,000 Buicks, and over 12% of vehicles sold in Russia.

Detroit’s costly labor structure is a handicap that needs to be overcome through negotiation with unions or with reorganization in bankruptcy.  But even foreign brands, with their lower labor costs, are unable to sell cars in today’s environment.

Until American consumers feel confident enough about the economy and their own finances to fill up dealer showrooms, the huge sums under discussion on Capitol Hill would be money wasted, merely postponing the inevitable bankruptcies of one or more companies—even though House Speaker Nancy Pelosi says that bankruptcy is not an option.

Potential buyers can’t get credit—and most new cars are sold on credit.   In October, GMAC, the credit arm of GM, began to require a higher credit score to qualify a potential customer for a loan.  According to GM, half of its sales decline in October—no word yet on November–was due to GMAC restricting its lending, costing about $1.4 billion a month in cash flow.

Congress needs to work on thawing out the credit market—and not just for autos but also for housing and other products.  Until that happens, and it could take many months, if the lawmakers believe that the auto industry deserves special help, members could simply give Americans money to buy cars.

This could be done in several ways.  The government could guarantee no-interest financing on cars—and itself pay lenders the cost of credit.  It could issue vouchers worth thousands of dollars a car to consumers. Or, it could award tax credits to buy cars, as it did with the Toyota Prius.

All of these incentives might cost the taxpayers less, depending on amounts and duration, than giving money directly to the automakers, and could be rolled back as the economy strengthens.

So, rather than lending $25 billion to the Big Three, here’s another idea.  Take the money and give consumers incentives to get into the dealer showrooms—and tell them to go car shopping for Christmas.

39 comments

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This got to be the most nuttiest nation cheering on the demise of their own companies without consideration of the nations economic consequences. First it was the Steel Industry, then the Textile Industry, then Ship Building, Electronics, Motorcycles, etc., on the way is Aircraft, & Machinery.
It used to be 4 in 10 employed in manufacturing, now its 1 in 10. Do you all want to be flip hamburgers or working at Wall-Mart for $8.00 an hour ?
31.5 Million families are now on Food Stamps. That’s 1 out of 10 families. Who pays for that ?
American companies are being sucked up left & right, so who will pay for the nations debt when imports continue to exceed exports ?
Just because you’re employed by a foreign company in the US does not reduce the trade deficit. Those profits go both overseas and are used to buy US Treasury notes.
China’s new status — it now owns nearly $1 out of every $10 in U.S. public debt
[And Japan another $1 out of $10] Additionally, the more China invests in U.S. debt, the harder it becomes for U.S. companies to sell their products overseas.

Just for an example: When China shed $50 billion, shying away from buying more Treasuries, Fannie Mae and Freddie Mac have had to pay more to borrow and have gotten less for mortgage bonds, pushing up rates for people seeking
home loans. Pushing up rates also pushed up the foreclosure rate. Finance touches everyone like it or not !
So you think your immune when we loose the auto industry ? I have news – you will be severely impacted without knowing how in this global financial world –
i.e. Just as allowing Lehman to fail froze the worlds credit markets. You’re still paying for that – instead costing $60 Billion in a loan to Barclay’s, it cost us now 4.7 Trillion instead. Smart move, it’s like not wanting to pay for water while allowing your house to burn down.

Posted by ddavid | Report as abusive

Are we out of our minds to consider throwing billions of dollars at the U.S. Automakers who are sleeping in a self induced bed of failure. It’s been a long time coming, its no secret that we Americans got smart and started to by Japanese vehicles over domestic vehicles for one simple reason. They truly build a better automobile and we learned that over the last ten years. The big three saw them coming, but there ignorance, closed minded leadership, and insulated Union safety net led them down this road. File bankruptcy, take it on the chin, and heed some advice from the Japanese Automakers school of thought, “kaizen” .

