A bail-out that passed

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Oct 2nd 2008 | DETROIT
From The Economist print edition

Amid Wall Street's woes, and as sales slump by 27%, failing American carmakers land a huge subsidy

AP
DETROIT seems to be where Wall Street meets Main Street. Tight credit is reckoned to have cost the American carmakers 40,000 sales in August, worth about $1 billion in revenue. The impact has been felt most by America’s Big Three—General Motors, Ford and Chrysler—which have suffered this year as consumers shunned gas-guzzlers in favour of the smaller cars mostly made by Japanese firms in American factories. Overall light-vehicle sales hit a 15-year low in September, with a fall of 27% compared with a year earlier, according to figures released on Wednesday October 1st. The problem is finance. “We have plenty of customers—what we don’t have is financing available to meet their needs,” Mike Jackson, chief executive of AutoNation, a leading car-dealer chain, told CNBC this week. He reckons that tighter credit and limits on finance for leases have cost his firm a fifth of its sales this year.

The Big Three have been hit by petrol prices pushing towards $4 a gallon, by more demanding federal fuel-economy rules and by the credit crunch wrecking consumer finance. But the federal government came to their aid this week when George Bush signed an energy bill that includes $25 billion in loan guarantees to ease their pain. Supposedly this is to allow the Big Three to retool their factories to produce more economical vehicles. David Cole, director of the Centre for Automotive Research, an industry body, estimates that such retooling could cost at least $100 billion. But money is money, so the infusion of cheap credit will help the carmakers pay their bills next year. “Given the market position of the Big Three, things will get sticky by mid-2009, because they have to keep spending on new programmes,” says Joe Philippi of Auto Trends, a consultancy.

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The rules are still being worked out, but the deal means that car companies—blessed with the government guarantee—should get loans with an interest rate of around 5% rather than the 15% they would face on the open market in today’s conditions. The stipulation that the loans are only for firms with factories at least 20 years old rules out nearly all the “transplant” factories that foreign carmakers built in America to get around tariff barriers. And even if some Japanese carmakers do qualify for loans, they are not expected to ask for them.

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So a sum that seemed preposterous only a few months ago has won overwhelming approval from politicians. Compared with the demand for $700 billion to underpin the financial system, who can complain about a mere $25 billion for carmakers? And using government money to keep honest, hardworking car-industry workers in their jobs is easier for politicians to justify than handouts for greedy Wall Street bankers. The sales-pitch is even more compelling in an election year.

Once industrial subsidies like this begin to flow, it is difficult to stop them. A recent study by the Cato Institute, a right-wing think-tank, found that the federal government spent some $92 billion subsidising business in 2006 alone. Only $21 billion of that went to farmers: much of the rest went to firms such as Boeing, IBM and GE in the form of export-credit support and various research subsidies.

The Big Three are already complaining that it will take too long to dish out the money, and they want the process speeded up. They also want a further $25 billion, possibly attached to the second version of the Wall Street rescue bill. The logic of bailing out Wall Street is that finance underpins everything. Detroit cannot begin to make that claim. But, given its successful lobbying, can it be long before ailing airlines and failing retailers join the queue?