A different kind of auto bailout

A DIFFERENT KIND OF AUTO BAILOUT…. [Note: this piece prompted some interesting discussion and emails yesterday, so I’m bumping it up for some additional promotion]

Obviously, policy makers have been mulling over what to do, if anything, about the fate of Ford, GM, and Chrysler. The American auto manufacturers are in deep trouble, and determining what kind of rescue package would be most effective has been on the minds of lawmakers, the Bush administration, and the Obama transition team.

But perhaps the political world has been looking at this the wrong way. Jeffrey Leonard, the CEO of Global Environment Fund, has a provocative idea in an online-only piece for the Washington Monthly — maybe it’s car buyers, not car companies, who should get a bailout.

[L]et’s get back to basics: what are we trying to accomplish, anyway? Presumably, Washington’s primary goals are to save jobs and to jumpstart the economy. Like it or not, getting people to buy cars is one of the most effective ways to get an economy moving. Cars have what economists call a multiplier effect, perhaps the greatest of any product, because every car that’s purchased creates a cascade of further stimuli — not just to those who make the car, but also to those who repair it, fuel it, outfit it, wash it, and so forth.

That’s why Washington has a major incentive to use companies like GM, Ford, or Chrysler to help us through the economic crisis. The way to do it is to offer a 50 percent rebate check to every purchaser of a new, American-made car produced by any auto company that signs up for a voluntary restructuring program with the federal government. The rebate would be paid by the Treasury Department, and then exchanged for preferred stock in the company that produced the car.

In essence, this plan would replicate the principles of our banking bailout, in which cash infusions from Uncle Sam into financial institutions have been linked to equity stakes in those institutions. In this case, millions of Americans could get new cars, aiding the economy with every car-related transaction. Detroit could clear out its sizeable unsold inventory and avoid taking on more debt, and Washington could gain a lever with which to change Detroit’s behavior. The government could even consider contributing some or all of the stock to the pension and healthcare plans of autoworkers, to help reduce the pressure of these unfunded liabilities on Detroit’s bottom line.

Leonard anticipates a heavy price-tag associated with his ambitious proposal, but the costs would be comparable to the $25 billion bailout that the automakers have already put on the table.

Reading the piece, I had a couple of concerns about rewarding a flawed Detroit business model, and adding millions of cars to the road that aren’t exactly efficient, environmentally-friendly vehicles. But Leonard anticipated these concerns, and tackles them head-on.

It’s a really interesting idea. Take a look.