What's an auto job worth?

Peter Luke almost asks a good question, and almost answers the question he asks. But his question and his answer are fatally incomplete in several respects. His logic is not fatally flawed; it is entirely absent.

Mr. Luke authors the Michigan Political Report, a blog on mLive.com, a site about “everything Michigan.” Mr. Luke asks, “What's an auto job worth?”

What's an auto job worth?

In Tennessee, where officials offered Volkswagen an incentive package worth $577 million to build a 2,000-worker assembly plant near Chattanooga, each job is worth about $285,000.

Translate that to the 235,000 workers employed by GM, Ford and Chrysler and the total worth of those jobs nears $70 billion. So $25 billion in federal bridge loans would seem like a relative bargain to avert bankruptcy that auto experts say would wreck the industry.

States have been providing expensive financial help to car companies for years so opposition by southern members of Congress to federal help for the domestic industry is more than inconsistent.

U.S. Rep. Zach Wamp, a Republican from Tennessee, said last week that the Detroit Three had to learn its lesson "the hard way." But hailing Volkswagen's announcement, Wamp said back in July that it was his region's "destiny" to make "the vehicles of the future."

There are several problems with Mr. Luke’s question and the four paragraphs that follow. First, local and state tax incentives cannot be compared logically to a federal loan. Second, the federal “bridge loan” to the Detroit 3 appears to be a bridge only to the next loan. Third, executives from the Detroit 3 have thus far been unable to say what they would do with the government funds. Fourth, the Volkswagen incentives include tax credits spread out over 3 decades, and infrastructure improvements with benefits lasting several years to decades, while the federal funds would get the Detroit 3 to the next quarter. Fifth, Volkswagen is profitable and its stock value is strong while the Detroit 3 are unprofitable and out of cash with near worthless stock.

Local and State Tax Incentives

An analysis by the University of Tennessee Center for Business and Economic Research (page 8) included the sources for the $577.4 Million came, and reported that it came from various city, county, and state tax breaks, infrastructure improvements, job training, and direct incentives. Apparently, none of the $577 Million came from the federal government. The Detroit 3 are not asking for state and local funds. They are asking the federal government to fund their solution. Yet Mr. Luke criticizes Wamp’s opposition to federal money for Detroit by pointing Wamp’s implicit support for state and local money for Volkswagen.

The Chattanooga Times-Free Press indicated Sunday that the federal government is providing $24 Million in direct incentives to the Volkswagen package. (The TFP’s article states that the $24 Million is included in the $577 Million, but the summary of state and local incentives in the UT-CBER report, as well as other articles from the TFP would indicate that this statement is incorrect.) If Mr. Luke did his algebra correctly by applying the $24 Million in federal funds, he might justify Detroit 3 asking the federal government for $2.8 Billion, but at almost 10-times that amount, the $25 Billion is not the bargain he claims.

Mr. Luke asserts that because states have been providing financial help for the auto industry, it is “more than inconsistent” for southern members of Congress to oppose federal funding for the auto industry. To perceived inconsistency is to fail (or refuse) to understand the difference between state government and the federal government. Just because state governments have doesn’t mean the federal government should.

Mr. Luke says, “Michigan would have given Ford hundreds of millions in tax breaks to build the cars that are the foundation of that company's destiny right here instead of Mexico.” But he offers no explanation as to why Michigan did not give incentives like Tennessee did. He notes that the Ford plant in Wixom Michigan “awaits the wrecking ball”, while Ford invests $3 Billion dollars and creates 30,000 direct and indirect jobs in Mexico. On the basis of total jobs created, Michigan and Detroit should have invested $1.443 Billion in incentives to Ford to match the state and local incentives from Tennessee and Chattanooga to Volkswagen.

“Bridge” Loans, Plans, and Payout

“Bridge loan” typically refers to a loan that keeps a business above water for a short time until additional investment or sales allow profitable repayment of the loan. The loan provides a bridge until an anticipated investment or profits eliminate the need for that debt. From testimony before the US Senate by the top executives from GM, Ford, and Chrysler, one could only conclude that the “bridge loan” would only keep the Detroit 3 above water until the next loan. When questioned about whether the Detroit 3 would be back for more money, the executives would not and could not offer any denial, indicating that they expected to be back for more, later.

Further, the Detroit 3 were unable at the last hearing to tell the Senators what they would do with the money if they got it. Supposedly, they wanted a blank check. Volkswagen got no blank check. The sources and uses of the funds – job training, infrastructure improvements, and job tax credits – and the benefits they were estimated to pay back were clear. For example, VW is investing $1 Billion in its plant. Much of that money will make its way directly into the local and state economy through grading and construction contracts. The Detroit 3 apparently want a gift.

Finally, the tax breaks offered by local and state governments to Volkswagen are spread out over the next 30 years. Similarly, the local infrastructure improvements would carry forward for decades, and benefit any manufacturer that locates in the same industrial park as Volkswagen, even if Volkswagen leaves. Spreading tax credits over a thirty-year period and offering infrastructure improvements to Volkswagen is nothing like a loan to the Detroit 3 to cover operating expenses. The Detroit 3 cannot even say that the funds they seek will create a benefit beyond the next few months, except to say that they hope, without knowing how, that the federal funds will keep them from failing, or at least defer failure.

Conclusion

Do not misunderstand this response: the Detroit 3 are not necessarily the problem. Chattanooga and Tennessee would likely have been just as happy to land the Ford plant and its 30,000 direct and indirect jobs. (The Volkwagen plant is projected to create between 11,000 and 12,000 direct and indirect jobs.) Why didn’t Ford look in Tennessee? or in Michigan? Why is it that Volkswagen can put a plant in the US but Ford can’t? The answer has little to do with state and local incentives, or even federally funded “bridge loans”.

Mr. Luke may ultimately be right that the federal government should offer bridge loans to the Detroit 3. But even conceding that, Mr. Luke is wrong when he asserts that it is inconsistent to support state funding while opposing federal funding.