How to Save the Auto Industry (Without a Bailout)

Ever since the Big Three auto companies flew in with tin cups and private jets seeking a $25 billion bailout loan from Congress, the media and most pundits have been fixated on three extreme alternatives: bankruptcy, bailout, or government takeover. But there are other alternatives that avoid these extremes, if only folks would ask the right questions.

First, let's think through the problem. Has anyone else noticed the irony that the Treasury Dept. is spending $700 billion to encourage the credit markets to loan more money, but the auto companies, instead of going to the private debt market as they should -- are coming straight to the Congress? Aren't we bailing out the credit markets so that they will make exactly this kind of loan?

The right question to ask here is NOT should we bail them out, take them over, or let them go bankrupt. That is what everyone is asking. The right question, which nobody is asking, is: what can we do to encourage the private sector to finance the Big Three?

What is the problem? Detroit's labor costs are too high, and they are not producing the right kind of cars for the current market -- affordable, extremely fuel efficient vehicles, not the expensive gas-guzzlers they produce -- so their business model is unprofitable.

Logically, then, to encourage private financing, we need to find ways to help Detroit become profitable, either by reducing their costs, or by helping them produce affordable, green-powered vehicles profitably, or both. We also need to look for ways to make loans and other financing more profitable to investors.

Too bad the media, Congress and the punditocracy are all focused on extreme, unpalatable and not-so-helpful solutions: bailout, bankruptcy or government takeover. No one in these opposing camps seems to be asking how we can avoid such extremes: fix the problems, encourage normal loans and investments, and make the auto industry greener and more profitable without all the drama.

Here's one way:

We can spur both new loans and new equity investment if we make it extremely profitable and attractive for the auto industry to move in the right direction, towards producing and selling advanced green energy vehicles. We can do that in short order if we make the entire business of producing such green vehicles 100% tax free. To reduce costs and boost sales, revenue from green vehicles should be free of all state and local sales taxes, and all federal income tax. Further, the cost of all materials and components needed to build such vehicles should be tax free as well, to reduce costs and increase green vehicle profitability even more. Interest on loans or bonds to finance the development, production or purchase of such vehicles should be income tax free, making such loans more profitable. The stock and dividends of companies producing green vehicles should be capital gains tax free, in proportion to the percentage of revenue derived from such vehicles in the previous year, attracting more equity investors and encouraging management to shift green to escape taxes. All the above should hold true for businesses producing the infrastructure needed to support green vehicles, such as electric, hydrogen and natural gas fueling stations, all 100% tax free.

If we take these steps, we will vastly reduce the costs and increase the profitability of producing green vehicles. We will also make loans for producing and purchasing such vehicles more profitable and attractive to lenders, simply by making the interest tax free, but also by making the underlying business more profitable. Overall, we will immediately spur enormous debt and equity investment in a revitalized, highly profitable Big Three dedicated to selling as many green vehicles as possible, in order to maximize profits and minimize taxes for each company and their shareholders. Essentially, we would be creating a green goldmine for investors, one that is good for both America and the Earth.

The benefits of this approach extend well beyond the auto industry. A study by the Pacific Northwest National Laboratory estimates PHEVs have the potential to cut US oil imports by 52%, or 6.5 million barrels per day. Plug-in vehicles can reduce energy costs nationwide by using underutilized, off-peak energy, which is generally cheaper and would otherwise go to waste. Local trips could cost as little as the electric equivalent of $1/gallon of gasoline. These savings and benefits could be even more dramatic if combined with a smart grid and renewable energy sources, such as wind and hydro power, further reducing emissions and allowing the PHEVs to act as an on-demand power storage system, storing cheap off-peak power from an increasingly green grid, for use during expensive peak-load times -- with vehicle owners pocketing a profit. If tax freedom were extended to ALL green energy technology (vehicles, clean/renewable energy sources, smart grid development, etc.) that would supercharge investment in green energy, reducing overall energy costs, while stimulating the economy and creating millions of new jobs.

And of course, one of the nicest aspects of this approach is that it does not require a dime of upfront federal spending. Further, it lets the market (not the government) decide which green auto technology wins.

