The Auto Bailout: What’s Behind the Wheel?

Nicolas Loris /

As discussed in Senior Research Fellow in Regulatory Policy James L. Gattuso’s recent blog post, the House this week approved a new $25 billion loan program for Detroit automakers, and the Senate is expected to soon follow suit. The loans are to develop alternatives to conventional fossil fuel powered vehicles as well as more fuel-efficient cars.

The Congressional Budget Office (CBO) estimates that the loans would cost the federal government $7.5 billion – double what the initial estimates were. CBO’s blog explains the reason:

Several recent press reports have incorrectly suggested that CBO has estimated a 15 percent subsidy cost for loans to the automakers, so that $25 billion in loans would cost $3.75 billion. CBO’s analysis, however, suggests a 30 percent subsidy cost for such loans under the conditions specified in the authorizing legislation. The resulting subsidy cost would imply a budget cost of $7.5 billion for $25 billion in loans. (Early this year, CBO had informally suggested a 15 percent subsidy cost. Since then, however, credit conditions for the auto manufacturers have deteriorated markedly — the market interest rates on their outstanding debt, for example, have risen dramatically.)”

But as Gattuso and I asked a few weeks back, is it really on the taxpayer to pay for Detroit’s change in business model. Detroit’s dependence on big, non-fuel efficient vehicles was its own doing. The strategy, not shared by rivals such as Toyota, was long a profitable one; for many years SUVs and minivans were a golden goose for the Big Three. But now this strategy is proving costly.

Moreover, not all of Detroit’s current woes are due to the lack of energy-efficient cars; high retirement and other labor costs may be more to blame. Lawrence Reed and Burton Folsom write that maybe complacency played a role:

In free markets, competition is a dynamic, never-ending, leap-frog process; the leader today can become tomorrow’s follower. If the leader has a 50 percent market share, as GM did at its peak, it must behave as if it is surrounded by competition or it soon will be. GM, and Ford and Chrysler too, should have seen it coming but didn’t, and now are incurring colossal losses while seeking help from a deficit-ridden federal government. GM’s market share is down by half. UAW membership is off by two-thirds.”

In any case, there is no reason taxpayers should bear the cost of the Big Three’s business decisions. And if the federal government bails out Detroit’s Big Three, who will be next in line claiming that they cannot fail and are in need of taxpayer help? Where does it end?