14

Should government help car makers?

Commentator Will Wilkinson

TEXT OF COMMENTARY

Scott Jagow: I told you yesterday that carmakers were looking for some help from Congress -- low-interest loans. The CEO of Ford said Detroit is not looking for a bailout, ghat being a loaded term these days, and all. Commentator Will Wilkinson says you can call it whatever you want, but it's still an undue burden on taxpayers.


Will Wilkinson: Detroit's "Big Three" automakers are struggling. Instead of making cars Americans want to buy, GM, Ford, and Chrysler are clamoring for tens of billions in taxpayer-subsidized government loans. Sadly, these sub-prime borrowers will likely get their cheap money. Both McCain and Obama are backing the bailout, lest the American public be visited with the calamitous extinction of the Pontiac Vibe and Chrysler Sebring.

Just this week, the government took over mortgage giants Fannie Mae and Freddie Mac. This put taxpayers explicitly on the hook for their massive liabilities. And earlier this year, the Fed opened the spigot to keep flailing investment houses afloat. There's a decent argument for these interventions. In each case, quick action might have kept these medium-sized disasters from snowballing and bringing down the whole economy. If so, the extravagant expense is worth it.

But what if one or all of the Big Three fail? Well, other companies will buy their assets and use them more wisely and profitably. Some people will lose jobs, most will find new ones and the gains in efficiency will make the economic pie larger and job-growth more likely. Maybe you'll buy a Toyota Camry. Made in Kentucky. We'll pull through.

Here's a paradox for you. Government guarantees often create the very conditions they are meant to guard against. The implicit guarantee behind the privately-owned yet "government-sponsored" Fannie Mae and Freddie Mac contributed to the irrational risk-taking in the mortgage industry that has pushed our economy to the brink. When individuals and firms are made to bear the costs of their own decisions, their decisions will be more carefully made.

Detroit doesn't need taxpayer subsidized loans. It needs to make better decisions -- or else fail.
The alternative to creative destruction is not stable prosperity. Propping up yesteryear's winners leads to stagnation at best, plain old uncreative destruction at worst. The best defense is often no defense. But politicians, who can see no further than the next election, have once again placed our bank accounts in harm's way.

Jagow: Will Wilkinson is a research fellow at the Cato Institute. You can find a link to his blog and share your thoughts at our Web site: Marketplace.org.

Log in to post14 Comments

Pages

You can say what you want, that is certainly your right. It's also my right to point out what a moronic statement it is. It's okay for Lenders is not alright for an industry that employs millions of people. That's a load of you know what! It's painfully obvious to me that you are out of touch with the middle class and what manufacturing does for us. I suppose that we should all just move on and learn from this experience huh?
Do you live in Detroit? Can you honestly say that we will only lose a "few jobs"?! You have not seen with your own eyes the desemation that the loss of manufacturing jobs has done to our landscape here in Detroit. Your thinking is short sighted and elitest and proof of what is wrong with this country. Lets see how far this country goes once the middle class becomes poor. Tell me what will happen to all those stocks and the housing market then?! Or are we to bailout companies that don't support the American bottom line?
What a load of nonsense!

Paying for mistakes is a universal fact of life. Are we still capitalist? Do we still have free markets? Is this still a democracy? Washington needs to tend to the peoples' business for a change and keep their hands off the rest.

We pay nothing for other countries' honest days of work. We export our work because we believe that we deserve a cheap, lavish lifestyle. We believe that we shouldn't be responsible for financial decisions, and that our young adults deserve to suffer because they haven't paid enough "dues" financially or emotionally.

The age of the manufacturing job that puts a roof over people's heads and puts kids through college is over. Now we have to do what we tell all people under the age of 30 to do: grow up. Remember that if GM could send its labor overseas and make a bundle without a PR nightmare, it would.

The big 3 are in trouble because the market that used to buy higher priced cars is shrinking because the realities of globalism are decreasing the income value of an honest day's work, combined with increasing prices for a days living. This decreases the price that people can afford to pay. That is why so many of the new cars in the neighborhood are Kia's.

They are also in trouble because they keep in the past with the old style steel box based car. The reality of our energy supply is creating the need to rethink the car but they just won't. The focus of our economy is no longer inovatione any more, everyone is obsessed with exploitation of the existing instead.

If we do help the big 3, we must as a condition of receiving the help, require them to do the right things, like completely new design of the car around lightweight structural materials, efficient shapes, alternative energy powered. And we must also help the new startups that are changing the car concept, like the Aptera. It would not be fair to subsidise the big 3 to the end of forward thinking startups who are just about to come to market.

This Aptera is cool. This is the future of the car. I am considering the hybrid version if I still have a decent paying job when it comes to market. Not even thinking about a big 3 anything.

