Fix Detroit? Guaranteed Car Loans and $4 Gas

Last week, on NPR’s Diane Rehm Show, a panel of auto industry observers discussed the future of the United States auto industry. The consensus? Chrysler is on its last legs, and General Motors and Ford will need a bailout to survive.

Dr. Sean McAlinden, chief economist and vice president, Research at the Center for Automotive Research, described his remedy to Detroit’s predicament:

What I think is really needed is a straight flat-out bailout: $15 billion dollars in cash with no restrictions except that it be spent in the United States—to carry these firms through to 2011 when this recession is over, and when their product line is 60 to 70 percent new, and with higher fuel economy, which is what the customer wants.

To set Detroit on the right course toward financial health and high-efficiency vehicles, Warren Brown, automotive writer and “On Wheels” columnist for The Washington Post, outlined an alternative plan:

Forget this crazy argument about socialism versus the free enterprise system. The bottom line is that we’re socialist when we need to be socialist and we’re free enterprise when that works. Right now, we need to be a little socialist.

Since we’re throwing money around anyhow [to rescue the financial sector], one idea could be federal guarantees of consumer loans [for cars], as long as they are for cars that get at least, let’s say, 35 miles per gallon.

To me, that would help accelerate the development of more fuel-efficient vehicles. But in the United States, we had the problem of making demands for more fuel-efficient vehicles, but doing nothing to encourage the purchase of those vehicles.

So let’s have federal subsidized loans of fuel-efficient vehicles. But there’s a catch. Let’s also have a floor under the price of gasoline. Four dollars a gallon seems to have done the job. It helped consumers make more considered judgments of the kinds of cars and trucks they buy. And it has also had some tangible effect on their driving behavior and fuel-wasting habits on the highway. The bottom line is that consumers need some skin in the game.

Oh, by the way, the Department of Energy today released official gas price figures for the week. The national average is now $2.71, exactly $1 less than the price at the beginning of September.

You can listen to the entire discussion from the Diane Rehm Show at the website.

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  • thompson

    I agree with Warren Brown. The return to $2.00 a gallon fuel will put Americans back in their old habits of wasting gasoline. True, I am a hybrid car owner, but we Americans sometimes have to be kicked “upside the head” to get the point. How about a floor as Brown mentioned tied to Federal gas tax? As prices increase, the tax would decline, so that the average price remains at $4.00 per gallon with say a 25 cent range. That will force consumers to get more fuel efficient vehicles, and put badly needed money into the highway trust fund for needed infrastructure repairs. How is that for a socialist thought?

  • Bryce

    howabout 3 or 3.50 for the bottom. Remember, 4 dollar gas doens’t only take out of car driving and purchases, but also out of the economy as a whole. let’s not kill all of our purchasing power, just enough to get the message.

  • Charles

    How about a floor of $2.50 stating January of 2009 and going up four cents a month until the floor is $5.00. This gives people a chance to get more fuel efficient vehicles over their normal buying cycle. BTW we need to spend the taxes on highway infrastructure.

  • Need2Change

    I agree with adding tax to gasoline. I’d probably increase the tax by $1/gallon.

    I don’t agree with government loans for cars that get 35+/gallon. That won’t help the Detroit big three.

    I don’t believe we should use U.S. bailout money to fund the buying of foreign cars.

    And like it or not, Detroit needs to move the cars that are currently on the lots — and most get less than 30 mpg.

  • Gerald

    Just for the records:
    When riding by a discout gas station this morning here in Vienna, Austria, I noticed, that the price for gas (95 ROZ) is at a new lowest level: 1.032 Euro per liter. Which is about 4.765 USD per gallon.
    We can live with this (compared to the months before relatively low) price and our economies have accommodated to.

  • AP

    Good idea if you do it right, but watch out for the implementation. It has the same “unintended consequences” problem that CAFE has.

