Commentary

Bail Out Car Buyers?

A bailout for Detroit would be unfair to taxpayers as well as to the firms in the industry that don’t receive subsidies, and it would distort market signals and incentivize inefficient, unproductive activities at a time when the economy can least afford it. Beyond those principled objections, there is the cold, hard fact that a bailout for these automakers under these circumstances would fail.

The Big Three are losing $6 billion per month collectively, and U.S. automakers are projected to sell even fewer cars in 2009. In other words, the operating losses will only grow. At Thursday’s hearing before the Senate Banking Committee, it became clear that the Big Three’s problems are much deeper than they originally ($25 billion) or subsequently ($34 billion) represented. Economist Mark Zandi — who was actually testifying in favor of a phased bailout — projected the full cost of a bailout at $75 billion to $125 billion over two years.

With such overcapacity in the industry already, subsidies to build more capacity or to retool would be an egregious waste of our children’s money. Yet House Speaker Nancy Pelosi still wants to see plans for Big Three investment in high-mileage vehicles, even though Americans will have even less interest in purchasing them as gas prices continue to fall nationwide.

Some raise the point that subsidizing consumption, rather than inefficient production, might be a better approach. I think there is a plausible argument that incentivizing demand behavior is more effective than incentivizing supply behavior to achieve policy outcomes. After all, the end purpose of production is consumption. For example, fuel efficiency standards imposed on auto producers compel them to produce vehicles with low or no profit margins. It hurts their bottom lines. There is only a compliance motive, and no profit motive, in making these kinds of cars. If reducing carbon emissions is an objective of policy, a gas tax would be a more direct (and probably fairer) way of achieving that goal.

Subsidizing demand, though, also carries the potential for perverse and unfair consequences. Someone who might have purchased a bicycle or a particular brand of small vehicle might suddenly be in the market for a larger vehicle from a different producer. Are such subsidies fair to the consumer who purchased a new vehicle last month or last year? Are consumers already swimming in too much debt? Is this an appropriate use of taxpayer dollars?

The best solution is to allow the bankruptcy process to work. It will be needed. There are going to be jobs lost, but there is really nothing policymakers can do about that without exacerbating problems elsewhere. The numbers won’t be as dire as the Big Three have been projecting.

As we eventually emerge from the recession, we need to stop thinking about Honda, Toyota, Nissan and the other foreign-nameplate automakers producing in the United States as non-U.S. companies. After all, they employ American workers, pay U.S. taxes, support local businesses and charities and continue to make investments in U.S. manufacturing. They are the companies leading the way forward. More broadly, we need to recognize that the world economy is no longer characterized as “our producers versus their producers” or “us versus them.”

It’s not so much competition between distinct companies that characterizes commerce in the global economy. It is really a competition between supply chains that tend to comprise value-added activities from multiple countries. Companies are not competing for markets as much as countries are competing for investment and talent. Smart public policy, by which I mean policies that carry few frictions and allow markets to work, will ensure a return to growth and high living standards.

Daniel J. Ikenson is associate director of the Cato Institute’s Center for Trade Policy Studies.