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October 29, 2008

Gush Up vs. Trickle Down

We shouldn't try a trickle-down approach to "saving" the auto industry and especially the auto finance companies; instead, if aid is needed at all, it should be shoveled in at the bottom of the economy from which it is sure to gush up (see a sample plan below).

The New York Times has done a great job of revealing that banks are using their bailout funds not to make more loans but to buy out their competitors. Now Cerberus, the private "capital management" company which owns most of Chrysler and a majority interest in GMAC is seeking federal aid for a plan to bail out its badly timed investments in the auto industry. Cerberus and GM have been fairly frank that the aid is needed to finance massive layoffs so that combination of Chrysler and General Motors can save cash. The question is why would we want to use taxpayer money to do that?

There is no promise that more money will mean more loans to car buyers. There is no promise that a taxpayer bailout will result in cars Americans want to buy even if they can get loans. There is also no recognition that "foreign" car makers are building cars in America with American labor that Americans want to buy. Do we really want to endanger the American jobs at Toyota in order to finance layoffs at GM and Chrysler?

Trickle-down aid to an economy doesn't work because 1) a trickle is too slow to aid an economy which has seized up; 2) the money tends to stay at the top – eg. be used for buyouts and/or executive salaries rather than flowing out into the broad economy where it's needed.

A Gush Up Proposal

Suppose that, instead of bailing out Cerberus and GM, we use our bailout funds to buy any and all cars and light trucks over ten years old BY THE POUND. Prices should be set so they are higher than the small amounts these cars fetch on the resale market today. All such purchased cars will be scrapped and recycled; in fact the program should be run through the junk dealers – they have much less overhead than banks. To avoid buying already scrapped vehicles, only those cars and trucks which have been registered for the last twelve months should be eligible.

The nice thing about putting money into the bottom of the economy is that it's sure to gush up. The owners of ten year old cars aren't going to stuff the money in their mattresses or finance neighborhood buyouts.

A few will be able to get by with one less car and switch to mass transit and use the money for other necessities. That's all goodness. Most will buy another not-quite-so-used car; there's a very good chance the newer car will use less fuel than the old one, especially since that's what people know they want and because cars get inefficient as they get older; also we're paying more for heavier cars so we're getting them off the road. That's a bonus.

The people who sell the not-so-used-cars to the people who scrapped their junkers will now have more money to spend on a new car. This is true whether the used cars pass through dealer lots or not. The dealers, who are in bad shape, will benefit from a firming of used car prices. Also, the more you get for a tradin, the less financing you need for your next purchase.

Money put in at the top tends to stay at the top; money put in at the bottom flows through the whole economy. The gush-up proposal will put money into the hands of the consumers most likely to spend it instead of the bankers most likely to hoard it. Gush up will also reduce the average size and age of vehicles in the American fleet and further reduce our gas consumption. Let's do something like that if we need more bailouts.

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