People Shaking Hands in Car Showroom
Credit: iStock

Executives in Detroit will sleep poorly this week. Congress has given them until December 2 to come up with a more convincing plea for government cash. While they probably wont show up with begging bowls via private jets this time, the heads of Ford, GM, and Chrysler are still unlikely to persuade Congress to cut an enormous check. There is simply no reason that these entities should get federal money in order to carry out layoffs and outsourcing. At the same time, millions of American jobs depend directly or indirectly on the automobile industry, and our economy badly needs a stimulus.

So lets get back to basics: what are we trying to accomplish, anyway? Presumably, Washingtons 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 thats 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.

Thats 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 Detroits 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 Detroits bottom line.

Such a rebate program would come with a high price tag, but not necessarily higher than the $25 billion that automakers have already requested. Current estimates of unsold inventory run at about three million cars and trucks, a substantial number of which are American-made. If the average price of each is $20,000, then that represents $60 billion in inventory value. Offering a 50 percent rebate on these vehicles would amount to roughly $30 billion. This is a high estimate, since only U.S. automakers would be likely to participate in the program.

Skeptics will have two major objections. The first is economic, and the second is environmental. Those who object on economic grounds would argue that Detroit has gotten into trouble because it produces poor cars at high cost, and that handing billions to the industry to help it sell more cars would simply reward a failed business model. Those who object on environmental grounds would note that much of Detroits unsold fleet consists of gas guzzlers that should be phased out, not introduced onto our roads.

As both a businessman and environmentalist, I sympathize with these concerns. I run an investment fund that is devoted to improving the environment and promoting clean technology. I drive an all-electric car (and my company invests in its producer). I spend my days thinking about how to create a clean and sustainable future. So I have no wish for a prolonged reign of mammoth automobiles that waste energy and harm the environment.

But I support clearing out Detroits inventory all the same, and heres why. For one, our automakers arent as bad as you think. If you go to Europe or especially China and Asia, you will see excellent small cars produced by Ford and Chevrolet that sell very well. You wont see them in the United States, however, because these are not the cars American have been buying. Like it or not, a major reason that American automakers have built the cars that theyve built for the domestic market is that theyve had to contend with highly misleading long-term market signals based on cheap gas. While engines have become more efficient over the last thirty years, much of Detroits ingenuity has gone into giving Americans more power, performance and luxury for the buck rather than more miles per gallon.

Unfortunately, Detroit will only produce cleaner, smaller cars, if the Big Three are freed of the weight of their existing inventory and prompted by the market to favor efficiency over size. So first we need consumers to buy up all of the existing new cars, and perhaps even give buyers a discount on gas for three years. Yes, gas guzzlers would be indulged, but theyre going to hit our roads at some point anyway. (You cant just bury thousands of new Hummers in the ground.)

With a little breathing room, U.S. automakers could then set their sights on supplying a market for smaller, cleaner cars. There are a variety of ways to create that demand. The most effective would be to impose a substantial gas tax. Another would be to tax weight or horsepower, as many countries do. (This is far better than a luxury tax, as it directly targets the gas wasters, rather than those who might just want a fur-lined Prius.) Such taxes can be phased in slowly or quickly, but the important thing is that if Detroit knows to expect demand for fuel-efficient cars, it will produce many more of them.

Our automakers are far more nimble than most people realize. In the early 1940s, Franklin Delano Roosevelt oversaw the conversion of our entire domestic auto industry into an armament-production enterprise in just six months. After the war ended, automakers quickly transitioned back into ordinary car production. Along the way, thousands of jobs were created, and the economy was jump-started. If we free Detroit of its current inventory and then send clear long-term signals based on higher fuel taxes, the industry will quickly adjust. Whats more, well also help revive our ailing economy. Its an expensive investment, but its one worth making.

This site and all contents within are Copyright 1969-2011 Washington Monthly
Editorial offices: 1200 18th Street NW, Suite 330, Washington, DC 20036

Our ideas can save democracy... But we need your help! Donate Now!

Jeffrey Leonard

Jeffrey Leonard is the CEO of the Global Environment Fund, a growth capital-oriented investment firm, and the chairman of the Washington Monthly board of directors. He is the author of five books and numerous articles on issues relating to energy, the environment, and economics.