At what point does the auto bailout go over the top?

I am a big believer in a return on investment approach to economic development.  I don’t know how else we can justify spending tax payer dollars in this area unless it can be shown to provide a return on that public investment.  If we spend a million, we should get back two or three million in incremental tax revenues?  If you look at it from a business model perspective, the multiplier on investment would have to be 2,3 or even 4 times investment because each new job creation adds additional social costs (health care, education, roads, etc.).

At some point, then, the auto bailout ROI turns deeply into negative territory.  The G&M is reporting this morning that the bailout is now up to $10 billion (or more than 40 times as much tax revenue as every corporation in New Brunswick combined pays every year).

Supporters will say that the money is a ‘loan’ and not a ‘grant’ and they will cite the example of the Chrysler bailout in the 1980s as proof the government can make a return on this type of investment but I think most people that study these things are getting nervous. 

We are definitely into uncharted territory here.  If we look at what the feds/prov gave Honda and others to set up in Ontario, at some point you have to ask yourself should that money be used to invest in new auto companies rather than bailing out the old.  Electric cars?  Indian cars? 

Just a few months ago they were talking about three billion dollars.  Now it is $10.  I hope we are reaching some type of end.

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13 Responses to At what point does the auto bailout go over the top?

  1. mikel says:

    We are DEFINITELY into uncharted territories here. However, there are things you are forgetting, namely that each job also sustains other jobs in the community. And workers don’t add substancially to health care costs necessarily. By a large margin it is the young and old that cost the health care and educational systems.

    On the CBC yesterday they spoke with a bankruptcy lawyer who was saying that the mere idea a couple of years ago that the american government would own many of the banks would be crazy. In this particular case, I think it was GM which will end up being largely owned by the United Auto Workers union in the US. THAT is definitely uncharted territory and it will be VERY interesting to see how it plays out.

    But again, this is simply survival of the economy. Personally, I sort of agree with you, I think if people were a little more proactive that the entire auto industry would be better off nationalized with a strong emphasis on green technology and electric cars. That would be great, but of course you’d hear all the ‘Lada’ and ‘Yugo’ horror stories (like the Pinto was any better).

  2. The other shoe will drop when government (especially the current government, which hopes it will be around then) finds itself so deep in the hole it must effectively eliminate almost all services it provides. This, of course, is the end-game for administrations advocating a minimalist government stance.

  3. Scott Mackay says:

    I guess you could say that continued government subsidies to industries that show little growth potential is neither desirable nor appropriate, not to mention, it’s contrary to the principle of free enterprise. But that’s where my usual rhetoric/ideology ends. The auto industry is an unusual exception and I think the current Harper administration recognizes this in that there is a public interest in sustaining [its] jobs and maintaining a strong and competitive national automotive industry.

    But let’s be honest, a de facto industrial policy has existed for decades in our country, and in some sectors, like aerospace and auto, government funding and policies (Auto Pact) have made a mockery of market forces. Which is precisely the reason we are not talking about the closure of auto plants in the maritimes, just outlets and dealerships. In other words, government policies have always favoured the auto sector, and favoured it to be in a certain place through corporate welfare to buy votes in southern Omtario and through regionally favourable industry pacts.

  4. richard says:

    Its a huge amount of money, to be sure. Not sure how much the GST cuts are costing (estimates say approx 12 billion per year in lost revenue), but restoring those cuts would go a long way to solving the problem. Either way, there are too many jobs/voters in ON to change course now.

  5. $10B would buy a lot of infrastructure for rail and broadband – both needed for the 21st century. Gen Y will not be buying cars. The automobile market will crash due to demographics anyway, even if the current economic situation doesn’t do it first.

  6. mikel says:

    There is no free enterprise ‘principle’, thats a delusion. Go to a philosophy class someday and try to nail down what ‘freedom’ means and you’ll get the drift.

    Scott’s first statement means its OK to subsidize industries that DO show ‘growth potential’? Examples of that include the dot com buildup, Microsoft, and of course-the auto sector which has virtually ALWAYS shown growth potential.

    It’s ‘unusual’ for the same reason mad cow was ‘unusual’, meaning, there are votes at stake. As PEI has stated, the importance of the lobster fishery has a greater proportional effect on PEI’s economy than the auto industry has on Ontario’s-have you seen the feds clamouring to bankroll PEI?

    There are also no such thing as ‘market forces’, such a statement is ludicrous and makes ZERO sense. It can and has been taken to mean everything from the stock market to supply and demand (none of which are ‘forced’ but ‘controlled’-the only debate is on who has the controls).

