my harebrained scheme
So, we can all pretty much agree that the American economy is going to hell in a handbasket. It also seems clear that nobody really knows what to do about it, so even though I’m not an economist, a policy specialist, or anything that even remotely qualifies me to propose a solution, I’m gonna go right ahead and propose a solution.
For me, the straw that breaks the camel’s back is the current push by the auto industry for another big bailout. They’ve spent years making cars that are less attractive and less reliable than the competition’s, and they continued to focus on giant gas-guzzling vehicles long after it made any sense. They deserve to fail so very, very badly.
We employ too many people to just lay off all at once, they whine. Too many sub-industries depend on us, they threaten — if we fail, dominoes start falling until we’re all ruined.
It’s hard to accept, but they probably kind of have a point there. The damage from a major burnout by one of the Big Three woud probably be felt for many years. Besides, this is a big, spread-out country; we are inextricably tired to our car culture (until we have the transporters from Star Trek, and I’m not holding my breath). So today I sort of concluded that some semblance of a U.S. auto industry must be saved. I’m just not thinking that the taxpayers should save it.
What if — mainly through a series of well-structured tax incentives, but also a stern “this is a necessary step to save our country, get your shareholders on board and do this” message from the Feds — we essentially forced the oil companies to absorb the car companies?
Last I checked, the oil companies were still posting multiple billions of dollars in profits per quarter. They provide the fuel for the cars we can’t live without, so they could probably remain healthily profitable even if they started to sell the cars at or barely above manufacturing cost: the old “sell the razor cheap, screw ’em on the blades” model. Lower prices would help American cars compete with foreign cars and make auto financing feasible for more people.
Then, with the vehicle producers and fuel providers under the same roof (well, a couple of competing consolidated roofs: GeneralExxonMobilMotors, ConocoChryslerPhilips, etc.), they may be in a better position to guide an orderly, rational transition from gas-powered cars and gas stations to alternatively-fueled cars and fueling stations: by 2015, your local FordTexaco station might do about 50% of its business in gasoline and 50% via electrical-charging-kiosks or battery-exchange service (full-serve! job creation, yo!). By 2020, down to 25% gasoline, and so on.
Put another way, since the oil companies have close relationships with the retail franchises (and I believe they have lots of corporate-owned gas stations too, do they?), they’d be in the best possible position to plan and execute that transition based on the insider knowledge they’d now have from their auto manufacturing divisions’ engineering departments.
Again, the financial incentive for them to make this work would be gradually increasing taxes on the profits from gasoline sales, and ongoing generous tax breaks on profits from alternative fuel sales.
I still like this idea after kicking it around in my head over lunch and this evening. I must be missing something major. Tell me why I’ve gone off the deep end here.
Jon | November 21st, 2008 at 12:49 am
Let’s not forget that the “Big 3” aren’t so big anymore and that there are numerous foreign-owned car manufacturers that are quite successful and employ hundreds of thousands of Americans.
I don’t buy that oil companies have an incentive to produce fuel efficient vehicles. I suspect they would lobby hard to avoid fuel efficiency mandates. It has a fox guarding the henhouse quality to it.
But I agree we shouldn’t just throw taxpayer money at them. What if it was an investment, though? What if the government saved them on the condition that they produce hyper-efficient plug-in hybrids and alternative energy vehicles in X amounts by 2010, increasing by N% per year thereafter? Do this in concert with massive tax breaks for consumers who purchase low or zero emission vehicles. It could be a stimulus plan that actually lands us where we want to be, instead of propping up an ancien régime.
Kirsten O. | November 21st, 2008 at 8:54 am
Rob I think you have a great idea..although I don’t see the incentive for the oil companies to absorb the big 3- and how can the govt. make them since the oil companies are not in need of any help?
I’m wondering why the bailout given to the banks can’t be used to help the auto industry? Did I miss something or didn’t the govt. give billions of dollars to banks so that they would LEND and stop the credit freeze? Despite the bailout it appears that the banks are still afraid to lend which was the whole point..I think the govt. should make them bailout Detroit..thats my two cents..and btw i’m scared..I think this is really going to get ugly..i’m going to learn how to make soap this weekend..
Rob | November 21st, 2008 at 10:10 am
Thanks, both of you, for your comments. The incentive I’m suggesting to get Big Oil to buy up the carmakers is just plain old finance: If you don’t, we’ll tax your profits at especially ridiculous rates. If you do, less ridiculous rates on those profits, and huge incentives on taking the alternative approach. The idea being that public corporation will always take the pash of lest resistance toward the money.
Jon has a good point that they’d lobby hard against this sort of thing, which I admit is essentially extortion… :^) But maybe drastic situations require drastic measures.
It is certainly possible that I’m a little overconfident, following an Obama victory, that the influence of big industries’ lobbies will really begin to diminish.
To Jon’s last point, that’s certainly one way to go, and probably more like what will actually happen. Personally, I just don’t trust the auto companies to hold up their end of any investment deal we could make with them. They’ve just been too badly mismanaged for too long. At least the oil companies have shown the ability to stay profitable no matter what’s going on. I do have to admit that that’s not necessarily an indication of brilliant management on their part, there are lots of circumstances and factors that play a role there.
Tim Walker | November 21st, 2008 at 11:44 am
Interesting post, Rob. As a theoretical exercise, it provokes all sorts of interesting thoughts, which you and the other commenters have started to explore.