Is this somehow an unfair subsidy of green over gasoline vehicles? Many economist argue that oil, coal and gas guzzling vehicles are already heavily subsidized in a number of ways, such as the infamous $25,000 Hummer tax credit, but even more fundamentally in that these vehicles contribute heavily to the social costs of global warming, foreign oil dependency and oil-related wars, but get a free ride by forcing the taxpayer to pick up these costs. But raising taxes on carbon fuels and carbon producing technologies, such as automobiles, while correcting the free ride problem, would be disastrous for a struggling economy and a struggling auto industry. Tax freedom for green energy and green vehicles is another way to correct the free ride problem, but one that stimulates the economy, rather than depressing it. Instead of a carbon tax, we can implement a no-carbon tax cut for a much better pro-growth outcome.

Are we going too far with 100% tax freedom for green vehicles? Not at all, because Detroit and the American economy are in dire straits right now. There is no excuse to not pull out all the stops right now. Our economy is dangerously vulnerable to wild spikes in the oil market, which vulnerability can only be reduced by reducing demand for oil. This we must do fast, at full speed, not half-speed, or more oil spikes will greet us if and when our economy begins to recover, possibly choking off any rebound. We have a long, long way to go before 100% of American vehicles are highly fuel efficient, and an even longer way to go before 100% of vehicles use 100% renewable energy. We can always reassess and maybe throttle back later when we have reached a reasonable midpoint goal, when say the auto industry is profitable again and 50% of all vehicles sold are plug-ins and deliver 100 mpg or better. But right now, we need a profitable, green auto industry and less dependence on foreign oil. It is a rule of economics: if you want more of something, tax it less. Ergo, no tax on green autos.

Tax freedom for advanced green energy vehicles is manifestly in the national interest, not just to save the automobile industry and millions of jobs, not just to avoid economic depression, but in order to reduce the ongoing strategic, economic, environmental and security risks posed by foreign oil dependency and global warming. But even disregarding the larger goals, it is nice to know there is a sensible alternative to bailouts, bankruptcy or socialism, and one that lets the markets work as they should.

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Given the unattractive options being floated by the punditocracy, one worse than the next, I hope this original proposal can help move the national debate in the right direction. If you agree, please help by forwarding this link on to your friends, elected representatives, the Obama Transition Team, the media, the blogosphere, and anyone you know who might be interested and helpful. And thanks!

Since You Ask...

Today I received an email video link from John Podesta, leader of the Obama-Biden Presidential Transition Team asking that I (and millions of others, no doubt) send my policy suggestions to the Energy & Environmental Policy Transition Team leaders, Heather Zichal and Carol Browner.

Perhaps the point is not that they need fresh energy policy ideas, but more to demonstrate their inclusiveness and openness to all viewpoints. Or is it? Maybe, just maybe, they really do want to hear some fresh energy policy ideas, as the looming economic abyss threatens to put all their best plans on hold. Now I don't want to be too cynical, because it would be nice if they really are open to new ideas. But think about it: with trillions going to the current bank bailout, and who knows how many other bailouts lined up behind that, how are they going to afford the $150 billion they plan to invest in the renewable energy industry? Further, since the current economic meltdown was precipitated in part by skyrocketing energy prices, can they really risk making matters worse by instituting a cap-and-trade carbon "tax" that would only make energy even more expensive? Will there even be any windfall profits to fuel this agenda -- as they hope -- if the economy is on a respirator?

Perhaps the smartest players in the transition are thinking, hey, maybe we need a plan B, something cheap, effective, but not economic suicide, and honestly wondering if anyone has any bright ideas.

Here is what I suggested:

Dear John Podesta, Heather Zichal & Carol Browner:

Thank you for sincerely seeking new ideas from outside the fold. Since you ask, I'd be happy to suggest a low cost but ambitious solution to many problems, one that you may not have considered.

All the biggest problems we face (the economy, jobs, the auto industry, oil dependency, global warming, the Iraq War) have at least one common solution, and almost nobody has figured it out yet:

MAKE ALL GREEN ENERGY TECHNOLOGY 100% TAX FREE.

It is that simple. We don't have to spend money, or hike taxes. Bailout or bankruptcy are NOT the only options for Detroit. We can create millions of new jobs and fix the environment/economy/auto industry/oil dependency with a smart, green tax cut. No sales or income tax on revenue from clean, renewable energy or technology (like plug-in, flex-fuel hybrids) that radically decrease oil consumption. No tax on the interest on loans for green energy investments. No capital gains tax on companies' stocks and dividends in proportion to the percentage of their revenue that comes from green energy technology. That simple policy will supercharge private investment in clean and renewable energy technologies... on the order of $300 billion per year, or more. That will create millions of new jobs fast -- many more than you could create by federal spending alone. That includes billions of new investment in the US auto industry, as investors see a greener path towards an increasingly tax-free auto industry. Further, it will encourage oil, coal companies and utilities to voluntarily go green, in order to escape taxes. A carrot frequently works better than a stick.

