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  • More on the Auto Bailout

    Posted by David Foster on December 10th, 2008 (All posts by )

    Newly-elected Congressman Jared Polis (a Democrat!) offers some interesting thoughts on the politics of the automotive industry:

    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.

    A suggestion with considerable merit–but it would, of couse, deprive Congress and the Administration of the fun of micromanaging a vast industry. More important, it would greatly lessen their ability to store up favors in the favor bank by rewarding specific constituencies. For these reasons, it’s unlikely to happen.

    Also, Jared’s plan…although in many ways superior to the pure-bailout alternative that is now on track to be implemented…does share with this alternative one major downside: it would redirect capital to the automotive industry that might be better employed elsewhere in the economy.

    See leaving a trillion on the table for thoughts relevant to government-established industrial policy.

     

    6 Responses to “More on the Auto Bailout”

    1. Jay Manifold Says:

      Indeed. How about “an exemption from capital-gains taxation on all debt or equity instruments used in the next six months to invest in” anything at all?

    2. toad Says:

      The main problem with temporarily or permanently doing away with a tax, capital gains or otherwise, is there is so little opportunity for pork, bribes, and what have you. I propose that in return for doing away with the capital gains tax that the Big Three automakers supply the US legislature with all the drinks, drugs, prostitutes, and gigolos that they want for the next 6 years.

    3. renminbi Says:

      Thanks for the link-this is what makes this blog so useful.

      One other comment.In so many ways, without the US the world would be a much more squalid place.Not that our chattering classes aren’t trying to make the US just like the rest of the world.

    4. jarhead Says:

      When a friend wanted to open a gym, I went over the business plan and the financing with him. A key question was how much of his personal net worth would he commit to the project. If he was not willing to commit his money, why should anyone lend him money for the project? Perhaps the same idea applies here… no money should be lend (given) to the auto companies without a major investment by the officers and the boards of the companies…major in terms of their personal net worth. If they (officers and board members) lack confidence in the plan, why should the tax payer fork over any money?

    5. Mrs. Davis Says:

      Jarhead is right. If they want a loan, they have to cosign. Everything. Houses, cars, trust funds. Everything. Otherwise, no loan.

    6. sol vason Says:

      I don’t think GM and Chrysler management want a bailout, even though they say they do. The want to file for bankruptcy so that they can break their union contracts, perhaps even eliminate their unions. They want to eliminate some dealerships, establish new dealerships, and change their contracts with others dealerships. But dealers have special, very expensive priveleges protected by federal and state law.

      Congress will not allow bankruptcy because unions and dealerships, both monster contributora and voting blocs oppose bankruptcy. So the Big 3 present half-baked plans in hope of having the bailout turned down.

      The result is that congress has decided to write their business plan for them so that congress can jhustify giving them money!

      Remember, in Washington, things are never what they seem to be.