Stimulate Car Buyers, Not Car Makers

Government rebates would do less harm than a bailout.

Should Uncle Sam save General Motors, Ford and Chrysler from bankruptcy? In normal times, most mainstream economists (and many mainstream legislators) would probably say no. But with financial markets in turmoil and the economy on the cusp of a nasty recession, these are hardly normal times. In any event, Congress and President-elect Barack Obama are committed to spending billions to keep the Big Three afloat.

What’s not been decided, however, is how that money should be spent. A radical change in perspective could spare the nation a lot of grief down the road. Rather than subsidizing the auto makers directly (and almost certainly sucking Washington into their management), why not give Americans the financial incentive to accelerate purchases of cars and light trucks? The consumer-subsidy approach would be a less wasteful route to the desired end, as well as one that would leave a less toxic legacy of market intervention once the economy has recovered.

While the details of the bailout have yet to be hammered out, all signs point to loan guarantees conditioned on concessions from the stakeholders — perhaps cuts in union and white-collar compensation, surely restructured bank debt, and maybe a shotgun wedding between Chrysler and GM. This would keep the industry alive and most of its workers employed — for a while.

However, even if the industry recovers with a lot of help from its friends, the price will be high. At best, the arrangement will inevitably tighten the all-too-cozy relationship between Washington and Detroit in matters of technology, pensions, fuel efficiency and environmental regulation, as well as opening the door to bailouts of equally worthy industries in distress. At worst, it will suck the taxpayers into the next automobile crisis, and the next.

Since a big fiscal-stimulus package for fighting the recession — some combination of tax cuts, extended unemployment compensation, infrastructure grants and assistance to states — is coming soon, why not stimulate consumers to buy cars? Why not offer eye-popping rebates — say, $3,000 — for a limited time to buyers of cars and light trucks? It would probably make sense to phase out rebates for the most expensive cars, and as a treaty obligation, it wouldn’t do to discriminate against foreign makes.

How much downstream benefit this would generate and for whom is hard to predict. Still, it is a fair bet that most of the money would be quickly recycled in the form of demand for everything from auto parts to car mechanics’ salaries — just what you want to happen in a recession.

If, say, 12 million nonluxury vehicles were sold in the next year — similar to 2007 — the rebates would total $36 billion. Of that sum, about one-half would go for cars built by the Big Three. Better yet, more than 80% could be expected to go for vehicles actually manufactured in North America, even if the auto maker is from overseas.

This is not a perfect solution. The rebates would have to be phased out so that sales don’t drop off a cliff the day after the deadline. Not to mention that it is far from clear that it ever makes economic sense to favor one industry over another during hard economic times.

But some form of aid to the auto industry seems to be politically inevitable. Wouldn’t it be nice to manage the task with maximum benefit to middle-income Americans — and minimal micromanagement by Washington?

Mr. Hahn is a senior fellow at the American Enterprise Institute and a visiting senior fellow at Oxford University. Mr. Passell is a senior fellow at the Milken Institute and author of the forthcoming “Where to Put Your Money Now” (Pocket Books).

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