CAFE

General Motors’ Losses Hidden by Deferral of Union Pension Obligations

by Hans Bader on October 21, 2010

in Bailout Watch, Economy, Employment, Labor, Regulation

Any General Motors bonds issued this year will be classified as junk by a key ratings agency.  Why?  There’s some risk GM will go bankrupt again, and it hasn’t really returned to profitability, the way it appeared to have. That’s because GM’s recent quarterly profit, which came after years of losses and tens of billions of dollars in taxpayer bailouts, was artificially created by the temporary deferral of billions of dollars in pension obligations that it owes to the United Auto Workers union.  Those unfunded pension obligations have risen by $6 billion since the end of 2009.  As Charles Lane of The Washington Post notes,

[A] little-noticed October 6 report from Fitch, the ratings agency, which highlighted the major unresolved issue of the bailout: pension obligations to its United Auto Workers employees. The union successfully resisted efforts to trim this long-term burden on the company through the bankruptcy process, and they continue to weigh heavily on the company’s future. Specifically, GM’s relatively robust free cash position – one of its major selling points in its pending IPO – is being artificially propped up by the fact that it is not yet legally required to make multi-billion-dollar payments into its ‘heavily underfunded’ U.S. pension funds. How underfunded are they? Well, the U.S. plans alone are $17 billion underfunded as of the end of 2009, Fitch says. When you include global operations, the total is $27 billion. . . GM’s pension obligations are actually $6 billion higher than they appeared at the end of 2009.

These obligations will likely have far more impact on GM’s financial future than the recent revelations that it lied about the Chevy Volt, which it was trumpeting in a “publicity stunt” to curry favor with politicians crusading against global warming.

Earlier, GM lied about whether it had paid back taxpayers for its bailout, which resulted in GM getting $50 billion in taxpayer money, and its finance arm GMAC getting another $17 billion.  (GM also received billions indirectly from taxpayers, through programs like the incredibly wasteful Cash for Clunkers, which cost  used-car and car-parts dealers billions.)

The Obama administration used the bailouts to keep the United Auto Workers’ massive compensation (worth up to $70 an hour), pension benefits, and rigid union work rules largely intact, while giving the UAW a big chunk of General Motors‘ stock, even though the UAW helped bankrupt the company.  The auto bailouts were so wasteful and so biased in favor of the UAW that they disturbed even the liberal Washington Post editorial board.

Another reason for treating GM bonds as junk is the way the Obama administration mistreated GM’s past bondholders.  It engineered the wiping out of General Motors’ bondholders, some of whom were non-union employees who had invested their life savings in the company, so that the GM stock that the Obama administration was giving the UAW would be worth more.

GM also faces increased regulatory burdens, such as CAFE rules ratcheted up in the name of global warming  (the initial tightening of those rules will wipe out at least 50,000 jobs in the auto industry), that will make it hard for it to expand its anemic 19 percent market share.  Other EPA global warming rules are expected to wipe out at least 800,000 American jobs and impose heavy costs on suppliers of materials used in manufacturing automobiles.  The EPA’s proposed ozone rules would wipe out 7.3 million jobs, according to one study.

Coming Soon: The Auto Purchase Mandate

by Iain Murray on April 1, 2010 · 1 comment

in Economy, Energy, Environment, Ethanol, Global Warming, Mobility, Nanny State, Personal Liberty, Politics as Usual

As threatened, the new CAFE standards have arrived, with the EPA muscling in on territory reserved by statute to the Transportation Department. As Marlo Lewis and I have noted repeatedly, this is an unconstitutional
step on a road to economic devastation.

However, in the light of recent events, this quote in particular caught my eye:

Gloria Bergquist, vice president at the Alliance of Automobile Manufacturers, said . . . “We have a hill to climb, and it’s steep, so we will need consumers to buy our fuel-efficient technologies in large
numbers to meet this new national standard.”

Even with very high gas prices, Americans have been unwilling to buy fuel-efficient vehicles in the same numbers as Europeans, because they rightly regard them as less safe. When the president talks about how
vehicles have not become more efficient over the past few vehicles, he is being disingenuous, because they have actually become much more efficient at providing more horsepower and more mass for the same amount of fuel. That’s what consumers want and in many cases need, but that’s also what makes this a particularly steep hill for the auto manufacturers to climb.

