Issues with the Big Three loan

Given the current discussion about the “Big Three” automakers asking for a loan in order to keep afloat in these rough economic times, I started thinking about taxes. Currently in the U.S., businesses and individuals pay (or are supposed to pay) both state and federal income taxes.

One of the underlying tensions in the “Big Three” loan issue was the fact that this would be a federal loan. The opposition to this loan came from several representatives from Southern states, which paid incentives for foreign-owned automakers to build factories in their states. Since these states had already paid one set of auto manufacturers to build there, they were less than cordial to the idea of using federal dollars to essentially do the same to another state’s corporations. This wasn’t openly talked about, but I suspect was an underlying cause of the resistance to federal help.

Another issue with the opposition to the “Big Three” loan was the idea of this being a blank check akin to the bank bailout earlier in 2008. This was simply a terminology issue that was leveraged in order to maintain opposition i.e. a red herring. It’s easy to oppose a loan when the bank bailout (arguably) flopped; another bailout would similarly flop. However, this wasn’t quite what was being asked (though I’m sure GM et al wouldn’t have said no to a blank check).

And here’s a difficulty: these Southern states did what I’m sure Michigan and Ohio did a long time ago: paid incentives to establish those industries in their state. There’s nothing wrong with a locality investing in a corporation in order to lure it in to an area. In essence Michigan tied its success to the rising star of the U.S. automotive industry. It’s main failing was not diversifying its industry enough. Hence, Michigan had no spare revenue to loan these corporations that are its lifeblood. Michigan’s constitution requires it to have a balanced budget so these corporations couldn’t ask it to go into debt in order to provide a “bridge loan.” For GM et al this was a real rock and a hard place.

However, instead of debating about whether or not Michigan could afford to lose a major revenue stream, much of the debate was about unions and accurate portrayals of how much an auto worker gets paid. This was another red herring created to give the lawmakers something to rally behind and debate about.

In my opinion the state of Michigan should create a referendum allowing it to temporarily run a budget deficit for the duration of the Bush-era recession. This would hopefully allow Michigan the ability to provide capital to GM, Chrysler and Ford without needing to beg the federal government for it. At the same time, I think it would be wonderful for Barack Obama’s administration to mandate that all automobiles used by the federal government be replaced during the next four years with new vehicles from the “Big Three.”