    But its not exactly ‘corporate welfare’, since Toyota set up in Ontario with relatively little ‘cash’. It set up there for trained workers and a large local economy. Those are,for lack of another phrase-‘market forces’. There hasn’t been an auto pact for almost two decades now, so that line is essentially dead.

    It’s very true that its a regionally argument, and that again points to the failure of Canada as a ‘federation’. If you look at actual services-as well as the various ‘acts of federation’ it is clear that Canada is less a country a more an economic unit.

    Keep in mind WITHOUT the auto pact there would have been NO industrial development in Ontario either. What effect that would have had is unknown, but a LOT of tax money would be missing from federal treasuries. As for dealerships, in many cities I’ve visited the same families tend to own the franchises of many of the different car companies, so this wouldn’t have made as big an impact as many suspect.

    But IF workers become owners in Canada as well as the US, then David could get his wish about a ‘greener industry’. Like I said, thats about the ONLY positive thing to come out of this and it will be interesting to see how it plays out.

  7. richard says:

    “Gen Y will not be buying cars”

    Are you taking bets on this?

  8. Anonymous says:

    GM and Chrysler were in trouble long before the economic crisis. We are throwing good money after bad even considering a bailout. Notice that we are not bailing out Honda and Toyota? Hell, taxpayers only paid $80M for a brand new Mazda plant in Woodstock Ontario last year. This is a crazy amount of money to be dishing out; the ultimate in corporate welfare. Let them go bankrupt.

    Similar to GM and Chrsyler, the forestry sector was in deep trouble before the crisis but no $10B bailouts there. If it were not for the auto makers being located in vote-rich Southern Ontario, a bailout of this magnitude would never be considered.

  9. mikel says:

    Actually, that’s not quite true, GM and Chrysler weren’t in much worse shape than Toyota is now. EVERY car manufacturer is losing money right now, some have more cash saved up. Toyota is NOT american, so the debate isn’t about subsidies HERE, Toyota has ALWAYS been heavily subsidized by the Japanese market, and GIVEN lucrative contracts as well as an auto industry that keeps foreign manufacturers out. The same goes for Honda, which has extensive ties to the Japanese military. In fact, its currently before the trade courts as to whether it was actually the Japanese government which invented Toyota’s hybrid engine.

    Virtually EVERY market has now been ‘bailed out’-mostly by necessity, which means the debate for the next generation is not ‘which ones do we bailout’ but ‘which ones should we OWN’.

    As for cars, that’s an interesting comment and depends highly on public transit. In europe in most areas I can’t imagine why ANYONE would own a car and I’d love to get rid of ours. But it all comes down to public transit, and I’m definitely not as optimist as Harold. Of course an oil crisis may GUARANTEE that we aren’t driving cars, so who knows.

  10. Anonymous says:

    @mikel

    “Actually, that’s not quite true, GM and Chrysler weren’t in much worse shape than Toyota is now.”
    >> No comment (what else can I say???)

  11. richard says:

    “>> No comment (what else can I say???)”

    Well, at the very least, you could have put some UPPERCASE into your response.

  12. mikel says:

    I suspect that means disbelief, but just go look at their public disclusure documents. While there is ‘restructuring’ to reduce costs, every auto critic out there has indicated that it is the simple fact that americans are not buying cars that is the reason the big three are failing (that seems fairly obvious since if it was the structure that was the problem then they would have been bankrupt ages ago). Toyota lost $2 billion last year, ironically the only reason they were able to be profitable was because of a joint venture with GM.

    Toyota often gets a weird kind of credit as though they were some kind of super company, but that’s far from the case. In ontario all their training costs are covered, their land is virtually free, there are virtually NO regulations on them-environmental or labour. And of course anybody that thinks IF they continue to lose money they won’t be lined up before government for a bailout just doesn’t know much about ‘free enterprise’. And again, they are being propped up by Japan by a protectionist auto sector and guaranteed government contracts and government paid research. So there is nothing ‘structurally’ different about Toyota. One thing that MAY turn out different is that the ‘new big three’, IF they end up being owned by their auto unions, they may adopt many of Toyota’s organizational principles. This will be interesting because Toyota gives a half hearted attempt to encourage worker ‘independance’. A worker owned car manufacturer of that size that encourages worker independance is, well, a socialist’s dream.

  13. Scott Mackay says:

    The G&M reported today that the average cost per taxpayer for every “job saved” was $1.4 million.

    http://www.theglobeandmail.com/report-on-business/14-million-for-every-job-saved/article1158733/

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