With the principle that the Federal Government can mandate that individuals purchase something now established with the Obamacare Act (although that too is unconstitutional, as my colleague Hans Bader explains), how long before we see an act of Congress aimed at forcing Americans to buy unsafe but fuel-efficient vehicles?

A chicken in every pot and a fuel-efficient car in every garage . . . or else!

Cross-posted from The Corner.

LibertyWeek 77: The Future of the Senate

by Richard Morrison on January 19, 2010

in CEI Projects, Podcast

Richard Morrison, Jeremy Lott and the American Spectator’s Joseph Lawler assemble to bring you Episode 77 of the LibertyWeek podcast. We explore the Massachusetts Senate race, Google vs. China on web censorship, the debate over global warming in Detroit, the cost of doing business in Venezuela and the inspiring philanthropic response to the humanitarian crisis in Haiti.

Policy Peril Segment 7: Fuel economy standards

by Marlo Lewis on August 11, 2009 · 1 comment

in Global Warming, Mobility

Today’s excerpt from CEI’s film, Policy Peril: Why Global Warming Policies Are More Dangerous Than Global Warming Itself, is on two global warming policies Congress has adopted: fuel economy standards and biofuel mandates.

Here are my previous posts in this series:

To watch today’s film excerpt, click here. To watch the entire film, click here.

The text of today’s film clip immediately follows. It includes footnotes to additional commentary and supporting information.

Narrator: If stopping new coal is the global warming movement’s top priority, a close second is jump-starting a ‘beyond petroleum’ transport system. They propose to do this by tightening new-car fuel economy standards. Why?

A car that gets more miles to the gallon emits less CO2 per mile [1]. But the federal fuel economy program, also known as CAFE, has serious downsides.

Sam Kazman (General Counsel, Competitive Enterprise Institute): Now there are lots of problems with fuel economy mandates. One thing, they raise new car prices. [2] Secondly, they restrict consumer choice. [3] But the worst thing is an effect you never hear their advocates talking about. Namely, fuel economy mandates kill people. [4]

Narrator: Here’s why. Heavier cars provide more mass to absorb collision forces, and bigger cars provide more space between the occupant and the point of impact. [5] Make a car smaller and lighter, and it will go farther on a gallon of gas.

Kazman: But you also make it less safe. According to the National Academy of Sciences, the current CAFE standard by downsizing cars, contributes to about 2,000 fatalities per year. [6]

Narrator: Legislation Congress passed in December 2007  requires a 40% increase in fuel economy by 2020. [7] In 2007, only two out 1,153 vehicle models met the new standards. [8] So expect more downsizing in the years ahead.

Another ‘beyond petroleum’ policy is to require the sale of alternative fuels. In December 2007 Congress also mandated that motor fuel producers sell 36 billion gallons of ethanol a year by 2022, with 15 billion gallons coming from corn kernals. [9] The result, we’re diverting massive quantities of grain from food to auto fuel. This contributes to the surge in global grain prices that is pushing millions of the world’s poorest people to the brink of starvation. [10]

But at least ethanol cuts down on CO2 emissions, right? Actually, no.

Dr. Dennis Avery (Hudson Institute): As we expand the cropland, then we get into the real trouble, because we release the greenhouse gas that’s stored in the soil as carbon. And with corn, we release twice as much gas as we would have released if we burned gasoline in the first place. [11]

[1] A gallon of gasoline (which weighs about 6.3 lbs.) produces 20 lbs. of CO2 when burned. If a car gets more miles to the gallon, it will emit fewer lbs. of CO2 per mile driven. The relationship between fuel economy (mpg) and lbs. CO2/mile is so strict that EPA bases its fuel economy ratings of vehicle models on tests that measure the carbon content of the emissions, principally CO2.

Unsurprisingly, virtually all CO2-reduction options for new motor vehicles are fuel-economy-increasing options. See p. 10 of the National Automobile Dealer Association’s comment on EPA’s reconsideration of California’s request for a waiver to establish greenhouse gas emission standards for new motor vehicles. 