I think that the cars should be sold for a far cheaper price at least 50% cheaper, there should be hardly if any no interest on cars and thats how the business will grow.
People don’t have money like they used to because food,bills, gasoline, parking and so on is sky high.Every day stores are having sales on clothing and everything because who will buy them when they need food on the table and a roof over their heads?

Posted by mary | Report as abusive

The big three are the reason why public transportation
isn’t popular, fuel is expensive, and air is not cleaner.
There is no reason what’s so ever to bail out them with
tax payers money.

Posted by nocars | Report as abusive

A substantial percentage of US consumer goods are coming from China. Perhaps US should seriously consider making Mexico as its “China” in its backyard for obvious reasons. Start investing in Mexico. Build factories in Mexico like those in China by Americans. Lower land and sea transportation costs. Move the auto plants to Mexico. No more legacy pays, union control and lots of flexibility.

Posted by ykc | Report as abusive

A substantial percentage of US consumer goods are coming from China. Perhaps US should seriously consider making Mexico as its “China” in its backyard for obvious reasons. Start investing in Mexico. Build factories in Mexico like those in China by Americans. Move the auto plants to Mexico. No more legacy pays, union control, illegal immigration and lots of flexibility.

Posted by ykc | Report as abusive

I think you should all look back in history at the years following 1929,bailout or not your in for a big wakeup call.20% unemployment pretty much for ten years to start an women weren’t in the work force then as today,everyone is going to be affected even those smug ones that think they have safe jobs flipping burgers an driving hondas,think of it as trickle down poverty!!

Posted by psl | Report as abusive

It is not that bank don’t want to loan, it is that people don’t have money to repay their loans.

This country needs massive wealth redistribution. It will happen one way or another. And economic protectionism will happen too. It is just the way the economy works. This is why Chinese came so concerned to talks today.

Posted by Ananke | Report as abusive

Does Congress really know who they’re talking to? Are the automakers fundamentally manufacturing companies or are they finance companies? Yes of course, they’re a blend and operate in tandem, but that’s a problem we should not ignore as we look at the risk associated with extending taxpayer money.

Manufacturing and finance businesses have very different models and require us to employ very different assumptions. It’s just not prudent to examine a capital intensive manufacturing model in the same way as we look at a highly securitized financing business. There are huge differences in the design, development, production and distribution of these products. Furthermore, there are significant differences in the market forces analysis of the strengths, weaknesses, opportunities and threats inherent in each.

In order to adequately assess the risk of lending to these “automakers” a prudent person should not simply accept the conventional notion that these businesses are homogeneous. In fact, we should better serve the American people by definitively separating these two very different components as we assess the risk to be undertaken. We may separate these in theory to facilitate more transparent and meaningful credit analysis which in turn may reveal a need to change these business models. Changing the business models is not the primary intent of this examination, but it is the transparency we seek for the protection for the American taxpayer, nothing more but absolutely nothing less.

Posted by GJ | Report as abusive

Obama won by approximately 8 million voters in popular vote. 7.5 million registered rust belt unionized voters. They voted for THEIR WALLETS, make no mistake. Southern and Western edge Midwest state reps and senators of BOTH parties will destroy your greed and insolence. You have been blatantly ignoring our “wealth redistribution” needs for decades; via voting in your cronies. I, along with many others out here, say, “Let them eat cake.”

Posted by max | Report as abusive

I have no problem bailing out any company as long as we force one radical idea. I call it the 4X rule. Any company bailed out with taxpayer money will be FORCED into a 4 trier compensation system whereas the top managers CAN NOT make more than 4 times the lowest paid worker. If the guy sweeping the floors is worth $5/hr then the CEO is only worth $20/hr (that is TOTAL compensation, not just salaries). Conversely if the CEO is worth a million a year, then the bottom folks are worth 250K/yr.
The way I see it, this will not stop anyone from creating a billion dollar company where the top people get really rich, it will just force the wealth be be redistributed to those who actually make it happen.

