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A Better Way To Bail Out Detroit?

I'm still skeptical about this push by both Barack Obama and Congress to fork over billions of dollars to ailing carmakers in Detroit (though, to be sure, James Surowiecki makes a compelling argument that letting GM go bankrupt right now could deal a devastating blow to consumer confidence and, with it, the broader economy). But Tom Evslin outlines an alternative bailout idea for the auto industry that might be worth considering:

The US government should order a complete replacement for its vehicle fleet to be delivered over the next four years. The new vehicles must be either plugin electric hybrid, pure electric, or possibly natural gas. Obviously retooling both at the manufacturers and suppliers is required to deliver this order so the government should be willing to prepay a significant part of it as it does for new weapons systems. That gets money into the system fast and creates/saves jobs almost immediately. It lets the suppliers retool as well as the final assemblers.

Ideally all auto companies ought to be able to bid. Maybe we only offer prepayment when there is a certain percentage American content although I hate be even that protectionist. Certainly the companies with Japanese names that build cars using American labor in the US ought to be on an equal footing with Detroit. American jobs are American jobs whether unionized or not.

Some infrastructure money needs to go into recharging stations. Good project to be doing as well. Also the electric grid needs work.

There's a certain logic to this. The U.S. government doesn't—and shouldn't—have an obligation to save individual firms, especially if those companies are reeling because they're poorly managed and no one wants to buy their products. But the U.S. government does have an interest in spurring the next generation of cleaner vehicles, so as to curb CO2 emissions. One approach would be to subsidize those cleaner cars directly, either by offering consumers tax credits if they purchase plug-in hybrids or electric vehicles, or by having the U.S. government buy the clean cars directly—which would, in essence, limit aid to firms that can actually deliver the goods.

The problem is that this is a less-than-ideal way to run the U.S. economy—we'd basically transform the auto industry into something akin to the defense industry. Expect to see ludicrous cost overruns and federal contracts awarded less for competence than for lobbying prowess. But if political pressure demands we do something, then Evslin's approach sounds more palatable than simply forking over money to dying firms in exchange for vague promises that they'll do greener stuff and few guarantees that taxpayers will ever get their money back.(On the other hand, there's a serious question of timing here: GM's electric car won't be ready until 2010 at the earliest, and the company's facing a cash crunch right now.)

And, yes, it'd be nicer still if we could take a more libertarian approach, simply taxing oil and letting the market work things out. But, as Dave Roberts argues today, transitioning away from an gasoline-based transportation system will probably require major government investments in new infrastructure—much like federal highway spending helped create our current car-based system—so it's not clear this can be left entirely to the market. I'd be interested to hear arguments to the contrary, though.

--Bradford Plumer