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Wednesday, September 10, 2008

Should the US Government Guarantee $25 Billion Loans to the Big-3 Auto Firms?

What Should Taxpayers Do for the Big-3 US Auto Companies?

That's the topic covered by a series of comments that prof bug left in two different threads at Carpe Diem, the libertarian web site run by Professor Mark Perry of the University of Michigan . . . and a site always worth visiting, even if (like prof bug), you're no libertarian yourself.

Two Related Issues 

The first buggy comment deals with the request by the Big-3 for a government-backed loan worth $25 billion, mainly for retooling . . . with a concentration by Ford and GM not just to bring out gas-saving vehicles like more hybrids, but more advanced technologies like lithium-ion batteries and GM's Volt engine --- which would be a plug-in electrical system.  Electricity has the big advantage that it can be produced from a variety of sources: not just oil, but natural gas (far cleaner, and with the US abundantly endowed with it), hydroelectric power, coal (again, lots and lots of it in the US, and yes, it can be made into an environmentally safe energy with added costs), wind-power, geo-thermo power, nuclear energy, and ultimately solar power . . . the sun the source of all energy in the universe (save for nuclear power itself).

And unlike oil, coal, and natural gas, these other sources of energy can't be easily exported, and hence the growing interest of China and India, among other countries desperate for new energy resources, wouldn't raise the US price to international levels.  So yes, with these commitments in mind by Ford and GM, prof bug supports the request for $25 billion underwritten by the US government (and hence ultimately tax-payers) . . . another $25 billion already provided for in the recent energy bill passed by Congress and signed into law by President Bush.

With one more proviso: it is unseemly for the top executives at Ford, GM, and Chrysler to reward themselves so richly after making managerial decisions the last ten years --- as the price of gasoline has surged steadily upward (until the last 6 weeks) --- to concentrate so heavily on gas-guzzling SUVs, sedans, trucks, and vans even if the profit-margins were higher.  Higher?  Yes . . . but then why have Toyota and Honda been so much more nimble than their American competitors in anticipating the shifts in consumer demand for gas-saving vehicles?

The Second Buggy Comment Tries to Reply 

It has to do, as prof bug tries to point out, not just with bad managerial decision-making at Ford and GM and Chrysler, but also the ways in which German and Japanese car companies are financed compared to US companies.  

Specifically, if you click here, you'll find the answer . . . as well as the pros and cons of the US system of major corporations in this country depending heavily on stock-market finance, as opposed to bank-loans used mainly by Japanese and German corporations.

A Reminder 

When anyone considers the pros and cons of US governmental subsidies in the energy sectors --- and technological changes in the car industry are intimately involved with those sectors --- he needs to keep in mind three facts in any cost/benefit calculus:

  • The international oil industry is not a free competitive market.  OPEC, by dominating oil exports --- 40% world-wide --- is a cartel that determines production levels and hence the prices of exported oil for other big exporters like Russia, Norway, Canada, Venezuela, Indonesia, and Mexico.  To analyze it as a competitive market is simply wrong.


  •  The entire energy industry in the US has been heavily subsidized by the Federal and state governments for generations now: whether oil, natural gas, coal, nuclear, hydro-electric . . . what have you.  The same is true of highways built by taxes on which gasoline and oil are delivered to gas stations and your home; and port facilities for importing oil imports; and certain limits on liabilities for nuclear energy, as well as tax write-offs.  That further interferes with analyzing energy markets generally as competitive free markets.


  • Not least --- and totally ignored by 99.9% of economists --- our country's dependence on imported oil from the Middle East and elsewhere (remember, it's an integrated market price-wise and it doesn't matter if we get only 60% of our daily 10 million barels of oil from OPEC) has entangled us way too deeply in the political and security affairs of corrupt gangster regimes in the Persian Gulf, North Africa, and Iran . . . just as the huge surge in oil prices has emboldened and fed the militaristic and aggressive policies of Russia and Iran, otherwise basket-case economies, and Saddam Hussein's WMD programs of the 1980s and 1990s, and (on a different level) the demagogy of Chavez in Venezuela.