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Why Aid For Auto Industry Is A Clunker For Taxpayers

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The Tampa Tribune

Published: December 12, 2008

If huge loans to U.S. automakers would save the domestic part of the industry and help the nation more quickly pull out of the recession, it would be well worth supporting.

But the deal as just approved by the U.S. House puts $15 billion at risk with no guarantees for anyone. No wonder polls show taxpayers overwhelmingly oppose it.

Republicans in the Senate are likely to stall the deal and possibly kill it. The consequences might not be pretty, but things could get even uglier if Congress starts pouring taxpayers' dollars into private enterprises with questionable management and high production costs.

The bailout of the financial industry made more sense because without access to credit, all businesses would be in jeopardy. The bankruptcy of one of more major automakers would be a shock, but it's not in the same category as bank closures.

On the flip side, Congress isn't wise enough to choose which private businesses should be allowed to fail and which should be saved from their own failed business model.

Republican Sen. Jim DeMint of South Carolina, when asked what would happen if the government bailouts continue, gave a sobering reply.

"We're going to have riots," he told Americans for Limited Government. "Already people are rioting because they're losing their jobs and somebody else has been bailed out. And the unfairness of it becomes more and more evident as we go along, because the auto companies may be hurting, but there are very few companies that aren't hurting. And they're going to hurt. We don't have enough money to bail everyone out."

He's right; we don't.

The federal government's share of the national economy has soared to 25 percent, the highest it has been since World War II.

That's without a national health plan. It's with absolutely no progress on preparing Social Security and Medicare for the looming retirement of the baby boom generation.

A big problem facing the automakers is that they promised union workers good pensions and health care for life. Taxpayers, unsure about their own retirement security, are in no mood to help cover the overly generous promises to well-paid, well-insured autoworkers.

There is disagreement over how much an average autoworker is paid, and newly hired workers do get considerably less than long-timers. The automakers themselves calculate that their average cost for an hourly worker, including all benefits and taxes, is $73.26 an hour.

Under the proposed law, a car czar would be appointed to oversee reforms that are not clearly defined. Presumably, the hourly cost would come down and union concessions would be required.

And if the federal car czar was unsatisfied with a company's progress, he could force it into bankruptcy.

It might work out well, but it might not. As President-elect Barack Obama put it, the collapse of the car industry "would lead to a devastating ripple effect throughout our economy."

The situation will be no different in the spring. It's hard to imagine the car czar making a decision that the president and a majority of Congress believe would devastate the economy. More likely, he would lead the lobbying effort for more loans.

Another issue is whether $15 billion is enough. The Big Three originally said they needed $38 billion.

Their books are out of balance. The value of all GM stock is now about $2.6 billion, and the company's debt is $45 billion.

As part of the conditions of the federal loan, the federal government gets stock worth 20 percent of the loan, which would make Congress a major owner of GM.

The government's rationale is to save jobs and boost the economy, so how would Congress react, as a stockholder, when foreign competition threatens the value it its investment?

The result could be bad news for consumers.

Taxpayers wouldn't be so irate if Congress were giving them loans and subsidies to buy Chevrolets, Fords and Chryslers. But taxpayers can't see a role for themselves in this deal except as the source of the cash, and they're right.

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