November 17, 2008
Economics Department
On the Calls for an Auto Industry Bailout
I was planning to write a post on the foolishness of bailing out the big domestic auto makers, but Kip Esquire has already written it for me. This is an important point to remember:
"Bankruptcy" is not the same as "liquidation." No one is seriously suggesting that General Motors be liquidated, all its plants shuttered, all its equipment left to rust and all its employees let go. Any obfuscation on this point is disingenuous fear-mongering.
Read the whole thing.
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It looks like the folks in DC are hell-bent to give the stimulus package another try seeing as the first one didn't have any real effect.
This time it's the car industry.
While the sanity of blowing cash around and running the national debt up even further is questionable; it seems inevitable - so this time let's target unemployment, create AMERICAN jobs and pump up the economy all at one time.
Consider the following:
Manufacturing costs of motor vehicles are 65% labor (i.e.: W-2 income), that's not all direct but due to suppliers. GM alone has over 1300 suppliers. (That's a lot of jobs!)
1 in 10 Americans makes all or part of their income due to the automobile industry.
Money turns over 5 times in a year.
Thus a vehicle with a manufacturing cost of 20K produces 13,500 in W-2 income which in turn becomes a total of 65K in 12 months due to the 5 turnovers.
(This isn't magic, it's simply how the economy works.)
Our domestic car makers are saddled with legacy costs, most of which will reduce dramatically in 2010 due to contract changes. They need to survive to get there.
Our own over-zealous government with a virtual alphabet soup of regulatory agencies has been no help either.
Foreign competitors have worked off-shore collectively to meet various US gov't. imposed emission and safety standards, thus dramatically reducing those R&D costs. American car companies are prohibited from that by our FTC.
Make no mistake; it’s no surprise that once again government has been a major part of the problem.
Here's the solution.
Instead of either shipping cases of cash off to car makers; or sending us all another check:
Send out a voucher for say $1,000 good on a motor vehicle for the percentage of the vehicle that's domestic. (Civic = 70% Ford Explorer=80%)
Let those not interested in a new car sell or give away their vouchers (Ebay would be loaded with them in no time flat) and those that are so inclined can use as many as they can get their hands on up to the full MSRP of the vehicle.
This would bail out the car industry without giving them a dime directly
Further it would reduce the overall age of the nation’s cars which would in turn;
increase overall fuel economy & decrease pollution.
Strengthen the dollar!
Since vehicles with a higher domestic content would be moving better this would reduce our imports, strengthening our dollar which would in turn further reduce what we pay for anything imported ...like gas!
Jobs
Instead of simply bailing out a few big companies, this would cause such a run that it would create employment throughout the industry affecting over 1300 suppliers and their workers.
That would give the economy good swift kick right where it needs one!
Pays for itself!
Since money turns over 5 times, and the vouchers are only good for the domestic content of the vehicle, every dime would be spent in the United States creating taxable income.
What is the income tax on 65,000 anyway?
(Remember? 20K manufacturing cost = $13,500 W-2 income x 5 = $65,000)
Another Stimulus Package?
I'm sure you'll agree that this makes more sense than simply sending out checks; many of which will be used to buy new flat screen TV's usually made in Malaysia or some such place.
As soon as I saw this long, pre-written comment post, I reached for the delete key. I don't like these kinds of posts. It's like calling in to a radio talk show and reading from a script: They cut you off.
But you know what? This isn't the worst bailout idea I've heard.
>>But you know what? This isn't the worst bailout idea I've heard.
Thanks!
I think it's the best idea I've had in 23 years.
-Doug Hageman / Authentic Connecticut Republican
Heh. I think you're wrong in a number of places, but there are a few parts of your idea I really like a lot. I'm writing another post just about your idea.