Bail Out The Car Buyers

As disastrous auto sales figures for November were reported this week, the Big Three auto companies–GM, Ford, and Chrysler–told Congress that they want government loans to keep from going bankrupt.

The pleas of General Motors and Chrysler were the most urgent. Ford allowed that its cash position was better and that it might get through 2009 without tapping the federal line of credit it seeks.

The Big Three, who less than a generation ago dominated the car business, submitted business plans on Tuesday ahead of scheduled hearings before the Senate Banking Committee on Thursday and the House Financial Services Committee on Friday.

Should Congress authorize the requested loans of $18 billion to GM and $7 billion to Chrysler, and a $9 billion line of credit to Ford? How far should taxpayers go to rescue an ailing industry?

In their business plans, the three said that they would change their model mix and drop some brands, shrink their workforces, and consolidate and retool plants.

Unfortunately, neither loans nor the companies’ promises address the basic problem: Americans just aren’t buying cars, whether GM, Toyota, Ford, or Nissan.

Consider the November sales data, showing GM ’s sales down 41% from a year earlier, Ford’s down 30%, and Chrysler’s down 47%. Foreign brands were hurt, too: Toyota down 34%, Honda 32%, Nissan 42%, Hyundai 40%.

It’s not that Detroit isn’t making good cars. Although GM has offered to drop its Pontiac line in exchange for government loans, Americans like Pontiac. It’s GM’s third best-selling brand, with U.S. sales comparable to VW, Mercedes, and Mazda. The idea that former Pontiac consumers will just switch to Chevys doesn’t make sense.

And the Big Three are healthy abroad. Most sales of Ford and GM cars are made overseas. GM sold 1 million cars in China last year, including 300,000 Buicks, and over 12% of vehicles sold in Russia.

Detroit’s costly labor structure is a handicap that needs to be overcome through negotiation with unions or with reorganization in bankruptcy. But even foreign brands, with their lower labor costs, are unable to sell cars in today’s environment.

Until American consumers feel confident enough about the economy and their own finances to fill up dealer showrooms, the huge sums under discussion on Capitol Hill would be money wasted, merely postponing the inevitable bankruptcies of one or more companies—even though House Speaker Nancy Pelosi says that bankruptcy is not an option.

Potential buyers can’t get credit—and most new cars are sold on credit. In October, GMAC, the credit arm of GM, began to require a higher credit score to qualify a potential customer for a loan. According to GM, half of its sales decline in October—no word yet on November–was due to GMAC restricting its lending, costing about $1.4 billion a month in cash flow.

Congress needs to work on thawing out the credit market—and not just for autos but also for housing and other products. Until that happens, and it could take many months, if the lawmakers believe that the auto industry deserves special help, members could simply give Americans money to buy cars.

This could be done in several ways. The government could guarantee no-interest financing on cars—and itself pay lenders the cost of credit. It could issue vouchers worth thousands of dollars a car to consumers. Or, it could award tax credits to buy cars, as it did with the Toyota Prius.

All of these incentives might cost the taxpayers less, depending on amounts and duration, than giving money directly to the automakers, and could be rolled back as the economy strengthens.

So, rather than lending $25 billion to the Big Three, here’s another idea. Take the money and give consumers incentives to get into the dealer showrooms—and tell them to go car shopping for Christmas.

This Op-Ed was featured in Reuters.com on December 4, 2008.