Regarding "Bailouts", I tend to think it's OK as long as the perpetrators (!) are thoroughly wamped in the process. There should be no opportunity to repeat in the near future. This means: Freddie/Fannie COEs and top management (and investors) who had _any_ involvement need to be nailed.
I'm OK with Detroit 3 getting thier own bailouts as long as they suffer the same consequences as anyone else getting a bailout.

Another question: I'm all in support of good ol' Amurican industry, but what about level playing fields for level players? Is this _really_ level playing fields? [Many foreign competitors have benefitted in recent months becuase they had already developed vehicles for markets that had set a Demand driving policy (huge fuel taxes). Since Detroit 3 didn't expand to those markets and develop globally salable vehicles, does that mean they should get a bonus (bailout) or a wamping (to emphasize the lack of product leading/planning/engineering).] How many vehicles does Toyota make in the US? (I'm not personally sure) How many does Ford or Chrysler make here? (again, not sure) I've heard (from a Ford employee) that he could only consider Toyota like any other competitor becuase Toyota built more vehicles here than Ford did. (Fact check anyone?)

Regarding CAFE: what kind of rediculous plan is this? Trickle-Down Fuel Economy? Notice how quickly the fleet fuel economy changed when it actually cost sonsumers (the "Demand") something so we had to be worried about it. Does forcing "Supply" to produce an undemanded item really drive "Demand"? Why do we think SUVs were so profitable and small cars not? Mr. Wilkinson, care to comment?

I’m always worried when journalists and commentators miss small details. Mr. Wilkinson used the Pontiac Vibe as an example of the failed brands of America. Perhaps he does not realize that this vehicle is a joint venture made by GM and Toyota. The Vibe is sold under a different nameplate as the Toyota Matrix, the same manufacturer who makes the best selling Camry he mentions later. If Mr. Wilkinson is unaware of subtleties in automotives such as this, what other subtleties is he not taking into consideration? Perhaps I’m just missing the point, or perhaps I’m just getting bad Vibes from this article.
Full Disclosure: 1. I own both Ford and GM stock, so I’m rooting for them. But, it’s not going to break me if they go under. 2. I own and drive a Japanese car and I love it.

I think Mr. Wilkersons comments are right on the mark. For years the big three have opposed every sensible government initiative (removing lead from gasoline, catalytic converters, air bags, MPG standards etc) They always claimed thousands of jobs would be lost and kicked and screamed all the way to their political allys while Toyota and Honda quietly worked to meet the new requirements and took market share. Now the big three are caught with their pants (or mileage) down and they're crying to Uncle Sam for help. How ironic. You would think the big three would have learned by now to look forward and focus on the future. I don't see Toyota and Honda asking for government help.

On the face of it, Mr. Wilkinson's argument is sound, however i think his premises are faulty. "Instead of making cars Americans want to buy..." - what? The big three dominated the SUV market, which Americans gobbled up en masse - until gasoline hit $4.00/gallon. America has lived in a bubble of cheap petroleum prices and lax CAFE standards while ignoring the reality that fossil fules are a finite resource. Sure, oil production may increase, and prices may fall again - until the next time. What we are paying for now is a lack of foresight in public policy - and the myopic nature of the market.

I've heard many learned economists on Marketplace say that the global economic effects of allowing FANNIE and FREDDIE to fail might rival those of the great depression of the 1930s. Is that what Mr. Wilkinson means when he says "we'll pull through"?

While these emergency measures are by any measure repugnant, the lesson to be learned is *not* "let the free market take care of it" - the lesson should be that government regulations aimed toward the good of the public *must* be enforced. If lending policies and regulations had been enforced instead of allowing creditors to play fast and loose the result of the burst might not have been so deep. The market will do what ever it takes to make a profit. The role of public policy is to establish - and, as importantly, enforce - the rules of the game. If the referees are absent, the game will get bloody quickly.

Top notch! If US automakers were as efficient in their management & leadership as the author is with his verbiage, this situation would have been avoided. Personally, as I think back to when the big three made the risky call to push their highest margin lines, SUVs & trucks, in the face of peak oil and growing foreign energy demand--especially as they killed-off lines like the EV-1 while purchasing Hummer--I find much wisdom in Wilkinson's "Propping up yesteryear's winners leads to stagnation at best, plain old uncreative destruction at worst. The best defense is often no defense." We cannot keep encouraging undue risk-taking by the very rich at the expense of the muddled class.

Mr. Boggs,
Please be consistent. Either you support government bail-outs or you don't. You say it is brilliant if someone says Detroit doesn't need taxpayer subsidized loans. Yet you say nothing about the government using tax dollars to prop-up struggling lenders. Lenders who made bad decisions by lending to people who obviously couldn't repay.

Pages

With Generous Support From...