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Thinking “Pull” Rather Than “Push” with the Auto Industry

November 16th, 2008 . by economistmom

Nice cartoon by Drew Sheneman (for the Star-Ledger, click on image for larger view), and good article in this morning’s Washington Post by Steven Mufson on the auto industry and the dilemma faced by federal policymakers in considering whether and how to help.  Do we throw life-support money at the industry to “save” it and risk much of that money going to those who made the bad decisions, or do we not, and risk the broader economic consequences of letting the industry “die” a natural death–even if a rebirth and transformation might eventually be possible?  And can the money that was supposed to be used for that longer-term transformation be put out more quickly, and justified, as life support for the industry?  Can we put conditions on the life support so that the shorter-term and longer-term goals aren’t necessarily contrary to each other?  As Steven explains in the article (emphasis added):

In Washington, President Bush and others see the $25 billion in loans Congress has already approved to retool the ailing automobile industry as a convenient pot of money to help automakers survive the economic tumult.

But here [in Detroit], automakers regard that money differently; it was part of a 2007 quid pro quo for helping them meet tough new fuel-efficiency standards. Without it, they’ll need to revamp their fleets to meet that mandate without assistance, and that, they say, is no easy task.

Ron Gettelfinger, president of the United Auto Workers union, said yesterday in a conference call that “the intent on that was to build an industry of the future.” The purpose of getting additional money now is different, he said. “The other thing is let’s keep the industry alive so we can move into the future.”

The tension in Washington is pitting the long-range policy goals Congress had in mind a year ago when it approved the loans against the immediate needs of the financial crisis. Under Energy Department rules, the original $25 billion would only be paid out after companies invest in new advanced technologies. Disbursements would be made over several years. An official at one major automaker said he expected that two-thirds of the money would end up going to suppliers of parts rather than to the Detroit threesome.

Democrats oppose the Bush administration’s bid to dip into the package originally intended to help meet the corporate fuel economy standards known as CAFE.

“That robs the industry’s future to pay for the present,” said Jim Manley, a spokesman for Senate Majority Leader Harry M. Reid (D-Nev.). “The first $25 billion, that was part of the grand bargain for CAFE standards,” said Michigan Gov. Jennifer Granholm (D). “That was to make sure that we in America produce the next engine, the next fuel-efficient engine that will wean us off foreign oil. The other part is a bridge loan to get us through this financial crisis.”

Many long-time critics of the auto industry who had pressed for a link between taxpayer money and higher fuel-efficiency in the 2007 legislation are torn. They find themselves in the surprising position alongside carmakers who want to preserve the purpose of that loan commitment.

“Taxpayers need and deserve these real benefits in return for their investment,” said Michelle Robinson, an auto expert at the Union of Concerned Scientists. “Our core principle is that it does not make sense to provide money for nothing. It would be bad for the industry, especially the workers, if we simply provide taxpayer money, and then in two years when gas prices spike again the companies are not prepared to sell the vehicles that Americans want.“…

To the extent that GM and Ford have steered away from gas guzzlers, the promise of retooling loans has held less sway than this year’s spike in oil prices and the collapse in SUV sales.

The July jump in oil prices to $147 a barrel “spooked everyone,” said Jon Lauckner, GM vice president of global program management. “It will ultimately decide what consumers want to buy.”

“Our view is that oil prices will not stay where they are today,” he said. “Beyond 2010, oil prices will look a lot more like they did in July than the way they look in November.”

Aha!  Can you say “carbon tax“?… Or “higher gasoline taxes”?… Lots of my economist friends–on the left and the right–can and do.  We ask: why are we wasting so much time, money, and energy (pun intended) pursuing policies toward the auto industry that only seem to push back against the surest way to get the “most transformation per taxpayer buck”?  Let’s permit, or even enhance, how market prices can more appropriately “incentivize” the auto industry to produce more fuel-efficient vehicles.  Even the auto executives are admitting (above) that market prices are what really get them to take notice and “transform.”

The Tax Policy Center’s lead blogger (on “TaxVox”), Howard Gleckman, has it just right in this post from a few days ago (sorry, Howard, just catching up…):

The bailout is being peddled as a way to encourage development of energy efficient cars. But money being fungible, most of this cash will go elsewhere—to CEOs, for health care, and for marketing. It is easy for a big corporation to shuffle costs to take advantage of government largess. Just look at what companies do to maximize the R&D tax credit. Besides, if I wanted to encourage technological entrepreneurship, the very last places I’d put my money would be Ford, GM, and Chrysler. As I have written before, if you really want to encourage alternative energy, raise the price of fossil fuel by boosting taxes on its use. If the price of gas is high enough, private research capital will flow like water.

The point is that to the extent that we (in Washington) are claiming we care about truly transforming the industry and not just “throwing money” at the problem, we ought to be thinking about the incentives created by our “assistance” and make sure we’re not pursuing counterproductive policies.  We need to come up with policies that will most effectively “pull” the auto industry (give them the right incentives) to really transform (mostly on their own)–rather than just the old policies that just try to “push” the auto industry out of their ditch–with still no place to go and still nothing “in the gas tank.” 

But to the extent that we really are still willing to “throw money” at the auto industry’s problem, I still hope we’ll throw money to those who really do need the assistance–that is, the unemployed or soon-to-be unemployed–rather than those at the top of the industry who really don’t need more reason to keep doing business in Detroit “as usual.”

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