Subsidizing businesses a risky path

Freedom New Mexico

While the nation’s attention was focused last week on the financial crisis, the $700 billion granted to Treasury Secretary Henry Paulson, and the Dow Jones industrial average, Congress quietly passed a budget measure that included $25 billion in subsidized loans for the auto industry. It may seem like peanuts compared with the Wall Street bailout, but it is yet another example of rewarding unwise decisions with taxpayers’ money.

The money is supposed to go for more research into fuel-efficient and alternative-fuel vehicles. But there’s no question that these subsidized loans can be used to improve the companies’ bottom lines, which is not the taxpayers’ job.

All of the companies we used to call the Big Three are reeling from dubious decisions: to give their unionized workers lavish pension plans, to rely on gas-guzzling SUVs and trucks for a big portion of their sales, to become bureaucratic institutions that have trouble bringing out new models nimbly. Now that gasoline has increased dramatically in price in the past few years, these automakers have strong market-based incentives to produce cars that get better gas mileage, and they should fund the research to do that.

In the 1970s, during the energy difficulties brought on by the Arab oil embargo and its aftermath, U.S. auto companies shifted emphasis to higher-mileage models rather quickly – and they are doing so now if you believe the emphasis in recent TV commercials. They don’t need the government to tell them that making cars that get better gas mileage is a good idea. All those unsold SUVs sitting on dealer lots deliver the message more directly.

Doling out heaps of sugar to the auto companies illustrates one of the many dangers inherent in the Wall Street bailout. If the government can use taxpayers’ money to bail out Wall Street, it makes it easier to justify bailing out other industries in trouble. Just three weeks ago, the auto company loan proposal was controversial with mixed prospects at best. But amid the chaos of last week, it passed with barely a murmur. Even as taxpayer resources dwindle, more interests will be clamoring for special treatment or “free” money, and there will be no principled reasons to deny them.

The way you get a healthy economy is to let those who make shortsighted or bad decisions suffer the consequences and those who make good (or even, sometimes, lucky) decisions to prosper. This subsidy to the auto industry is a big step down the wrong road.