    Let’s say that if the total price (including taxes) will be over $4.00, we charge $0.90/galon tax. If you put a floor of $4/gallon under the price of gas, and the “wholesale price” of gas drops below $3.10, the tax goes up to keep the price at $4.00. You’d think that if the wholesale price drops to say, $2.00, the government would charge $2.00 tax to make it $4. Right? Wrong!

    Oil companies would charge $3.10 at the least, since any less wouldn’t be noticed by the customer. You’ve rewarded your “evil” oil companies with price supports (I don’t believe oil companies are evil – they provide a product we all need, and their profits are smaller in proportion to sales than Microsoft’s).

    Your gas price sign of over $4.00 shows the problem. Today I saw gas for $2.39. As a long-time automotive engineer, I can tell you that the volatility in gas prices is killing the domestic auto industry. They have no dependable home market for fuel-efficient cars (most people are not like the readers of this site). It takes 5 years to bring new products to market, so when fuel prices suddenly change, you’re stuck.

    Ten years ago, any domestic auto maker that didn’t make SUV’s would have been out of business, because that’s where the profits were. Now it’s the opposite. What do you do? (The Japanese and Koreans could sell small cars profitably because they had already paid for engineering their cars for their home market, where fuel taxes are high. People there will PAY for small cars because of the high fuel prices. Combine that with an artificially cheap currency, and they can make money.)

    So here’s what we should do to put the average customer in sync with the domestic auto industry: 2 years after passing the law, add $0.10 to the tax every 3 months ($0.40/year) for 5 years, for a total of $2/gallon additional tax. Once it’s charged, divide the total revenue and refund it to everyone as a tax credit on income tax – it’s revenue-neutral. All the infrastructure to do this already exists; it’s cheap to implement, compared to subsidies, etc.

    For 2 years, it doesn’t cost anything, but everybody knows it’s coming. Customers will know they need to plan for it and buy fuel-efficiency, and so will the domestic car manufacturers. After two years, the tax increases slowly kick in, and there is a dependable market for the more fuel-efficient cars being promoted.

    In the seven years it takes to happen, most “gas-guzzlers” will be worn out. Collector cars will survive, they’ll just cost more to run – and people don’t drive them much anyway.

    By making the tax independent of the wholesale fuel cost, and making it a larger portion of the price, the volatility of the price is reduced percentage-wise. This is the only way I can see to provide a reliable market for domestic manufacturers. We should have done something similar in the 1980’s.

  • Samie

    Everyone is fixated on the price of gasoline which in my view is silly. If you create an artificial tax what happens when prices go up to say $5.00?? We seen last summer many politicians wanting to temporarily reduce federal taxes on a gallon of gas, how would this be any different? By the way adding federal tax is political suicide which only empowers those who love to reduce regulations. Also think of those who this hits the hardest that is lower income and middle class families b/c more of their disposable incomes go to things like food and gas. Does something that creates a floor for gasoline really change the habits of those who can afford a Escalade, NO it does not!

    I agree that the Big 3 needs to get the under 35mpg vehicles off the lots, give the loans to do what they want but under one condition, that is they agree to new standards for increasing MPG in luxury brands say new private vehicle fleets over $50,000 that get under 18mpg. The point is to add efficiency to those vehicles that lead to bad business practices of the big three. The government would give rebates or tax incentives to domestic car companies to meet the new standards but delay the legislation say 5 years for all automakers to develop market solutions to the new legislation.

  • Will S

    AP wrote;

    >2 years after passing the law, add $0.10 to the tax every 3 months ($0.40/year) for 5 years, for a total of $2/gallon additional tax. Once it’s charged, divide the total revenue and refund it to everyone as a tax credit on income tax – it’s revenue-neutral. All the infrastructure to do this already exists; it’s cheap to implement, compared to subsidies, etc.

    This appears workable, low risk, and results oriented while taking effect gradually, allowing everyone to plan for it. Let’s call our congressional representatives.

