The Automobile Bailout Solution: Unique and Simple

In the next few weeks Congress will approve a bridge loan package for the automobile industry totaling perhaps $25 billion. I presume it will be done before President Bush leaves office so that President-elect Obama will not have that particular stain on his hands. History will conveniently ignore the political makeup of the current legislature that signs off on the financing deal.

Congress will have excoriated the executives of the auto industry for their profligacy, pundits will have spanked the American consumer for its love affair with large vehicles and oil, experts will have promulgated business strategies and operational wisdom from afar, and the public will point to Congress for failing to create, enact or enforce adequate mileage and pollutant standards. During this opinion free-for-all we will have ignored the fact that our automobile workers are some of the finest in the world, not withstanding their pay. We will conveniently ignore the fact that we built our competitors' industries and allowed their restrictive import quotas. We will presume that the managers, designers and executives of the automobile industry have no conscience and no desire to build quality and environmentally sound vehicles -- as if they are not citizens of the world without personal care for future generations. Then the American taxpayer will sign up to hand over $25 billion. This, in my opinion, is necessary for a number of reasons. First, America is too big to cross in a Renault Mégane. Next, Americans really are bigger than the Europeans and that Mégane is too small. And finally, until we address the pathetic lack of adequate mass transportation, both inter- and intra-state, Americans will buy cars they feel safe in, translated as large, polluting gas-guzzlers, no matter what the metropolitans think the rurals should do.

When we are done with the hand-wringing and finger-pointing and a bit before the check-writing, it may be a good idea to think like American bankers -- those still in existence -- instead of whinging Eurocrats. Our bankers identify the need and lend to it, they securitize the debt in multiples, and the hallmark of all good lending practices: they spread their risk. The automobile industry is by all accounts undercapitalized and outdated, which makes it unclear what the true extent of the "need" is and what the best way is to make the debt secure. Instead of asking taxpayers to lend into an unclear system, it seems prudent to ask how taxpayers can spread their risk.

And now a word from Henry Kissinger and Richard Nixon: linkage. Kissinger defined linkage to the Senate Foreign Relations Committee this way: "The administration sought to move forward across a broad range of ideas so that progress in one area would add momentum to the progress of other areas."

The greatest ideas are often the simplest. Impediments to implementation of ideas often come from those who, through accepting change, have the most to lose. It makes good sense to have policy decisions based on expected or hoped-for behaviors and linked to outcomes on several fronts with attendant rewards or punishments. This system can be applied to the current automobile lending request. The question is: who are the players?

For the last fifty years the energy industry has benefited from an almost-incestuous relationship with the automobile industry and by extension, Congress. For the last five years, the energy industry has increased profits and increased the size of its balance sheet while benefiting from advantages other industries don't enjoy. There are arguments for and against the billions of dollars of tax breaks that the energy industry gets, and I have argued for them for the better part of thirty years.

I grew up in the oil patch. I remember a dinner in the '80s when then-Treasury Secretary Don Regan promoted removing intangible drilling costs from the energy industry's panoply of tax benefits. We were horrified. In the twenty-plus years since, there have been a number of attempts to reduce or eliminate them. Most Americans don't understand how all the tax benefits work. But they do understand these incontrovertible facts: in the last five years the combined profits of the American energy industry have increased substantially more than $25 billion, the cash on hand of the American energy industry has increased substantially more than $25 billion, and finally, the American energy industry has received more than $25 billion in tax benefits and relief. These "overages" take into account normal industry growth projections.

The automobile and the energy industries are inexorably linked. A cursory look at the past relationship between Atlantic Richfield and General Motors and the public transportation of Los Angeles is convincing enough. Even the most casual of observers get the fact that as the Big 3 automakers wean themselves from dependence on oil, energy companies are reshaping themselves to something more than oil and gas producers, refiners, and marketers.

There is logic in Congress promoting this linkage. Simplicity is the key. It makes good sense for Congress to say "no" to an outright bridge loan to the automobile industry. It makes more sense for Congress to tell ExxonMobil, ARCO, Chevron, ConocoPhillips and their fellow travelers that they should lend the automobile industry $25 billion. The taxpayers could guarantee the loan based on performance criteria.

Congress really can force that loan. If the taxpayers have to make the loan, Congress could take away all the tax benefits from the energy industry until the bridge loan is paid off. Or they can let the free market system between two titanic industries figure out mutual benefits, with some old-fashioned congressional guidance.

The good thing about capitalism is that, unlike democracy, there are no inalienable rights to survival. I'm willing to bet that the oil companies would strike a harder bargain than Congress will. That would strengthen both industries, and that's good for everyone.

Comments

[wordvarc]

Hey conservative capitalists.

Maybe let BigAuto die.

Put the 25 billion in a bridge fund to cover old pensions and provide healthcare.

Let new creative thinkers buy their junked factories, initiate innovative technologies, and hire new and old workers.

[research]

Pay 10B$ to buy iout the big three

or pay more than

100 B$ in

3 Million unemployment claims.

[berkeleygirl1962]

Interesting idea. But isn't it simpler to nationalize the Big Three?

[research]

less than 3B$ GM market capitalization.

Moore is right!

buy the big 3 out.

replace the management.

raise CAFE standards.