[2] There are basically two ways to increase fuel economy–downsizing (making cars smaller and lighter) and new technology. Typically, advanced technology costs more than conventional technology. The Energy Information Administration, for example, estimates that California’s greenhouse gas/fuel economy standards, which President Obama recently adopted, will increase the average price of a new car by $1,860 in 2016. [Obama's program will also impose heavy burdens on the nearly prostrate U.S. auto industry, as economist Keith Hennessey explains.]

[3] The CAFE program all but killed the market for large station wagons, because automakers could not produce millions of these once popular “family cars” and meet the CAFE standard for their vehicle fleets.

In addition, as a general matter, because fuel economy mandates increase vehicle cost, they inevitably price some consumers out of the market for certain vehicle models, restricting their choices.

Ironically, the federal fuel economy program boost the production and sale of gas-guzzling SUVs. Consumers who might otherwise have purchased big station wagons instead bought large SUVs. Congress regulated SUV fuel economy less stringently because (1) SUVs are built on a light-truck chassis and thus are classified as trucks rather than as passenger cars, and (2) most SUVs traditionally were used for farming and business rather than commuting. Fuel economy standards helped create the boom market for low-mpg SUVs–a classic case of the law of unintended consequences.

[4] Sam debates the issue of whether CAFE kills with an analyst from Natural Resources Defense Council (NRDC) here.

[5] I am always amazed when people with scientific credentials deny the safey implications of regulatory-induced vehicle downsizing. How can they claim that size and weight don’t matter? That’s denying the laws of physics. There’s a reason why boxing matches don’t pit lightweights against heavyweights, or why marathon runners don’t play professional football.

Yes, new technology can improve the crashworthiness of small cars. But, as Sam explains elsewhere, a large car with new technology will still be safer than a small car with new technology. To the extent that CAFE constrains the production and sale of larger, heavier vehicles, it limits auto safety.

[6] Sam refers to a National Academy of Sciences/National Research Council (NRC) study, Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards. See pp. 25-29, especially p. 27. The NRC estimates that in 1993, a typical year, downweighting and downsizing of cars contributed to 1,300 to 2,600 auto fatalities, 13,000 to 26,000 incapacitating injuries, and 97,000 to 195,000 total injuries.  

[7] The so-called Energy Independence and Security Act (EISA). Click here to read the Congressional Research Service’s summary of the EISA provisions.

[8] Prior to investigating, I had assumed there must be at least 30-50 models on the road that met the fuel economy standards mandated by the 2007 Energy Independence and Security Act. But EPA’s fuel economy ratings for model year 2008 reveals that only two out of 1,153 models, the Toyota Prius and Honda Civic Hybrid, met or exceeded the standard (35 mpg for both city and highway driving conditions).

[9] Click here to read the Congressional Research Service’s summary of the EISA provisions.

[10] I provide references here on biofuel policy and world hunger. In May 2008, the International Food Policy Research Institute estimated that biofuel demand accounted for 30% of the increase in world cereal prices during 2007-2008. For further discussion, see Dennis Avery’s October 2008 paper for the Competitive Enterprise Institute. 

[11] Dennis’s CEI paper recaps the literature on CO2 increases from biofuel policy-induced land-use changes, including Searchinger et. al. (2008) and Fargione et al. (2008). Additional reviews of these studies are available on World Climate Report and CO2Science.Org.

LibertyWeek 46: The Great Porn Wall of China

by Richard Morrison on June 9, 2009

in CEI Projects, Podcast

Your faithful host Richard Morrison welcomes back special guest co-hosts William Yeatman and Michelle Minton for Episode 46 (listen HERE!). We start with the investors that are getting worked over by the politically-distorted bankruptcy of Chrysler, the ascension of the Swedish Pirate Party to the European Parliament and the Great Porn Wall of China. We then move on to proof that beer is better for you than water, a sign that airline travel may get more expensive, and an example of how voters deal with corrupt politicians. Finally, we wind things up with some very educational Olympic News.

