Posted by Gilmour Poincaree on December 15, 2008

December 15, 2008

by Andrew Main, Business Editor – The Australian


WERE you surprised on Friday to learn the $21 billion bailout of the US motor industry had been held up by the US Senate?

Me neither, any more than when we then learned that President George W.Bush subsequently said he was prepared to keep GM and Chrysler going at least until the end of the year.

But independent of how the rescue operation does end up being structured, it’s worth saying that the Republicans’ reluctance to throw money at Detroit deserves a fair bit more sympathy than the last time US legislators jacked up on a global issue, over the initial $US700 billion ($1.06 trillion) TARP bad debt rescue package.

In simple terms, why should the US taxpayer rescue an industry that has been fighting tooth and nail for decades not to move into the 21st century?

The main ostensible issues are about bringing down disproportionately high pay for Big Three car workers, but what’s just as important — particularly to president-elect Barack Obama — is modernising the products dramatically.

In the same way that George Bush senior notoriously announced at the Earth Summit in 1992 that “the American way of life is not negotiable”, the Detroit giants have been behaving for decades like the eccentric Corporal Klinger in the film and television series M.A.S.H.

In one episode Klinger spray-painted himself gold, dressed up as the Statue of Liberty and wrapped himself in the Stars and Stripes in a bid to be sent home from the Korean war as being mentally unstable. It didn’t work.

The big Detroit carmakers have been doing pretty much the same thing, building a perception in motorists’ minds that if they’re not driving something huge and locally made, then they’re letting the nation down. Cue old newsreel shots of American-made trucks helping to win World War II — over 50,000 6×6 trucks and 4WD jeeps went to help Stalin’s Russia, for instance.

But there’s a much more subtle game that’s been played for years by Detroit’s lobbyists in Washington: tax breaks for big vehicles.

Back in the 1970s, which is ironically when the first oil price shock occurred, the US income tax code was altered to give a break to small farmers and self-employed workers who needed a truck for work. Because there was a luxury car tax in place, now long gone, there was an immediate write-off allowable for any truck with a maximum gross weight of more than 6000 pounds (2720kg). The weight limit was set deliberately high to stop cheating by car manufacturers, since the only car you would find in the US that heavy is the President’s armoured limousine. That scale of vehicle is right at the top end of 4WD sizes in Australia.

The tax break got more generous as the years went by, not less, so that by 2003 you could get a year of purchase tax write-off of up to $US100,000, plus there was something called a “bonus deduction”; that climbed from 30 per cent to 50 per cent, and on top of that the whole cost of the vehicle could be written off over a generous five years.

It’s not quite a case of buyers being paid to own the giant SUV trucks, but it came close. Congress did a minor backflip in 2004 with the passage of the American Jobs Creation Act (honestly), cutting back the maximum initial write-off to $US25,000 but keeping the other two generous elements of the scheme. There’s other skulduggery in the cupboard, not least the fact that way back in the late 1970s light trucks and 4WDs were exempted from the legislative moves to improve US-made vehicles’ fuel consumption, and the fact that around 2005 the tax break for hybrid vehicles was pushed down (below $US2000) rather than up.

There’s also a strong piece of automotive folklore that Toyota fast-forwarded development of its Prius hybrid car because Washington had given Detroit a billion-dollar subsidy to get serious about hybrids. The chastened Detroit chiefs who last month got a huge shellacking for flying their corporate jets to Washington did make sure on their next visit that their industry’s most fuel-efficient new models were readily available for the politicians to look at, but the new models are clearly only just emerging from the development stage, unlike the Prius.

Obama has taken the view that there should be significant strings attached to any loan deal, most specifically requiring cars that are dramatically more environmentally friendly. Any economist will tell you, meanwhile, that the global capacity for car manufacturing has increased well past demand in recent years, mostly because of new factories in China and India, which invites the question of whether the US needs a car industry at all.

But one look at the unemployment, and thus electoral, consequences of a total Detroit shutdown will tell you that a compromise has to be on the way. Not if, but when.

But when it does come, the US legislators would be well advised to fix the tax rules to encourage more environmentally friendly vehicles. The industry likes to say it takes four years to develop a new model, yet there’s a fair chance that those new models have been designed already but not put on the production line. The makers certainly don’t have four years to play with — and maybe not even four months.

The most disgraceful canard of the lot from the Detroit spin industry has been that GM, Ford and Chrysler were building vehicles that US drivers wanted to buy. Looked at another way, the drivers wanted big SUVs because the tax laws had been fixed to favour them, plus of course the manufacturers enjoyed higher profit margins from making bigger easy-to-make trucks. Let’s not even speculate on who pushed for those tax breaks in the first place.



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