  • Tony

    The problem with regulating the price of gasoline is that pricing is the mechanism by which supply and demand are regulated. The reason gas rose to $4 is because at the time, that was the price at which oil companies could sell all the gas they had, but no more. If the price had been higher, they’d have ended up with a supply glut and if it had been lower there would have been shortages and gas lines.

    If the government puts a floor under the price of gas, whether it be $4, $3.50, or $3, and the “correct” price is closer to $2.75, you end up with excessive supply. This isn’t necessarily bad (higher supply means more security since we can bolster reserves against a rainy day), and it isn’t necessarily good (excess supply will further erode prices on the open market, harming producers, which at the end of the day are legitimate companies in whose success we all have a stake, and in turn would provide a competitive advantage to economies around the world that don’t institute such controls, or that do the opposite, like China which sets a ceiling by subsidizing the cost of energy).

    Rather, the point is that the interactions are complex and the consequences of such interference are by no means well understood. Yes, it will reduce US consumption, in turn harming the US economy and consumers even if it is for our own good. But it will do much more than than.

  • Samie

    Tony is right commerce would suffer and consumer spending would decline and or debt would increase. Interesting idea but not practical in our political institutions. The interesting thing about this is how uneven the distributional outcomes would be. More stable policy would give loans to the domestic companies but focus on technology with government incentives to meet future goals. We should focus on requiring hybrid, electric or diesel technology to luxury vehicles that say use V8-V10 engines. The burden of added cost would shift to higher end car buyers who have more disposable income instead of the working class folks. The point should not be gas prices, or how much one drives but offering vehicles that are more efficient but do not constrain consumers from adding to the economy.

  • veek

    -Another option, especially if business gets hit with higher taxes, is for Ford and GM to simply quit production of most North American models. Rather than meaning doom and gloom for the company and its shareholders, it could be their salvation. Both companies are doing quite well in the rest of the world markets, and it’s only in North America where they are tied down with the boat anchor of lower profits and a bleak product outlook. Many of their small cars (including ones that we see in the US) are already designed or made overseas. The two companies could also import most of the good-selling reasonably-sized cars here, given American bias in favor of imported vehicles.
    – GM and Ford both have a commendable loyalty to their US workforce which will probably keep them from exercising that option.

  • Bryce

    lets not forget how STUPID it would be to exit out of the largest auto market in the world. lol

  • Tony

    One appealing thing about a tax on gas is that it leverages existing government authority in a very simple way to realize a well-understood effect. For that reason, I might be inclined to support a FLAT gas tax increase — IE a fixed cents per gallon tax that does not vary with the underlying price and thus interfere with the use of pricing to synchronize supply and demand.

    The biggest problem with a tax increase is that — well, it’s a tax increase. I’m a fiscal small-government conservative, and thus believe that all other things being equal, less tax is better. Nevertheless, my conservative views also force me to be pleased with the reduced consumption resulting from recent high prices. In other words, the reduced consumption is good, but the resulting harm that has come to the economy (and hence individuals participating in that economy) is an unacceptable trade.

    One possible way to balance these competing impulses, I think, would be to take an approach similar to the one adopted by proponents of the FairTax — some kind of rebate or “prebate” by which the taxes collected via an increased fuel tax would be distributed back to those who have paid them. In order not to undermine the tax’s influence on behavior, the size of the prebate would have to be the same for all, or at least would have to be independent of usage, so that people would still reap a meaningful benefit from limiting their consumption. The idea being that if you continue to exhibit average behavior with respect to consumption, it’s a wash. You pay a lot more for fuel because of the tax, but you get back the difference between what you do pay and what you would have paid without it. However now, instead of saving $2.50 or $3 for each gallon of gas you buy, you save $4 (or $4.50 or $5 or $15…). You avoid or at least mitigate the harm, but you still have the opportunity for substantial gain through modification of your own behavior.