Obama Panders to the UAW: $30 Billion More for Wasteful Auto Bailout

by Hans Bader on June 2, 2009

in Bailout Watch, Economy, Employment, Energy, Global Warming, International, Politics as Usual, Stimulus to Nowhere, Trade

The federal government is giving another $30 billion in taxpayer money to General Motors to allow it to operate without having to cut excessive union wages. The Obama Administration is “gambling” on its ability to turn around the company under government control.

The Obama Administration has said it will now interfere not just with the “selection of the company’s board of directors,” but also in “fundamental corporate decisions,” and “major corporate events and transactions.” For example, Obama recently pressured GM to keep its headquarters in crime-ridden, economically-collapsing Detroit.

The $30 billion is excessive even if the Administration’s wildest hopes come true. Even if federal money were the only way to keep GM afloat (which it isn’t — GM could be made competitive simply by cutting its excessively high employee wages to lower levels that still exceed average American wages), and even if the bailout saved not only GM jobs but also the jobs of “related suppliers and dealers,” “the price of the U.S. government bailout comes to about $125,000 per employee, including those working for related suppliers and dealers,” according to the Washington Post.

If GM had rejected a federal bailout and takeover, and simply filed for bankruptcy in December, it would be recovering on its own right now, since it could have used bankruptcy proceedings to tear up the collective bargaining agreements with the United Auto Workers that saddle it with excessive wage and benefits and rigid work rules, and it would also be benefiting from the recent collapse of oil prices. It was record-high gas prices that forced consumers to buy smaller cars last year, battering GM’s finances, which were based around selling big cars. But gas prices have fallen from over $4 a gallon last year to $2.50 now. So the bailout is saving no jobs, it’s just allowing GM to keep union wages high at taxpayer expense, while keeping it from becoming competitive in the long run. (The recent drop in gas prices will also mask the effects of incompetent management of GM by the Obama Administration. On the other hand, the Administration’s CAFE and global warming regulations, which GM opposed before it was taken over by the Administration, will destroy tens of thousands of autoworker jobs).

The bailout is neither necessary nor likely to be successful in the long run. In its failed auto bailout in the 1970s, Britain did the same things that Obama is doing, like propping up high union wages and promoting the production of little “green” cars consumers may not want. Its bailout failed miserably, destroying the British auto industry’s chance of survival.

“‘Countries . . . protect ailing auto companies on the theory that they need to protect jobs,’ said Maryann N. Keller, an independent auto analyst. ‘But it’s not clear that protecting companies leads to the revival of those companies.’ As for the jobs, Keller said ‘a lot of that is bunk’ because Americans would buy the same number of cars no matter who the maker is. ‘Somebody would still make the parts,’ she said. ‘They would just be made for a different customer.’”

Why is the Obama Administration doing something so wasteful? Politics. The UAW is one of the biggest sources of money and manpower for the Democratic Party and Obama, and the UAW is now calling the shots. (The UAW spent millions electing Obama).

While taxpayers have spent tens of billions of dollars bailing out the Detroit automakers, the UAW has made little in the way of sacrifices, refusing to accept cuts in pay that could keep the automakers able to compete with lower-cost competitors. As even the liberal Washington Post lamented, “the union can boast that it has been promised no loss in ‘base hourly pay, no reduction in . . . health care, and no reduction in pensions,’” even though excessive union wages and benefits helped sink the company. Meanwhile, the government has ripped off pension funds and bondholders who loaned the car companies money.

The bailouts aren’t the only outrageous waste of taxpayer money taking place right now. Even bigger is the wasteful $800 billion stimulus package, which is harming the economy, both by triggering foolish trade wars that have backfired and cost at least 40,000 jobs, and by driving up interest rates for businesses that need to borrow money to expand or create jobs. (The government is keeping down interest rates on its own debt by printing vast sums of money to buy its own bonds, in order to finance the exploding national debt, which will result in massively higher taxes).

New fuel economy rules will make cars more costly, less safe, trigger regulatory cascade

by Marlo Lewis on May 19, 2009 · 4 comments

in Global Warming, Odds & Ends

 

At some point today, the EPA and the Department of Transportation (DOT) will propose a first-ever joint regulation to establish first-ever greenhouse gas (GHG) emission standards for new motor vehicles. The new standards, covering model years 2012-2016, will raise federal fuel economy standards to 35.5 mpg in 2016.

