Should the U.S. Adopt the German Auto Plan?

BY busadmin  March 20, 2009 at 10:44 AM EDT

Euro; via Flickr

Question: I am curious how you believe we should balance helping big companies with also helping their customers.

The number one basic business principle is: Businesses don’t do well without customers. Solution: Provide customers.

Here’s a case in point. NPR aired a story recently about how Germany (where they believe in doing things the smart way) is propping up its auto manufacturers (as well as manufacturers of other national origin). They are paying owners of old cars to take them off the streets and have them crushed (so they can’t be sold again!!), and paying them to buy new cars (cleaner, more efficient, and guess what – keeping cash flowing and providing customers).

Here in the U.S., we don’t seem to believe in this strategy. Is it because we have too strong a national misunderstanding of the word ‘socialism’ that we are not allowed to give money to people? Or is there some true economic principle behind this strategy not to use the demand side to drive recovery?

We can only provide massive welfare to big, formerly rich companies. So instead of providing companies with cash flow and customers, we write them loans, checks, and purchase their stock (that’s not socialism??), which does not provide them with customers. So the money ends up in the trash can and helps pay some payroll for executives and lobbyists to run around between Detroit and Washington trying to lure even more wasted money to their non-enterprises.

I truly believe we are going about this recovery of the auto manufacturers in the wrong way, but what I really want to know is what YOU think, Paul, since you are the only economist on TV who seems to be able to explain anything!

Paul Solman: This is a very interesting question. Sorry I didn’t read it before interviewing Baron zu Guttenberg, the German Minister of the Economy and Technology, though it did come up in our conversation. I wanted to include it in the final cut, but the Baron was too hard to understand. Here’s the transcript, and his own version of the shortcomings of “scrapping.”

He’s defending the German stimulus package, which America has criticized as too little, too late. zu Guttenberg emphasized the sustainability of a stimulus.

zu Guttenberg: If you ignite just a quick fire which…doesn’t have a broad effect as such – we call it straw fire in Germany. So that wouldn’t be enough….We need to see the long term perspective as well…We took investment in infrastructure, we took investment in education, we lowered our taxes, we lowered our labor wage costs and other things, so quite a remarkable package, and…it already causes some effects but not as far-reaching as I would like to see and we have to await the results first.

Me: But isn’t that an argument for greater stimulus rather than have this little fire that just sort of fizzles out, have something that really gets the economy…burning again?

zu G: I’ll give you an example of the quick fire – one thing we have offered to the public is as we call it a “scrapping premium” for old cars, and this is a thing that was quite successful now for a couple of months. It costs a hell of a lot of money, it’s EUR1.5 billion and it will be…

Me: So about $1.7 billion.

zu G: Approximately.

Me: And you pay somebody to bring in their old car and scrap it?

zu G: Exactly and scrap it. And so that caused a rather positive effect but it will be over probably in May already although we actually thought it should be for the whole year. So we always have to keep in mind what happens when such a program ends. So you can say: Well, you prolong it, and you prolong it endlessly, but then you would….really endanger all the liberal thinking by pouring money and money and money again, and without any long term effects.

Me: By “liberal thinking” meaning market thinking?

zu G: Market thinking.

The minister was a little too hard to understand, and so we didn’t use this exchange on the air. Also, the program was clearly not the minister’s. (He’s a conservative who’s taken his job only recently from a Social Democrat.)

But he was, in effect, answering your question directly. If the net effect of giving money to consumers is to speed up their spending short term at the expense of spending later, have you simply ignited what we’d call a brush fire that will quickly burn out, at considerable taxpayer expense? The argument for giving money to the auto companies is to keep them alive long-term, by insisting on structural changes in exchange for the money.

You ask for my view as to whether or not we’re going about the recovery of the auto makers in the right way. Frankly, I just don’t know. I like the idea of trying lots of approaches, as FDR did in the Great Depression. How about a scrapping incentive pro-rated to how much more mileage your new car gets than your old one?

Editor’s Note: Watch Paul’s interview with Baron zu Guttenberg, the German minister for economy and technology, here: