I plan to write a series of posts on the issue of bailing out the Big Three. Let me cut to the chase on a couple of points.
First, yes, I do think we need to save the car companies. The primary reason: if they fail, the U.S. would be looking at a near-term loss of up to 3 million jobs, mainly in Midwestern states that are already beaten down economically. Given the fragile state of the economy, the consequences of this would be nothing short of catastrophic.
Second, I don’t think a bailout of the form the government is currently considering would be much help. Yes, it would buy the car companies some time. However, given that the Big Three are collectively burning through about $6 billion per month, “bridge financing” bailouts in the $25 billion range would buy them only four months. Nothing in the economy is going to change in the next four, or even six to ten months that will suddenly propel car sales and again secure the finances of the car companies. And I don’t think our country can realistically afford yet another bailout in the $100+ billion range.
So, what can be done? I have two radical suggestions. The two are not mutually exclusive.
Option 1 is for the government to buy a controlling stake in the three companies. The combined market caps of three car companies is now only about $10 billion (Chrysler is privately held; I’m guessing its value is $3.7 billion, which may be high). If the government were to buy a controlling 51% stake in these companies for all of $5.1 billion (or less), it would be able to select Board members and directly influence corporate policy and finances in whatever direction it sees fit. In fact, it might be able to do the same with much less than a 51% investment. When the economy recovers, the government would simply sell its shares on the open market and make a nice profit, which it could return to taxpayers in the form of a tax refund.
There already is precedent for this. Unless you missed it, the government now owns (or soon will) pieces of several financial institutions. And one could argue that the government also effectively owns “corporations” like Amtrak and the Post Office through tight regulations and by controlling their funding sources.
Option 2 is to offer Americans a $10,000 refund on their purchase of a new car. Instead of taxpayers footing a $25 billion tab to help the automakers—which has no direct benefit for the average Joe—I’d rather the government take $25 billion and give it back in the form of a discount to car buyers. 2.5 million people could get a dirt cheap car this year. Why would this help? Because, by keeping U.S. car factories running at full capacity for months, no one would be losing their job.
I would add a few stipulations. First, the car or truck must be assembled in a U.S. factory—but it can be a foreign nameplate. This specifically keeps U.S. manufacturing jobs intact, but keeps the playing field level. Honda will still be rewarded for making Accords in Ohio, Toyota for making the Camry in Kentucky, and so on. Remember, this is about American jobs, not GM, Ford or Chrysler jobs.
Second, optionally, we can add fuel economy sticks and carrots to the size of the refund amount. More fuel-efficient vehicles or those with key technologies (hybrids and electrics, namely) could get a bigger refund, and certain gas guzzlers could be exempted from a refund altogether.
Third, to avoid price gouging, I would add a requirement that manufacturers cannot suddenly raise their cars’ prices above list.
The beauty of this approach is that everyone benefits. Consumers get a new car at a bargain price, and still have the freedom to purchase a foreign nameplate. The car companies get their much-needed cash infusion. Manufacturing jobs are preserved. The government can provide a viable incentive for consumers to choose more fuel-efficient vehicles, thus helping to advance a sensible environmental agenda. States will get a boom in sales tax revenue. And I would expect that the stock prices of the car companies, their parts suppliers, and all the companies that support the auto industry will rise, as well, thus helping drive the broader U.S. (and world) economy.
Obviously, Option 2 is a one-shot deal, good for 2009 only. Which is why I like Option 1 in conjunction with this plan. My biggest objection to bailing out the car companies is my fear that even if they cross the chasm until the economy recovers, they still won’t be any better managed and will be doomed to repeat the mistakes they’ve made over the last three decades. Can the government do a better job by controlling their Boards? I’m not sure, but I think it’s time to try something new.
Please share your thoughts by adding a comment.