This is considerably more stringent than the standard Congress adopted in the December 2007 Energy Independence and Security Act (EISA), which would boost average fuel economy to 35 mpg by 2020.

This is bad news for three reasons.

New cars will be less safe. The proposed standards will require the average car and light truck to be 40% more fuel efficient by 2016. That’s a very aggressive schedule. To meet it, automakers will have to deploy advanced technologies (such as hybrid engines), but that won’t be enough. They’ll also have to reduce average vehicle size and weight. That, in turn, will at a minimum make the average car less safe than it would otherwise be.

Why? It’s a matter of physics. Heavier cars provide more mass to absorb collision forces, and larger cars provide more space between the occupant and the point of impact. Make a car smaller and lighter, and it will go farther on a gallon of gas (and emit fewer pounds of carbon dioxide per mile), but it will also provide less protection in collisions. The National Research Council estimates that the pre-EISA (27.5 mpg) fuel economy standard contributed to about 2,000 additional fatalities per year.

New cars will be more costly. As an unnamed senior administration official said yesterday in an embargoed press briefing, the EISA fuel economy standard will add $700 to the cost of a new car in 2016. The revised standards will add another $600 to the average sticker price. Yet the anonymous official claimed the new rules will help revive the prostrate auto industry. Yep, increase the average cost of a new car by $1,300, and more people will buy them! 

As my colleague Sam Kazman comments, the federal fuel economy program “kills consumers by reducing vehicle size, and now it may well kill car companies by forcing them to produce cars that consumers don’t want.” 

The GHG standards will start a regulatory chain reaction with potentially devastating economic impacts. The new standards are the regulatory complement to the endangerment proposal EPA issued on April 17. As explained here and here, once EPA and DOT finalize the Fuel economy/GHG emission standards, an estimated 1.2 million previously unregulated buildings and facilities will qualify as ”major stationary sources” of carbon dioxide under the Clean Air Act’s Prevention of Significant Deterioration (PSD) pre-construction permitting program. Thousands of small- to mid-size firms could be compelled to obtain PSD permits in order to build or modify such “major stationary sources” as office buildings, enclosed malls, big box stores, and commercial restaurants.

The PSD  permitting process is costly and time consuming. In 2003, the average permit cost $125,120 and 866 hours  for regulated entities to obtain (not included any technology investments regulated entities had to make). No small business could operate under the PSD administrative burden. A more potent Anti-Stimulus would be hard to imagine.

NADA report proves California waiver would create regulatory patchwork

by Marlo Lewis on February 13, 2009 · 2 comments

in Energy, Global Warming, Legal, Mobility

A front-burner issue facing Environmental Protection Agency (EPA) Administrator Lisa Jackson is whether to grant a waiver under the Clean Air Act allowing the California Air Resources Board (CARB) to implement first-ever greenhouse gas (GHG) emission standards for new motor vehicles. Thirteen other states are poised to adopt the CARB program if Jackson grants the waiver. In all, about 40% of the U.S. auto market would come under the CARB rules.

Jackson’s predecessor, Stephen Johnson, rejected CARB’s application  in December 2007.  His reasons, published in the Federal Register in March 2008, may be summarized as follows. EPA’s historic practice has been to grant CARB waiver requests to address air pollution threats arising from circumstances specific to California–its topography, regional meteorology, and number of vehicles. In contrast, global climate change is, well, global. Conditions associated with global climate change in California are not sufficiently different from those in other states to justify a separate emissions program.

This argument, which is tantamount to saying that EPA won’t allow CARB to combat global warming because global warming is bad for people everywhere, predictably elicited scorn from California politicians and environmental groups.

“Patchwork Proven,” a new report by the National Automobile Dealers Association (NADA), presents two compelling arguments against granting the waiver that Johnson should have made.

First, granting the waiver would violate the Energy Policy and Conservation Act (EPCA), which prohibits states from adopting laws or regulations “related to fuel economy.” Yes, I’m well aware that in Central Valley Chrysler-Jeep, Inc. v. Goldstone (2006), the U.S. District Court for Eastern California held that EPCA does not preempt CARB from establishing GHG standards for new motor vehicles. However, the Court’s reasoning was spurious, and Johnson should not have given it a free pass.

The CARB emissions program is essentially fuel economy regulation by another name. CO2 comprises 97% of the GHG emissions from motor vehicles. Since there is no commercial technology for capturing or filtering out motor vehicle CO2 emissions, the chief way to decrease CO2-equivalent grams per mile (that’s how the CARB GHG standards are calibrated) is to decrease fuel consumption per mile, i.e., increase fuel economy.

As “Patchwork Proven” points out, the relationship between fuel economy and tailpipe CO2 emissions is so close that EPA tests compliance with federal fuel economy standards by measuring vehicular CO2 emissions. The bottom line: “Absent a significant increase in new vehicle fleet fuel economy, it is impossible to comply with CARB’s regulation.” So the CARB emissions program is substantially “related to fuel economy.” As such, it is prohibited by EPCA.

Alas, in this day and age of judicial activism and global warming hysteria, we should not expect Jackson to pay heed to the spirit of EPCA.  However, she and other Obama Administration officials should be worried about havoc that the waiver would wreak on the distressed U.S. auto industry.

CARB and its allies repeatedly deny that granting the waiver would create a regulatory “patchwork,” with automakers required to comply in different ways in different states. According to them, there would be at most two programs: the federal program and the California program.  A dual system of regulating air pollution from vehicles has been in place since the start of the Clean Air Act. Vehicles built to federal standards are “federal cars” and vehicles built to CARB standards are “California cars.” Automakers have had no trouble building  cars that meet two different emission standards. Promulgating GHG emission standards would merely update a system that has worked well for decades, CARB contends.

The fundamental flaw in this argument is that CO2 is not like the air-quality damaging pollutants subject to existing EPA and CARB emission standards.  For smog-forming pollutants such as nitrogen oxides, both EPA and CARB specify how many grams per mile individual vehicles may emit. That’s not how CARB regulation of GHG emissions would work. There would not be two types of vehicles, “California” and “federal.” Rather, the CARB standards specify the CO2-equivalent grams per mile that each automaker must attain on average for the fleet it delivers for sale. In other words, the CARB program implicitly specifies fleet-average fuel economy.

This is a radical departure from previous EPA and CARB emission standards, and it inexorably produces a regulatory patchwork.

Here’s why. Consumer preferences and the corresponding mix of vehicles delivered for sale differ from state to state. For example, in 2007, the Dodge Ram (with a fuel economy rating of 18.7 mpg) accounted for 20.66% of all Chrysler vehicles sold in California, but only 9.46% of all Chrysler vehicles sold in Rhode Island, and 8.43% in New Jersey. In contrast, the Jeep Grand Cherokee (with a fuel economy rating of 20.2 mpg), accounted for only 5.23% of Chrysler vehicles sold in California but 11.23% of Chrysler vehicles sold in Rhode Island, and 16.26% in New Jersey.

The number and percentage of vehicle models an auto company “delivers for sale” differ from state to state.  For any auto fleet, no two states are likely to have the same average fuel economy or CO2-equivalent grams per mile.

Thus, to comply with the CARB standards, automakers would have to adjust the “mix” of vehicles offered for sale in each state adopting those standards. In each such state, an automaker would have to “deliver for sale” enough vehicles with CO2-equivalent per mile (fuel economy) ratings above the CARB standard to offset vehicles delivered for sale with ratings below. The “mix-shuffling” required for compliance  in State A would likely be different from that required for compliance in State B, C, and so on.

Note that the CARB program would create a vehicle-rationing patchwork even if there were no competing federal fuel economy standards. As the NADA report puts it, “If CARB’s regulation were to take effect in all 50 states, the resulting 50-state patchwork would require automakers to manage 50 unique state fleets and to individually meet CARB’s standard 50 different ways.”

Since the current mix in each state is determined by consumer preference, the adjusted mix would clash with consumer preference. The most likely compliance strategy would involve “rationing larger vehicles, discounting smaller models for quick sale, or other pricing strategies that distort the market,” the NADA report warns. Is that any way to rescue the auto industry?

Adding insult to injury, it’s not even clear that the CARB standards would achieve any significant reduction in emissions. CARB claims that adoption of its standards by 13 states would eliminate 59% more CO2 emissions in 2020 than would compliance with federal fuel economy rules. But companies forced to “deliver for sale” smaller, lighter, more fuel-economical vehicles in the CARB states would be allowed, under the federal fuel economy program, to sell more large, heavy, gas-guzzling vehicles in non-CARB states.

Moreover,  if CARB rules restrict the supply and increase the cost of gas-guzzlers “delivered for sale” in California, for example, Californians would still be free to buy lower-priced gas guzzlers in Nevada and bring them back home. Emissions in California might go down somewhat, but auto sales, jobs, and tax revenues might go down even faster.

California politicians and environmental lobbyists talk about the CARB emissions program as if it were the greatest thing since sliced bread. Lisa Jackson would be well advised to read “Patchwork Proven” before deciding on CARB’s waiver request.

Auto Bailout – Destroying Detroit by ‘saving’ it

by John Berlau on December 11, 2008 · 8 comments

in Bailout Watch, Economy, Mobility, Nanny State, Odds & Ends, Personal Liberty, Politics as Usual, Regulation, Zeitgeist

In a famous quotation from his 1986 address to the annual White House Conference on Small Business, President Ronald Reagan quipped that “government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

The Detroit bailout bill that passed the U.S. House of Representatives last night — agreed to by the White House and Democratic leaders but at this point apparently without enough Republican support to survive a filbuster in the Senate — is unique in that it fulfills all three of the government actions Reagan describes in one fell swoop. All it once it not only subsidizes U.S. automakers, it subjects them to heavy regulation as well that have nothing to do with profitability and everything to do with fulfilling “environmentally correct” objectives.

Existing mandates can in part — but only in part — explain some of Detroit’s downfall. As CEI’s Sam Kazman wrote recently in the Detroit News, the Corporate Average Fuel Economy (CAFE) standards are a “$100 billion research and development burden” that “have long been a noose around the industry’s neck. CAFE ignores the market, in which consumers balance their demands for fuel efficiency against other needs such as size, and forces automakers to sell models of cars, so that the “average” car meets a ceratain miles-per-gallon.

Over the years, CAFE has led to the abandonment of popular models such as the family-size station wagon. It has also meant, as Kazman points out, a reduction in traffic safety as consumers have been forced into smaller, less crashworth cars. The National Research Council estimates that CAFE has caused 2,000 additional traffic deaths per year.

Yet Congress accelerates these efficiency mandates that are deadly for the industry and, literally, for drivers, as a condition of providing the money to “save” it. As Wall Street Journal columnist Holman W. Jenkins Jr. writes, “To become ‘viable,’ as Congress chooses crazily to understand the term, the Big Three are setting out to squander billions on products that will have to be dumped on consumers at a loss.”

The bailout conditions the dollars the federal government would hand out on the industry largely adhering to an emission standard from California that is much stricter than that of the federal government and based on faulty science. As Jenkins writes, this mandate would mean “an even more massive auto wreck” that “would render most of [the industry's] auto designs, profit centers and tooling unsalvageable.”

If Congress really wanted to provide immediate help to the auto industry it would repeal the costly CAFE, or at least get rid of the “two fleet” rule that mandates that smaller cars have to be made in the U.S., not in Europe where they are more profitable. This mandate is another expensive demand that autoworker union muscle had enacted that is now dragging Detroit down. Congress should also suspend antitrust rules to make cost-saving mergers or joint ventures easier.

In the meantime Detroit — the vast community including the parts makers and others that work with the auto industry — should really ask itself if bankruptcy would be any worse than the price of becoming an appendage of Washington in a bailout. A Chapter 11 bankrupty gives the car firms a chance of being restructured into lean, profitable companies. This bailout would not only squander billions of taxpayer dollars, but put the foot on the pedal of government regs driving Detroit into “reverse.”