Can Congress save the U.S. auto industry?

McClatchy NewspapersNovember 12, 2008 

WASHINGTON — The lame-duck Congress is expected to reconvene next week with a bid to help the ailing Detroit carmakers, and lawmakers are weighing initiatives that could provide as much as $50 billion in new assistance.

With its stock battered and its market capitalization down to World War II levels, General Motors is warning that without government aid it could run out of cash this year.

The Bush administration has declined to lead any rescue of GM, Chrysler and Ford. However, the Democrats who control both chambers of Congress are readying plans that seek to lend a hand to the once-proud manufacturers. The three carmakers employ more than 200,000 people directly and sustain nearly 3 million more indirectly, according to a recent study by the Center for Automotive Research.

Lawmakers are expected to convene in a special session, probably Tuesday, to consider three possible approaches, which would:

  • Modify an existing loan made in September. Congress approved a $25 billion loan then to help U.S. automakers build more fuel-efficient cars, but companies have had difficulty getting the money because of sticky federal rules. Lawmakers plan to urge the Bush administration to make the process quicker and easier.
  • Make it easier to tap the financial rescue package. The $700 billion rescue plan that passed Oct. 3 is intended to help financial institutions. That means the carmakers' financing arms could qualify but not the manufacturing end. Congress will look at ways to modify the rescue plan's terms, with an eye to providing $25 billion of it to the auto companies.
  • Help Detroit carmakers with health and pension obligations. Under the most controversial idea being floated, the firms would get $25 billion to help pay the rising costs associated with 780,000 retired autoworkers and their families. The United Auto Workers is pushing this idea. The generous health and pension provisions that the UAW won when Detroit was flush are now a big part of what makes them uncompetitive against foreign rivals who don't give their workers such expensive benefits.

No legislative decisions have been made, and the principal players are saying nothing publicly.

Lawmakers are beginning to take sides, however. Skeptics, largely Republican members of Congress, are concerned about the price tag and the implications of rewarding a sector that's suffering from previous bad decisions. That reward is something economists call moral hazard: If government bails out private businesses that make bad decisions, it encourages others not to fear risk and thus to act recklessly.

"I'm trying to focus on the moral hazard," said Rep. Tom Price, R-Ga., a member of the House Financial Services Committee. He and others also are concerned that helping the automakers will encourage every private business that's having financial trouble to ask Congress for aid.

"Does it end with manufacturing? What about retail? What about Circuit City?" asked Rep. Spencer Bachus of Alabama, the committee's top Republican. The electronics chain filed for bankruptcy Monday.

There are also concerns about the cost and increasing the already-record federal deficits.

"I know the questions we're going to have, because of the questions we had with financial services," when constituents challenged the $700 billion bailout, Bachus said.

Supporters of aid to the auto industry say that without help, however, major automakers could go bankrupt by the end of the year. The economic impact on the upper Midwest, from Ohio through Illinois and Michigan, could be comparable to a Hurricane Katrina.

"At a time like this, pragmatism has to be the working philosophy of the day," said Rep. Paul Kanjorski, D-Pa., the chairman of the House subcommittee on capital markets, insurance and government-sponsored enterprises.

He said the size of the loan shouldn't be a stumbling block, noting that the $700 billion financial-rescue plan "was based on a number pulled out of the sky to give clarity and show we were serious. Whether we go up or down that much doesn't make a difference."

House Speaker Nancy Pelosi, D-Calif., says that any package would be "limited" and would include restrictions on executive pay and tough reviews of how the money was being used.

The White House has been open to ideas, saying that it's willing to help cut the red tape involved in the $25 billion loan to promote more fuel-efficient cars but is reluctant to change the $700 billion rescue plan's terms.

Treasury Secretary Henry Paulson said Wednesday that it was a mistake to use rescue funds for the auto sector.

"I think it is very important for me to live within the intent of the bill, rather than trying to find loopholes or what have you," he said.

However, he agreed that helping the sector through other means isn't a bad idea, and suggested that a broader approach is better than a stopgap measure.

"I know the automakers are important. We care about the auto industry in the U.S. They are a key part of our manufacturing industry, and manufacturing is critical," he said. "I have said very clearly, I think the administration has said that we need a solution. But the solution has got to be one that leads to viability."

(Kevin G. Hall in Washington contributed to this article.)

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