As a practical matter, I think it’s a non-starter for a few reasons:
1. That scale of corporate intervention has only happened, as far as I’m aware, during the Great Depression and WW2. And even then, it didn’t bridge industries like you’re suggesting. Yes, you and I may see it as reasonable to talk about the “petroleum-automotive complex,” but that doesn’t mean it’s feasible to unify it.
2. Part of the infeasibility comes from the management side of things. The Big 3 and Big Oil have one major thing in common: huge capital infrastructures. After that, though, there are myriad differences – starting from a heavily unionized workforce of the Big 3 – that would put the oil execs in dangerously uncharted waters from Day One.
3. The other part of the infeasibility is political. There are substantial reasons why *both* industries would resist this combination, which means that you would face resistance from the *combined* Congressional delegations of the oil states (Texas, Alaska, California, Louisiana, Wyoming, Oklahoma …) *and* the Big 3 states (Michigan, Indiana, Ohio, Kentucky, Illinois, Nebraska …), *plus* the states that generally would resist this scope of government intervention (Idaho, Utah, Arizona, Arkansas, Georgia …), *plus* the states with large constituencies of non-unionized auto workers (Alabama, Mississippi, South Carolina, Tennessee …). The states I’ve listed by name have 42 senators between them: it’s hard to see how such a diverse bloc could be overcome to make this work.
Again, let me stress: it’s an ideal with several appealing aspects. I just don’t think it would be enacted in the real world.
Peter I | November 21st, 2008 at 12:38 pm
It’s a good idea but the only problem is that you’d have trouble keeping the oil companies from disassembling the Big Three. With the exception of maybe Ford, the future looks very bleak for all these companies and they would eat away at the profits of the oil companies substantially over the long haul. You can blame this on R&D or the unions or whoever you want but you can’t force a debt on another company and require that they don’t do anything to cut their losses.
The sad reality is that the US auto industry is going to fail and all those jobs are going away unless it’s changed drastically. If Obama is serious about taking a big step towards energy independence, then this may be the perfect time to repurpose the auto industry completely towards a commitment to electric cars and a grid that would support them. That’s the kind of project that could actually pay dividends for both the country and auto industry while saving us the long-term fallout from losing all those jobs and suppliers. Put a tax on non-commercial gas vehicles that makes that forces average consumers to buy the products.
It’s not like Detroit is unaware of this shift, they just need a cataclysmic event to force them to make a change and this current economic break could be it.
Bryan Mishkin | November 21st, 2008 at 2:54 pm
Your idea is certainly unique and creative, however I believe in practice it would be difficult to execute. First anti-monopoly laws would come into play in this situation. Second I believe that the tax incentives are a good idea in theory but in practice would only entice the bare minimum necessary to obtain them.
I’m staunchly against bailing out the big three (or any other company for that matter). Their business model and leadership have forced them into this position and they should be allowed to fail. Will it result in pain for the US economy? In the short term yes but in the long term its less clear. That largely depends on whether other auto makers (IE Tesla) spring up in their place.
With the Big 3 gone, the worst case scenerio is that their market share is gobbled up by Japanese, Korean and other auto makers which means more sales for these foreign car makers. More sales means more plants opened, more parts needed, etc. and its likely those plants would be built in the US so while there would be job losses, in my view they wouldn’t be as doom and gloom as the Big 3 and UAW would have you believe. In the best case scenerio green auto makers spring up in the US to take their place and build cars which are sleek (maybe higher some apple folks for design ;)), innovative, compelling, and gas-free resulting in a net gain in jobs created.
In any case a bailout doesn’t allow the free market to take its course. Someone will take the Big 3’s market share if one or all fail and that market share its just a matter of who or how to determine how much of an impact it has.
Micki | November 22nd, 2008 at 9:22 am
Rob, great thinking, but…… Didn’t the big 3 respond to the demand for fuel sucking “safe” huge vehicles by the American public. The demand went down the minute gas prices hit $4 a gallon. Could a gradually increasing gas tax be used somehow to pay for a bailout while at the same time altering the demand for more fuel efficient cars? What would be your next family car and why? Sent from iPhone
KMGuru | December 2nd, 2008 at 10:09 pm
Perhaps let GM die which could happen in 5 months anyway. Sell Chrysler to a large Utility like TVA to make electric cars. Oil companies will have no interest in plugins. Just a twist on your idea. Ford could survive on its own when GM is no more.
Rick J | December 3rd, 2008 at 2:59 pm
You appear to be misinformed regarding the “drivers” that have lead to the current Detroit 3 situation. Ford and GM are very competitive in terms of fuel economy and quality compared to anyone on the planet. The transplant OEM’s in the south of the US have been blessed with a large number of tax breaks and incentives to attract their business to specific states. The primary difference between the Detroit 3 and the transplant OEM’s is Union vs. non-Union. The Detroit 3 are faced with a VERY uncompetitive labor situation that is the result of an accumulation of benefits and concessions made in the past. This coupled with unfair currency rate and trade practices by certain foreign governments have dug a big hole. Unlike Delphi and other automotive suppliers, who through Chapter 11 restructuring could effectively cripple the union and slash their benefits and payroll, the Detroit 3 may not be able to use Chapter 11 to achieve similar results. It is clear that these inequities must be resolved before the US government, Big Oil or anyone else can help the Detroit 3 to survive for the long term.