This is an article from the archives. Links and some facts and findings may be outdated.

The Detroit bailout — Part 2

Daniel J.B. Mitchell is professor emeritus of the Anderson School of Management and the School of Public Affairs.

dan mitchellOn March 30, President Obama announced a new plan to bail out Detroit’s Big Three companies, offering possible tax incentives for consumers to buy new cars — assuming Congress goes along. But the plan overlooks a fundamental problem: The United States has international obligations under its trade agreements and would have to offer such incentives to buyers of any new car, including foreign-made cars or cars made in the U.S. by foreign firms.

The new plan also seeks to provide assurances to car buyers that new car warranties offered by GM would be honored if that firm went into bankruptcy. But note that even if GM and the other two U.S. firms were doing as well as Toyota and other foreign firms — which are not facing the threat of bankruptcy — they still would not be selling enough cars.

These problems add to a slew of challenges before Obama’s bailout plan, which I underlined in a Jan. 13 UCLA Today op-ed titled, “How to make Detroit productive after its bailout.” In essence, the major problem facing the Big Three American companies is that they’re not selling enough cars to be profitable, and in a prolonged recession, that problem is likely to continue.

The original plan — loaning the Big Three money — revolved around just providing cash for Detroit to keep on piling up losses. The loans would not have avoided bankruptcy unless more vehicles were sold — and the government would have nothing to show for all its lending when bankruptcy occurred. I suggested that if the policy of the federal government is to keep the U.S. auto industry afloat, it would be better to buy motor vehicles from the Big Three for use by transit agencies and other public entities. Such an approach would address the immediate problem of insufficient sales.

It is also significant that President Obama is offering less to Chrysler than to GM, which is mainly a chance for Chrysler to work some kind of merger deal with Fiat. Notably left out of the new plan is Ford. Ford has so far not asked for bailout loans, and there is no way to know what the Ford strategy was in avoiding the original bailout. But one possibility is that Ford originally hoped to be the last man standing when GM and Chrysler finally went under.

Ford could then, as the good guy that had taken no loans, magnanimously offer the federal government the option of taking selected GM and Chrysler facilities off life support — with a significant federal subsidy to finance the favor. And it would be the one remaining U.S. car company.

If that were the Ford strategy, it has been undermined by the new federal marriage to GM. Unless the feds back up Ford warranties, Ford could be further undermined as car buyers gravitate to GM, which has such a backup.

In short, my old position stands. If the federal government wants to bail out the U.S. auto industry, it needs to buy the products of that industry for use by public agencies. Then, at least if the bailout plan fails, we will have something to show for all the money that has been spent and will be spent in the effort.
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