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Money & Politics

An Alternative to Bailout Nation

Posted By:Larry Kudlow

Companies:General Motors Corp

At his news conference this morning, where he introduced New Mexico Gov. Bill Richardson as Commerce-secretary designate, President-elect Obama refused to play his hand on the Detroit/GM bailout story. That tells me he’s aware that the country is getting fed up with the thought of bailout nation.

And so far the Detroit automakers’ case lacks detail. In particular, everyone is waiting to see if the UAW will reopen its existing contract to knock down its high compensation numbers which still compare unfavorably with the Japanese carmakers in non-union Detroit south. UAW head Ron Gettelfinger is scheduled to talk today about contract negotiations. We’ll see what he comes up with, if anything.

In the meantime, the former big-three automakers have upped the bailout anti from $25 billion to $34 billion, while GM [GM Loading... () ] along with Chrysler are perilously close to running out of cash — perhaps even in the next few weeks. Nancy Pelosi yesterday indicated her support of using TARP money for the carmakers. This morning the Bush administration seemed to open the door on this front, if just a little bit.

Remember, there’s already $25 billion coming from the Energy Department, allegedly for fuel-mileage efficiency standards. But that $25 billion is no longer enough. There’s gonna have to be a congressional vote to change the mandate on the Energy Department tranche. But if TARP money is used, that will open the door to all manner of additional bailouts. That’s why this is becoming a really important issue — one that goes beyond the automakers. And that’s why Obama and his advisors are treading very cautiously on this.

Automakers Want $34 Billion, What Do We Get?

Is the U.S. really about to become bailout nation? I sure hope not. Using Chapter 11 bankruptcy as a reorganizing tool is a much better idea than federal money. The airlines have used it. Steelmakers have used it. Retailers have used it. I don’t know why we didn’t use it for Lehman and the other banks. It’s a matter of first principles — and I’m talking about market principles. Bailout nation puts us on the wrong road.

Treasury man Paulson is apparently thinking about requesting the second TARP tranche of $350 billion. I wish he wouldn’t. Not only do I still want to tarp the TARP, I’d like to close the door on bailout nation.

And I still believe the ultimate solution for all these problems — be it the carmakers, the banks, mortgages, foreclosures, or all the rest — is a significant pro-growth jolt for the economy. Economic growth will solve our problems. And the best way to move to a growth agenda is to lower tax rates across-the-board, including corporate taxes and individual taxes if at all possible.

Lower tax rates will boost asset values and reward successful producers and investors. That’s what we need. A $700 billion big-spending package merely moves money from the private sector to the government and then to a government-targeted bailout. That’s not growth. That won’t create new factories or new technologies or new risk-taking. Permanently lower tax rates will.

This is the cutting-edge issue. And I sure hope the Republican party in Washington and around the country gets on this message. There is an alternative to bailout nation. It’s called supply-side tax cuts. That will jolt the economy back toward growth.