Auto Bailout – Destroying Detroit by ‘saving’ it
In a famous quotation from his 1986 address to the annual White House Conference on Small Business, President Ronald Reagan quipped that “government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
The Detroit bailout bill that passed the U.S. House of Representatives last night — agreed to by the White House and Democratic leaders but at this point apparently without enough Republican support to survive a filbuster in the Senate — is unique in that it fulfills all three of the government actions Reagan describes in one fell swoop. All it once it not only subsidizes U.S. automakers, it subjects them to heavy regulation as well that have nothing to do with profitability and everything to do with fulfilling “environmentally correct” objectives.
Existing mandates can in part — but only in part — explain some of Detroit’s downfall. As CEI’s Sam Kazman wrote recently in the Detroit News, the Corporate Average Fuel Economy (CAFE) standards are a “$100 billion research and development burden” that “have long been a noose around the industry’s neck. CAFE ignores the market, in which consumers balance their demands for fuel efficiency against other needs such as size, and forces automakers to sell models of cars, so that the “average” car meets a ceratain miles-per-gallon.
Over the years, CAFE has led to the abandonment of popular models such as the family-size station wagon. It has also meant, as Kazman points out, a reduction in traffic safety as consumers have been forced into smaller, less crashworth cars. The National Research Council estimates that CAFE has caused 2,000 additional traffic deaths per year.
Yet Congress accelerates these efficiency mandates that are deadly for the industry and, literally, for drivers, as a condition of providing the money to “save” it. As Wall Street Journal columnist Holman W. Jenkins Jr. writes, “To become ‘viable,’ as Congress chooses crazily to understand the term, the Big Three are setting out to squander billions on products that will have to be dumped on consumers at a loss.”
The bailout conditions the dollars the federal government would hand out on the industry largely adhering to an emission standard from California that is much stricter than that of the federal government and based on faulty science. As Jenkins writes, this mandate would mean “an even more massive auto wreck” that “would render most of [the industry’s] auto designs, profit centers and tooling unsalvageable.”
If Congress really wanted to provide immediate help to the auto industry it would repeal the costly CAFE, or at least get rid of the “two fleet” rule that mandates that smaller cars have to be made in the U.S., not in Europe where they are more profitable. This mandate is another expensive demand that autoworker union muscle had enacted that is now dragging Detroit down. Congress should also suspend antitrust rules to make cost-saving mergers or joint ventures easier.
In the meantime Detroit — the vast community including the parts makers and others that work with the auto industry — should really ask itself if bankruptcy would be any worse than the price of becoming an appendage of Washington in a bailout. A Chapter 11 bankrupty gives the car firms a chance of being restructured into lean, profitable companies. This bailout would not only squander billions of taxpayer dollars, but put the foot on the pedal of government regs driving Detroit into “reverse.”