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The Auto Bailout: a Bad Deal

by John Paul Rossi

Mr. Rossi is an associate professor of history at Penn State Erie, The Behrend College. He writes on business and economic history and a writer for the History News Service.

With the economy tanking and unemployment skyrocketing you'd think the Obama administration would be doing all it could to save jobs. But if its auto bailout plan is any indicator of its current direction, we're on our way to losing a lot more jobs.

Why is that? Because President Obama and his advisers are repeating the central mistake of Franklin D. Roosevelt's New Deal-contradictory programs that undermined economic recovery in his time. While the Obama stimulus package creates jobs elsewhere, its auto bailout will eliminate more than 500,000 jobs. Americans need an overall federal government recovery plan that stops job loss and starts job creation.

To rescue and revive the auto industry, the bailout must be linked to other vital American interests. We have spare workers and empty auto factories; they can be used to solve American problems of oil dependence, pollution and greenhouse gas emission reduction. Only through this kind of linkage can the Obama administration avoid the New Deal's failure to generate a self-sustaining economic recovery.

Today's Republican critics charge that government spending is why the New Deal couldn't get the nation out of depression. The real problem was that the New Deal lacked a coherent recovery plan. Its programs often worked against each other. Some, like the Works Progress Administration (WPA), created jobs for the unemployed, while others, such as the National Industrial Recovery Act's industrial policy, helped cut demand for labor.

Much like the current auto bailout plan, the New Deal's industrial policy set production to low levels of demand. Production cuts were generally successful in pushing up prices, profits and, to a lesser extent, wages, but hours worked and production lagged.

The overall result was that industrial employment did not drive recovery during the New Deal. While Roosevelt's programs did push down unemployment from its 1933 record of 25 percent, unemployment remained high -- 17 percent in 1939 after six years of the New Deal -- and recovery was elusive.

The Obama administration is repeating Roosevelt's mistakes. While its stimulus will increase industrial jobs, its auto bailout will lead to the elimination of production jobs, and close 14 factories and more than 1,000 dealerships. Despite these cuts, the auto makers and parts manufacturers say they still need about $48 billion more from the government.

Because each auto manufacturing job generates spending that supports about four other jobs, these layoffs and dealer and plant closings are going to ripple through the economy with devastating effect. A chain reaction of bankruptcies will sweep the auto parts industry, resulting in even more job losses and business closures.

Spending taxpayer billions to this end is a very bad deal. A much better investment is a smart and equitable federal policy, quickly applied, to restart the auto industry.

Here's how it can be done:

Use already appropriated Federal government bailout funds to make $15 billion of investments in auto manufacturer and parts supplier stock. This will keep the auto industry afloat for the next four months.
Require banks receiving bailout money to use 10 percent of the "aid" -- $4 billion to date -- to generate new auto and truck loans for the purchase of fuel-efficient vehicles.
Add $15 billion to the factory conversion grant fund legislated by Congress in 2007 to convert existing auto plants and auto supplier factories to manufacture highly fuel efficient cars, trucks and buses and their parts. Require the government to distribute these grants within three months.
Create a $5 billion grant fund to help poor and high-unemployment school districts and municipalities purchase hybrid buses and vans for mass transit. Impose a 120-day "use it or lose it" requirement on these funds.
Recycle 10 percent of the Alternative Minimum Tax "fix," which does little to stimulate the economy -- $7 billion -- and use it to fund a generous "cash for clunkers" program which buys and scraps old inefficient and highly polluting cars from their owners who in turn are required to use it to purchase new cars.

These actions will provide funds to keep the auto industry going and revive it. They will do so by stimulating demand for the auto industry's goods. This will rescue the industry and lay the foundation for economic recovery.

Instead of bailouts that destroy jobs, the Obama administration needs to integrate its recovery programs and business bailouts so that they systematically link demand for goods, labor and production capacity to employ more workers and create economic growth. If he fails to do this, President Obama will repeat one of Roosevelt's greatest economic mistakes. Even worse, the economy will continue plummeting toward depression.

This piece was distributed for non-exclusive use by the History News Service, an informal syndicate of professional historians who seek to improve the public's understanding of current events by setting these events in their historical contexts. The article may be republished as long as both the author and the History News Service are clearly credited.