Posted by Douglas | Report as abusive

I absolutely agree with Ms. Roth. Since were running the printing press on overtime why not print a bunch of extra money to build solar panels, wind farms and natural gas conversion kits for our cars. We can stimulate demand by extending tax credits to everyone who buys a green product. All the inflationary pressures would be mitigated in part by the corrected trade imbalance energy independence would bring. Stopping the war and forcing health care providers to provide health care instead of profits and dividends wouldn’t hurt either.

Posted by Anubis | Report as abusive

once the russians had 5-year plans:remember WELL, here we go in the US with plans for planning! i will only get it if it wasn’t that skorsky lost the parts contract for MARINE ONE—now even this is off shored…tell me, will the car companies off shore the new ecnomical proposed models??? supply chain ecnomics 101. go figure!

Posted by holly | Report as abusive

Whatever happens, the American automakers need to produce immedieately: a mid-size version of the Chevy Avalanche, a utilitarian car (a la Jeep or model T) that any ham or backyard mechanic can actually maintain, and a small car with at least one large seat that can accomodate our fat asses.

Posted by Gulchman | Report as abusive

Diana is absolutely right, how complicated can we make this subject. People are not buying Cars! This is the problem, Allow anyone who has a job and the means to pay a car loan buy a car. Give money to the people so they can afford to buy cars from our automakers, or slash all new car prices by 50% right now and watch how many people flood our dealerships to make a new purchase, quit putting money into the hands of the people that already have to much money to manage as it is

Posted by Ty | Report as abusive

Not even the Americans are longer foolish enough to think that, even though petrol prices have come down massively, buying a Hummer or any other hugely ENVIRONMENTALLY DESTRUCTIVE car model is still a good idea.
I would like to put the fear of God into Ms Furchtgott who doesn’t even mention the fact that most of those car models are soo passé – small, low energy cars are what is called for now – Small is beautiful, small cars, small credits, smaller houses, smaller egos and everything will be a lot better. Our planet needs car makers with a vision not bailing out the ones who failed pathetically!!

Posted by Esther Phillips | Report as abusive

The US Government is wasting the tax payers money bailing out these car makers. The money would be much better spent developing the next generation of cars instead of flogging a dead horse. Japan, Europe, China and every other country on earth are developing the next generation of plug-in electric vehicles. You yankees may as well go back to the horse and cart, because by the time you wake up to reality that’s all you will be able to afford. For God’s sake you have the infrastructure and technology there in Detroit to do this now. Get on with it and stop paying executives that still believe the SUV is the future. That’s not what the world wants or is America the world?

Posted by brad | Report as abusive

To ykc,
Hey why don’t the rest of the world treat the US like they treat China, Mexico, and all the other poor nations of the world. Why don’t we turn the tables. Lets peg all our currencies to the Chinese currency or the Euro and make the yanks work for us for $1 per day. Lets all band together and put a tariff on everything that comes out of the US like they do to everybody else. Lets take their car industry with the electric car, get out of oil all together, and only buy non-US resources. This way we can have 200million $1 a day slaves and the rest of us can enjoy our lives without their greed. Beautiful.

Posted by Brad | Report as abusive

Put a few new boxes on our 1040 tax returns. Check the box if YOU want to add an additional $111.47 to your return to give to the Detroit auto industry. Check the next box if your SPOUSE wants to add an additional $111.47 to your tax return. Put the number of children in your family in the box and multiply by $111.47 for each dependant that wants to contribute an additional amount just for the Detroit Auto Makers and their Unions. How much money would be captured by the IRS? Now, below those boxes put the same thing for another $2459 for each family member in the USA to contribute extra to the Wall Street Industry. (It’s simple math. Divide the bailout money by the USA popluation. Corporations are excluded from the population count since they are mostly owned by tax paying citizens.) Now below those boxes put another few contribution boxes for AIG, and Bears & Stearns, etc. If these contributions were optional how much would the IRS collect? Who in their right mind would continue checking the boxes?