Inaction on Big 3 would cost taxpayers billions

updated 3:53 p.m. ET Dec. 10, 2008

WASHINGTON - The U.S. auto industry’s problems will cost taxpayers plenty whether or not the government helps Detroit.

Just walking away and letting the struggling Big Three automakers go under would drain government coffers by about as much as the $15 billion bridge loan that lawmakers are preparing, and perhaps much more, according to outside analysts. The costs would come from lower tax collections by the federal, state and local governments and the payment of extra unemployment, pension and other benefits to unemployed or retired auto workers.

There’s sharp disagreement among outside experts about exactly what an auto industry failure would look like and how much it would cost taxpayers. But what’s clear is that while no one knows how much government aid the Big Three will ultimately need, inaction would also be expensive, assuming automobile production drops and more workers lose their jobs.

“It’s possible to push arguments like this too far, but there is still a net cost” to government without taking action, said Lou Crandall, chief economist for the bond market research firm Wrightson ICAP in Jersey City, N.J. “The question is whether the social objective you’re pursuing is worth that net cost.”

The Center for Automotive Research, a non-profit organization in Ann Arbor, Mich., estimates that if Ford Motor Co., General Motors Corp. and Chrysler LLC completely stopped making cars next year but returned to 50 percent production levels in 2010 and 2011, it would still wipe out nearly 2.5 million jobs next year.

Video   Shelby on auto bailout Dec. 10: “A lot of the management needs to go,” Sen. Richard Shelby tells CNBC’s The Squawk Box about Detroit’s Big Three automakers. CNBC

The center, which gets a small portion of its budget from auto companies, says 239,000 of those jobs would come from the Big Three, 795,000 from their suppliers, and 1.4 million from other jobs created by the spending of auto workers and suppliers’ employees. The number of lost jobs would decline to 1 million by 2011 as the Detroit companies resume work, foreign automakers in the U.S. expand their production, and some laid-off workers find other jobs.

Overall, that lost employment would cost government at all levels $50 billion next year and $108 billion over the next three years, the center estimates, with Washington bearing most of that cost. Almost a quarter of the money would be for unemployment, welfare, health care and other costs government would have to carry, while the rest would come from lost collections of income taxes and payroll taxes that support Social Security.

In a more severe scenario in which the Big Three halted all U.S. operations completely, the three-year cost to taxpayers would be $156 billion in lost tax revenue and higher spending, the center says.

“Without question” it would cost the government less to give the Big Three a loan than to watch them curtail production, said Sean McAlinden, the research center’s vice president for research. “That’s better than taking this huge tax and transfer payment hit.”

The conservative Heritage Foundation, however, says such projections are far too dismal.

William Beach, a senior fellow in economics at the thinktank, says it is likelier that the Detroit automakers would declare bankruptcy but continue reduced operations as they try to re-emerge as leaner but stronger companies. During this lull, foreign auto companies in the U.S. would see their sales increase and would hire additional workers, cushioning much of the blow to government budgets.

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