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Detroit Can’t Count on a Jump-Start From D.C.

Image has not been found. URL: /wp-content/uploads/2008/11/assembly-line.jpgGeneral Motors assembly line (by habfam flickr)

In a blizzard of partisan rhetoric, congressional leaders sparred Friday over whether America’s struggling auto makers should be the next benefactor in the lengthening series of federal bailouts.

Key Democrats have pushed furiously for an additional $25-billion infusion to help the sinking industry. Earlier this year, Congress approved $25 billion in low-interest loans to help the Big Three retool their factories to produce smaller, more fuel-efficient vehicles. Those funds, however, have been held up because of red tape. The Bush administration announced last month that it could take between six and 18 months for the money to reach the companies.

Senate Majority Leader Harry Reid (D-Nev.) vowed Friday to bring the proposal to give General Motors, Ford and Chrylser more money to a vote in next week’s lame-duck session. The $25 billion would come from the already approved $700-billion financial rescue package.


Illustration by: Matt Mahurin

But the plan has hit a GOP wall of opposition. Many Republicans, who begrudgingly signed on to a bailout of the financial system, seem to have drawn the line at rescuing Detroit.

“I’m afraid it will be sending money down what we call a rat hole,” Sen. Richard Shelby (Ala.), the highest-ranking Republican on the Senate Banking Committee, said in an interview on MSNBC Friday. “It might be a temporary fix … but until some fundamental things are changed about their [auto makers'] model, it’s not going to work.”

Democratic leaders, including President-elect Barack Obama, have called repeatedly on Congress to pass legislation this month that would spend billions of dollars to buttress state Medicaid programs, extend unemployment benefits, make loans to auto makers and build roads and sewers. Obama has said his support for the Big Three hinges on their willingness to use the cash infusion to retool factories to produce more a fuel-efficient fleet.

In a letter to Senate Minority Leader Mitch McConnell (R-Ky.), Reid said that, at the very least, he intends to proceed Monday with two of the items — extension of unemployment benefits and more money for Detroit.

“These two provisions,” the Nevada senator wrote, “both address especially urgent needs and seem most likely to win your support and the support of your caucus.”

Reid shouldn’t hold his breath for passage. The administration opposes any new stimulus measures, contending that its $700-billion bailout strategy is enough to repair the economy — if it’s given the time to work. Officials in the Treasury Dept. also have rejected using any of that money to help Detroit. They have argued that the money would be more effective if it targets the finance industry.

GOP congressional leaders, already disgusted by federal interventions in the private sector, seem ready to let Detroit go under.

“There is a better way to get the economy moving,” Rep. Jeb Hensarling (R-Tex.), head of the Republican Study Committee, told CNBC Friday. “And it’s not helping out these [auto makers] who are the slave to the big labor unions and are making products that people don’t want to buy.”

Reid’s office said Friday that details of the Democrats’ plan are still being worked out.

McConnell issued a noncommittal statement questioning how anyone could endorse a proposal that has yet to be introduced.

“Taxpayers deserve to know if this bailout [of Detroit] would increase the national debt and raise their taxes,” McConnell said. “Perhaps when a bill is actually written, and its costs are known, both Republicans and Democrats can take a position on the legislation. But it sure would be helpful to actually see the bill before commenting on it.”

McConnell is hedging his bets on an Detroit bailout for another reason: The industry has a big presence in his home state of Kentucky. In 2005, roughly 20 percent of the state’s manufacturing workforce was employed by car manufacturers and related businesses, according to the U.S. Bureau of Economic Analysis. The auto and related industries accounted for $5.4 billion of the state’s gross domestic product. In 2006, Kentucky ranked third in the nation, behind Michigan and Ohio, in total light-vehicle production,

Kenneth Troske, director of the Center for Business and Economic Research at the University of Kentucky, said McConnell might not be a favorite of the auto unions but the industry’s prominence in Kentucky puts him in a bind. “He’s obviously in a difficult position,” Troske said.

Still, Troske added, an auto maker bailout would do more harm than good over the long run because it would set a precedent that some companies are too big to fail. The better alternative for the Big Three would be a Chapter 11 bankruptcy filing, Troske contended. Stockholders and pensioners would be hurt, but the companies would keep operating.

“They’ll continue to produce cars; they’ll continue to sell cars,” Troske said. “The executives would get fired, but they’ve already proven that they don’t know how to run a company.”

Auto industry representatives blame their predicament on external factors. Stephen J. Collins, president of the Automotive Trade Policy Council, which represents Ford, Chrysler and General Motors, pointed to high gas prices, less consumer spending and the credit freeze.

Still, U.S. auto makers are hardly blameless for their troubles. For years, the industry kept making gas-gulping SUVs while fighting tougher fuel-efficiency standards that would have made them more competitive when gas prices skyrocketed this summer.

But the question some lawmakers are asking is not who’s to blame, but what would be the economic consequences if one or more of the Big Three is allowed to fail.

In an interview with CNBC Friday, Sen. Debbie Stabenow (D-Mich.) said the effects any company declaring bankruptcy would be dire. She argued that the debate is not merely about the Big Three but about “whether or not we’re going to make things in this country — whether or not we’re going to manufacture anymore. … This is a bottom-line question of jobs and the future of the economy in America.”

Detroit’s woes should be a cautionary tale for the protectors of the industry. Many lawmakers, led by Michigan’s powerful Democrats, defended the auto makers’ opposition to new fuel-efficiency standards. Blind defenders of labor, which created a costly pension and health-benefits system that has made the Big Three increasingly less competitive in the global economy, also contributed to the problem. For example, the cost of health benefits owed by GM to employees and retirees over the next 80 years is estimated to be $55 billion, The New York Times reported last year.

Complicating Detroit’s plight, the Detroit Free Press reported Friday that Chrysler is paying its top executives $30 million in retention bonuses, even as the company is hemorrhaging cash and employees. Company leaders, who are scheduled to appear before Congress next week, will no doubt hear an earful from lawmakers over their priorities.

Such news will likely not sit well with Sen. Charles Grassley (R-Iowa). Grassley, the ranking member of the Senate Finance Committee, wrote to Democratic leaders Friday urging that any legislation to help Detroit should “include restrictions on executive salaries, compensation packages and excessive internal spending.”

Maybe Congress has learned something from the finance bailout after all.

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