[lksfriday]

Many times individuals will over look the simple approach and proceed down the dark and lonely path doing it the "hard way" without thinking. Sometimes we just sit back and let them make mistakes and hope they will learn from them and improve.

Obviously, that approach with automakers has not worked.

Why do Americans seem to think we have to have a new car every 2 or 3 years? Why do we have to out-do-the-Jones? Why does everyone have to have the biggest, newest, latest, brightest car on the road? What would I buy? The best fuel efficient non-electric car possible. Texas is too big to even think about having an electric car.

American carmakers really got themselves into a bind and Mr. Price's idea seems workable but is anyone out there in the real world that can make the changes listening? I think that is somewhat doubtful!

What can our leaders do to solve these major economic problems?

Simple, look to those like Mr. Price who is thinking outside the box and have solutions that will make a difference?

Oh, while you're fixing the auto industry, pass this along --- Folks, standardize the side of the car that the gas tank is on. So that we do not have to wonder which way to pull into a gas station when you are in another car!

[mydogshakespeare]

Brilliant! But would Big Oil control of Big Auto prevent with change to electric vehicles?

[ctpriest]

Every time I read something by this guy I am struck by his clarity of thought and his ability to write.
In this article he takes the simple industry practice (one that both the energy industry and the automible manufacturers have always done) of upstream and downstream lending-that is, lending to suppliers and purchasers when the needs arise, and adds to the mix Congressional incentives (loan protections), disincentives (loss of tax benefits) and public policy needs (polution and mileage standards) in a way that keeps tax dollars from being wasted or risked.
Simple! Workable! Capitalism at its best!
Is anybody in Washington listening to this guy? Maybe somebody should tell Obama to have a cup of coffee with him every couple of months. He's a ground level thinker when everybody else seems to hover at 30 thousand feet.
Thanks Mr. Price.

[avazd]

"Capitalism at its best" would be for us to let these companies all go the way of the Edsel to make room for some real innovators in car manufacturing. A bailout, or a loan, from any source just creates unfair advantages and stifles true competition. Let survival of the fittest take over. I'm not talking about the misunderstanding of "fittest" as "strongest," but the real meaning of "fittest": most adaptable to change. Innovate or die. Now that's true capitalism at its best.

[GaPeach7]

And the 3 million+ workers who will be out of jobs? It will take time for the "real innovators in car manufacturing" to come into the industry (and if they are already in the industry, then I do not know about them). What do you propose we do about the workers who will need to wait for these "innovators"?

[BuckeyeGal]

Ah yes, true capitalism. Sterling examples include AIG, Citigroup, JPMorgan, Well Fargo, right?

[USBrit]

And the oil companies would encourage innovations for the car companies like V10 engines that get 5 MPG, much as they have for the last 100 years. Personally speaking, the big three have known since the 1970's they were on the wrong road and have steadily followed policies that emphasize short term results, as in for the next quarter or perhaps as long as the next year, and have consistently, along with the oil companies (and the rednecks), fought anything that smacked of greater fuel efficiencies - they even spent a great deal of money fighting safety standards in the 60s. The only positive I can see in this plan is it would be oil money that would be tossed on the fire rather than ours. American companies do a far better job of marketing than they do of innovation and my guess is the big 3 still want to attack things along those lines, especially now that oil is temporarily cheaper. The 'free market' does not solve all ills. It is time to get some longer term society level goals in place such as much improved fuel mileage, otherwise I say let the big 3 die. And better fuel mileage suits the oil companies not at all.

[disgustedcitizen]

This is the second time I have heard the option of having Big Oil bailout the Big Three. This is an excellent idea. Lord knows that Big Oil wouldn't be where it is today, without the Big Three, so it is a logical extension.

[blueshifter]

I'm sorry, but that is a terrible idea. It's like having a heroin dealer lend 100 dollars to a junkie, to help them get back on their feet. The oil industry would, implicitly or explicitly, attach conditions to the loan that would insure the auto manufactures continue to create hydrocarbon inefficient engines.

The simple idea is to tax gasoline, impose a carbon cleanup cost on it, make the consumer feel the carbon pain. This will force the market to look for the best carbon mitigating transportation solutions. Put the tax money to work on the levies were gonna need for all our coastal cities. The water's gonna start rising, trust me on this.

And the big american car companies, having to compete with the big subsidized foreign companies? let them die. We need the shakeout. Let Tesla take over; American ingenuity will rise to the top - IF we let it, by letting bad organizations go extinct.

[customgreen]

On the face of it your idea sounds good. I reality it will never see the light of day. Now if I were an energy company, lets say like Exxon/Mobil I would buy a Chrysler, or even a GM. I could use my vast quarterly profits and use them to transform the industry. Given the way we now look at oil (at least for now) it would make good sense for the oil producers to wrap it all up. Buy Chrysler transform them into a more fuel efficient company and at the same time get fantastic free press for being out in front of the energy crisis. As long as they are supposedly transforming into more diversified fuels, it could all tie in.

[drkazmd65]

Interesting take on the problem customgreen,...

It would take vertical integration in the transportation industry to a whole other level.

Maybe BP or Shell would consider a working partnership with Ford or GM just to compete.

Hmm,,....