    The devil, of course, is in the details — including how to manage such a system as consumption and hence tax revenue drops. Do you increase the tax rate, reduce the rebate, or some combination of the two? And of course, who thinks for a second that such a proposal would make it across the desks of 535 members of congress without anyone trying to “improve” it by adjusting how the prebate is distributed in furtherance of some social agenda or other. EG maybe people in norther climes get a bit larger a prebate than everyone else to help heat their homes, or maybe people with less efficient cars get a little bit less.

  • ex-EV1 driver

    I have a better idea. How about giving Tesla $1 billion to build the Model S and accelerate the Blue Star (Tesla’s code name for their 3rd model which is affordable by all) and let the idiots that run the Detroit Behemoths die like they deserve to after so many years of mismanagement.
    This will give the US an automaker who makes cars people want at prices they can afford. If one is worried about the working class in Detroit, they can stipulate that the Blue Star plant be put there.
    Why bail out companies that have shown that they don’t have a clue how to run their businesses anymore.

  • Bryce

    current management brought us the Malibu, the CTS, the Enclave, and other models that are profitable and popular expanding GM’s sales into the market that it hasn’t seen in decades. (malibu sales nearly doubled this year) The dead weight models are left over from previous management and they are working with what they have and trying to revamp it during a financial crisis.

    Besides, tesla already killed the model S……o, and where are all the original roadsters of which hundreds were to be produced in the first year alone. (last year by the way) Never happened until this year, and there were less than 50. All that didn’t happen during the financial crisis, but before, and because of faulty management. Why do you think they have switched CEOs so many times in the last year or so. I wish the best of luck to them, but they are really fallin apart.

  • Timothy J Bradley

    I agree with the idea of Warren Brown that a $4 per gallon floor is needed. Today, here in Florida, the price of unleaded was $2.39. You can’t put this floor “in operation” with this price. It will go back up, and when it does would be the time to impose it – along with the consumer/environmental friendly loan subsidies for the purchase of fuel efficient cars. My concern for the subsidy is that it will mortally wound GM, Ford, and Chrysler – who have such a limited number of fuel-efficient vehicles – but the subsidy can be a “sliding scale” for a few years, thus allowing purchasers of big GM Hybrids to have some assistance. (Note: this sliding scale cannot subsidize the Lexus Hybrids – at any level.)

    While were at it. Kill ethanol production from corn. Make ’em grow switchgrass, but prohibit agribusiness from utilizing any acreage currently or historically committed to corn, soy, etc.

    Socialism? You betcha, but we saved the capitalists on Wall Street (had to, I suppose) – now let’s get smart. I may never buy an American-made vehicle, but that doesn’t mean for a New York minute that I want our auto industry to fail.

  • Timothy J Bradley

    Nobody has yet responded to my very recent post of , but I should clarify my statement that
    “purchasers of big GM Hybrids” (should) “have some assistance” – I should have limited this to vehicles produced prior to the introduction of a subsidization bill. Obviously, the intent is to encourage the future of fuel-efficient vehicles. The corrolary proposition would seem (at first glance) to be that the goal is to discourage companies from producing gas-hog (read: large SUV’s like Suburban, Tahoe, Expedition, Yukon, Armada, etc.).

    My thinking is this. GM has made Hybrid SUV’s. There is a market, hopefully diminishing, for such vehicles. Let’s help GM, Ford, Chrysler, get rid of their INVENTORY of large hybrids, while “sunsetting” the subsidy to discourage future production. It should be easy enough to craft the language to exclude Lexus Hybrid SUV’s – sorry, but this market is composed of Junior League ‘fashionistas’, but perhaps I have succumbed to the masculinity of too many “like a rock” commercials, and am willing to accept the niche market of “real men” who need to haul boats, and hay, and all sorts of B.S.

  • Bryce

    people who haul hay do that for work….not for fun……and those people are my neighbors. : ) None of them have boats…..though one has an RV I think, but that runs on its own power.