Mormon Democrats

Now that we have all had a chance to vent our frustration over the Big Three’s grand entrance on Capitol Hill it’s time to come up with some solutions for the auto industry.   (Let’s face it folks, when you come begging for emergency cash, you have more credibility if you fly into National Airport coach class, take the Metro to the Capitol, treat your senator to a Big Mac at the National Space and Aeronautics Museum McDonalds after your hearing then take the Metro back to the Airport to avoid paying for a night at Motel 6.)  Since the four “Ts” (timely, targeted temporary, and tangible) apply to the automotive industry our strategy will be to optimize these characteristics, I’ll use it as my basic strategy.

Like most relationships in economics, there are trade-offs to be made between these four criteria.  For example, typically there is a tradeoff between timeliness and targeted.  If your economy is falling rapidly, there may not be enough time to gear up the administrative mechanisms to effectively target resources to the most affected sectors of the economy.  To balance out the effects of these tradeoffs, it frequently makes sense to have a coordinated package of interventions.  For example:

Phase I: Immediate jumpstart of the US auto industry

·         Using normal operating funds invigorate production (and save the government so money by)

o   Prepaying up to 90% of the contracted cost of vehicles normally purchased during FY2009.

o   Accelerate the delivery schedule of the vehicles

o   In consideration of the “Prepay and Accelerate” policy, the Government will receive a discount on the cost of the vehicles.

·         Using a sizable chunk of Bailout Money, create a one-time car loan program with the following features:

o   Loans will be issued through the various car manufacturer’s Acceptance Corporations

o   Loans will be financed using US Treasury Bills as part of the Bailout authorization

§  The interest rate will be fix based on the following:

·         Interest rate of the T-bills

·         Sufficient interest to cover expected administrative costs by the government

·         Risk premium

·         Up to 1% “profit” for the Treasury

·         Sufficient interest to cover expected administrative costs by the Acceptance Corporation

·         Risk premium for defaulted loans

§  Borrower must be a U.S. citizen.

§  If the debtor defaults on the loan, any unpaid balance after reposition could be levied against the individuals tax refunds

o   Loans will be targeted to individuals with steady employment and mid-range credit scores

o   Models eligible for the loans must be new and at least 50% American in origin. Vehicles with 80% or more origin will receive priority. Vehicles with high gas mileage ratings and/or hybrid engines will receive priority

o   The program will run until the allocated money runs out or 2 years, whichever happens first.

Phase II: Development and production of multi-fuel vehicle

·         Using a chunk of alternative fuel R&D funds combined with FY 2010 motor pool budget, develop and produce a small number of vehicle models using current or almost developed sources of energy that have the following specifications:

o   Are electric/internal combustion hybrid

o   Electric sources of energy include:

§  Plug in capacity with easy to remove battery

§  Solar panel on roof and/or trunk

§  Combustion engine

o   Combustion sources of energy include:

§  Gaseous fuel

·         Propane

·         Natural Gas

·         Methane

§  Liquid Fuel

·         Flex fuel (85% ethanol)

·         Regular unleaded gasoline

Strategically, Phase I fills much of the lost demand by infusing funds directly into the hands of citizens who are in the market for a new vehicle and by directly purchasing vehicles.  Both methods could be implemented within a few weeks so they meet the timely test.  They both are targeted to an industry that is hurting.  Both are temporary with specific time limits.  Targeting financing results in a tangible asset; loans that are paid back with a modest amount of interest over the T-bill.  The pre-pay and accelerate policy would result in the government obtaining vehicles at a modest discount, yielding a long run benefit to taxpayers.  Taxpayers would also benefit by keeping a non-trivial number of Americans working.  Since working Americans pay more taxes than non-working Americans, it is the people’s best interest to ameliorate this situation long enough, if possible, for the economy to self-adjust.

The second phase meets the country’s strategic needs in a much more robust way.  One of the main reasons that oil producers produce huge price spikes is because we have little to no energy flexibility.  By developing vehicles like the one I outlined and selling them in large numbers we end up with tremendous flexibility.  If foreign oil concerns start charging too much, a significant portion of our citizens will simply flip a switch (or have the car’s computer do it for them) to a different source of energy thus reducing the amount of oil sold.  Most of the engineering would involve developing a multiple fuel injector and coordinating it with the vehicle’s computer.  Off the assembly-line vehicles would be modified for the extra (gaseous) fuel tank(s), batteries, and solar panel instillations.

The Government would benefit by having the first Multi-fuel vehicles on the road, thus they could operate with little effect on its bottom line through any future oil shocks.

Will this plan solve Detroit’s entire problem?  Probably not, but at least it would be a possible solution that is likely to make or save the government money.  It doesn’t do as well in terms of timeliness, but should kick in as Phase I is phasing out.  It would be temporary in that the Feds only agree to prepay and accelerate for a couple of years.  It is targeted to an industry in worse shape than most of the rest.  It has the potential of creating a tax generating asset – multi-fuel vehicle technology that will be used for several years to come (until a better technology is invented).