Wednesday, December 10, 2008

Government Motors

Two sound pieces on the auto bailout in today's WSJ opinion section.

The first, not surprisingly, is from Holman W. Jenkins who asks why the government that helped create the current crisis should be expected to correct it:

Under a law of politics, such truths were unmentionable in last week's televised circus because legislators are unwilling to do anything about them. They won't repeal CAFE because they fear the greens. They won't repeal CAFE's "two fleets" rule (which effectively requires the Big Three to make small cars in domestic factories) because they fear the UAW. They won't hike gas prices because they fear voters.

And make no mistake: An even more massive auto wreck lies ahead when a soon-to-be taxpayer-financed and taxpayer-owned auto industry confronts a California rulemaking that, in a silly gesture against global warming, would render most of its auto designs, profit centers and tooling unsalvageable.

We hate to admit it, but the only good idea from the bailout debate is the proposal for a new "auto czar." Along with disposing of Chrysler and downsizing Ford and GM, his job should be to confront Congress with its own policy cowardice and failure. If saving gasoline and Detroit are both worthy goals, let's ditch CAFE and institute a gasoline tax to make consumers value the cars government is forcing auto makers to build. If Congress doesn't have the tummy for that, at least ditch the "two fleets" rule so Detroit can import small cars to meet the mandate.

Under CAFE, the government is trying to control the supply of fuel efficient cars that Detroit can make available to consumers. Under a gas tax, the government would be seeking to stimulate demand for such vehicles from consumers. If you have to choose between the two, the latter is a much better alternative for the auto industry as well as consumers.

The second piece is more a surprise. It's written by one of the incoming members of Congress and urges a capital gains tax cut on auto investments:

Our United States Congress of lawyers, doctors, diplomats, retired military officers and career politicians -- along with their staffs of intelligent young political science majors and MBAs -- now finds itself poring over "business plans" submitted this week by Ford, GM and Chrysler. People who have never before in their lives seen -- no less implemented -- a business plan are now trying to decide if these companies will succeed by means of a "capital infusion" with various imposed preconditions and negotiate what we taxpayers (investors) should be getting for our money. Something is wrong with this picture.

If we as a society place a public premium on "saving" the automobile industry from its default reorganization under Chapter 7 or Chapter 11 bankruptcy -- which has been good enough for the steel and airline industries, among others -- then a better manner in which to express that premium might be to establish special tax consideration for those who are willing to take on the risk. One way of doing that is to provide an exemption from capital-gains taxation on all debt or equity instruments used in the next six months to invest in the troubled auto makers.

By waiving the future capital-gains tax on all investments in the automobile industry, we enhance the projected return models and therefore the likely occurrence of a privately funded "bailout." There are turnaround firms and funds, and they are experts at what needs to be done. Tax exemption for gains would certainly get their attention. It also wouldn't cost taxpayers anything because it only forgoes future government revenues that wouldn't exist absent this incentive.

It's not every day that you see a member of Congress fessing up to the body's lack of business acumen and proposing a solution based on solid economic principles that doesn't just throw more money at the problem. It's even rarer when that Congressman is a Democrat. Kudos to the author of the piece, Congressman Jared Polis from Colorado. Let's hope that he continues to demonstrate such pragmatic thinking once he's ensconced in the halls of Congress. Past experience has shown that such an outcome would be the exception rather than the rule.