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John R. Price Headshot

The Automobile Bailout Solution: Unique and Simple

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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 The automobile industry is by all accounts undercapitalized and outdated, which makes it unclear what the true extent of the "need" is and what the best way is to make the debt secure.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.