Federal Bailouts – The Case Against GM

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Last week I penned a piece on the case for the bailout of GM as long as everybody else was begging with their cup out. In that piece, I pulled out the tissue to talk about the sad tale of pension woes and skyrocketing health care costs as reasons to feel sorry for GM. Well, that is, after all, the view presented by Detroit Free Press writer Tom Walsh in his touching piece about GM’s request. But, I have had a change of heart. And the funniest part about that change of heart is that the positions of the presidential candidates gave me the opportunity to do that. So thank you Senators McCain and Obama!

As we have been discussing, we decided to take a deeper look at the planks and platforms of the presidential candidates as they relate to the manufacturing industry. According to a summary of those positions found in this IndustryWeek.com article, we thought we would comment on the candidates’ views on the automotive industry.

McCain: He supports a tax credit for consumers based on the reduction of carbon emissions. Specifically, he would give a $5000 tax credit to anyone that buys a zero carbon emission car. Other vehicles, according to the article, would be part of a graduated tax credit. McCain would also offer a $300m prize for “the development of a battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars.” In addition, McCain supports CAFE standards, mileage requirements automakers must meet. When they don’t, according to the IndustryWeek article, they pay a small penalty. McCain advocates for more stringent penalties.

Obama: Also supports a tax credit for purchasing fuel efficient vehicles. Obama’s credit would be $7000 per vehicle. He would also “establish a National Low Carbon Fuel Standard (LCFS) to reduce carbon in fuels 10% by 2020.” He also supports the notion of placing 60 billion gallons of advanced oil fuels into the supply by 2030. What is perhaps the most striking portion of Obama’s automotive platform, however, is to provide $4b to the automakers to “re-tool” their facilities for such vehicles. (Obama also supports increasing fuel economy standards 4% per year).

There are certain industries that are able to apply for and obtain various research grants, stipends or qualify for loan guarantees (the Small Business Administration comes to mind) from the Federal Government. But most rank and file manufacturers that we work with can only “re-tool” when they have earned enough profits to re-invest them into the business. Then, they can take advantage of various R&D tax credits. If the US government allows GM and the others to “re-tool”, then we really have created a precedent for all sorts of bail-outs, hand-outs, subsidies, outright grants, whatever you want to call them for all companies within any industry.

In consulting we say, “you get the behavior that you incent to get”. Both candidates have it right by encouraging consumers to buy fuel efficient cars (just like Bush eh with that SUV tax credit?). But a re-tooling bailout is not the answer.

–Lisa Reisman

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