TCS Daily

Auto Sales Boom and Help the Economy; But Politicians Set Ambush

By James K. Glassman - December 3, 2001 12:00 AM

Recent economic news has been terrible. Unemployment shot up from 4.9 percent to 5.4 percent in October as the number of jobs fell by 415,000 - the biggest one-month loss since 1980. Factory orders fell sharply in September and industrial production dropped for the 12th straight month - the longest decline in a half-century.

But there's been one amazing exception.

Car and truck sales in October were the highest in history. Ward's AutoInfoBank recently reported that vehicles sold at a seasonally adjusted annual pace of 21,260,000, breaking the record set in September 1986.

The reason is simple: Facing the first U.S. recession in a decade, General Motors took the courageous step of cutting financing rates to zero in a program called "Keep America Rolling." Other automakers followed suit. As a result, GM sold 554,642 new cars and trucks in October - up from 407,168 a year earlier. Ford boosted October sales by 36 percent; Toyota, by 28 percent, and Chrysler, by just 5 percent since it did not offer no-interest loans on some models.

The contrast between GM's action to boost sales and the economy and Washington's own attempts could not be more striking. Despite Federal Reserve Board reductions of more than four full percentage points in short-term interest rates, the economy has continued to sink. Such cuts, as tax-rate reductions, take time to flow through the economy. Car sales, though, turned from sharply negative to sharply positive practically overnight, and GM has extended its zero-financing program through Nov. 18.

There's another contrast, too. The airline industry demanded - and got - a government bailout. The tourism industry is seeking one. Rep. Bill Nelson, D-Fla., recently introduced a bill to provide a $500-per-person tax credit for travel expenses. The auto companies, rather than seeking a government handout, gave breaks to consumers. The zero-financing program, according to Deutsche Bank, amounted to an average out-of-pocket discount for consumers of $3,600 per vehicle.

"Given what occurred on Sept. 11, we needed something to help drive traffic into the showroom and help to bolster consumer confidence and consumer sentiment. That was our goal," said Paul Ballew, GM's general director for global market and industry analysis.

No industry is better situated to do so as none is more central to the economy than auto making. The University of Michigan Center for Automotive Research recently reported that new car and truck sales account for 3.7 percent of the nation's Gross Domestic Product, and those sales drive about 5 percent of private-sector jobs - 6.6 million workers in industries from aluminum production to computer-chip manufacture. Total payroll: $240 billion.

Incentive programs aren't without cost. Nick Lobaccaro, an analyst for Lehman Brothers, told Bloomberg News, "Over time, using incentives to stimulate sales is a profit destroyer."

But the auto industry can take care of itself - if only politicians will leave it alone. General Motors had built up a $21 billion cash reserve as of June 30, 2001; Ford, $18 billion. And GM's management believes the stimulus of sales will help the company and the economy in the long run.

The question is: Will the government keep hands off?

Some want it to put up roadblocks. The New York Times reported Nov. 2, "Environmental groups have criticized the Big Three [automakers] for bolstering sales." And Democratic Senators have bottled up President Bush's energy proposals as they pursue a plan to apply stringent fuel-use standards to small trucks and sport utility vehicles, Detroit's hottest sellers.

The standards - called CAFE, for Corporate Average Fuel Economy - currently require average miles per gallon of 27.5 for new cars and 20.7 for small trucks. Analysts estimate that altering the standards as some in Congress want would force the Big Three to pay annual fines of $2.5 billion.

The National Academy of Sciences has pointed out that the fuel standards haven't saved fuel, as people only tend to drive more. But the rules have increased the risk of driving, as automakers must make lighter, less crash-resistant vehicles to meet the standards. The Insurance Institute for Highway Safety reports that people in small cars and trucks are twice as likely to die in crashes as people in larger ones.

Consumers should be able to make their own decisions about the kinds of vehicles they want to buy and safety tradeoffs they want to make.

The tightening of fuel economy rules would serve merely to halt incentive programs - closing down assembly lines across America. That's the last thing this nation needs in today's tough times.

"The mission of this administration," said Commerce Secretary Donald Evans on Oct. 31, "is to ensure that our government stands behind - not in the way of - those who seek rewards and take risks." Well, the auto industry is showing the way in seeking rewards and taking risks. Will government keep its end of the bargain?

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