Slashing taxes on green energy will directly lower the cost of green energy, but also lower the cost of ALL energy. Economic law states that increased supply results in decreased price. So new green energy investment will increase the total energy supply, decreasing the price of all energy, including oil and coal. Increased energy diversification and competition will create a permanent downward pressure on energy prices. Cheap energy will in turn stimulate every other sector of the economy, creating millions of non-energy jobs as well. By contrast, a carbon tax, or cap-and-trade, would raise the cost of energy, crippling the economy, and putting more people out of work.

Take note: NO FEDERAL SPENDING IS REQUIRED. Further, any tax revenue reduction will be minimal initially -- since green energy is now just a small part of the economy -- and as it grows, revenues will grow from green energy payroll taxes and other sources. A focussed tax cut on this one sector of the economy can lift all others by keeping the price of energy low for all, and producing massive domestic employment. A tax cut here will produce a massive tax revenue surge from the rest of the economy. Tax freedom for green energy will make the US the world leader in green energy investment in President Obama's first term -- in fact, most world green energy investment will go through the US for the tax advantage.

So forget the $150 billion federal "investment" over 10 years -- that is PEANUTS compared to what is really needed here and now, and what the private sector can do if you make green energy technology tax free. And please forget the stupid cap-and-trade proposal that does not really work and will only raise the price of energy, and further depress the economy. Tax freedom for green energy technology provides the same tax differential as a carbon tax, with the same incentive to shift green, but will stimulate rather than depress the whole economy by pushing energy prices lower.

(Oddly enough, tax-free green energy is logically the double-negative of a carbon tax: the no-carbon tax cut. Similar but diametrical concept, superior result.)

A 100% tax cut for renewable, clean energy technologies, vehicles and infrastructure is the cheapest and most effective stimulus you could provide right now for our struggling economy in general, and for financing a green revitalization of the auto industry in particular. And it is the absolute best and fastest way to achieve your goal of creating a clean, green economy, and creating millions of new jobs.

Let's see if anyone is listening.

Oh, by the way: YOU, FRIENDLY READER, CAN HELP. Please email the link to this page (http://tinyurl.com/5g83bx) to your friends, family and elected representatives -- and let's not forget the Obama Transition Team! To anyone who might be interested, tell them, please, to take a look at the idea and the link, that Tax Free Green Energy is the best way to save the economy and the planet at the same time, and that we prefer our energy cheap, green and tax free. Then ask them, please, to feel free to raise questions or comment, and pass it on.

Maybe somebody will eventually tell the President.

We can do it. Yes we can!

The Wrong Wish List: What the Green Energy Lobby Wants

Surfing to Green Wombat, Todd Woody's Energy/Technology column at Fortune, we can read about the renewable energy industry's five item wish list they hope to get next year from the Obama administration. The list contains two good ideas, two that are OK, and one that is just freaking terrible. While generally positive for renewable energy, the list does not contain the one GREAT idea that the industry really should ask for, which would make most of the rest unnecessary.
Here is the list as reported by the Wombat:

• A five-year extension of the production tax credit for the wind industry (it currently has to be renewed every year) to remove uncertainty for investors.
• A major infrastructure program to upgrade the transmission grid so wind, solar and geothermal energy can be transmitted from the remote areas where it is produced to major cities.
• Impose a national “renewable portfolio standard” that would mandate that utilities obtain a minimum 10% of their electricity from green sources by 2012 and at least 25% by 2020. Two-thirds of the states currently impose variations of such requirements.
• Mandate that the federal government - the nation’s single largest consumer of electricity - obtain more energy from renewable sources.
• Enact a cap-and-trade carbon market.

The Wombat notes that none of these are new ideas. More to the point, they are not great ideas. The last one is -- potentially -- an economy killer.
More effective than ANY of the above would be simply to make ALL renewable, clean energy technologies 100% tax free: free of all sales, income and capital gains taxes. No tax on plug-in, flex-fuel hybrids; no tax on electricity from wind/solar/hydro. No income tax on profits from such revenues. No capital gains tax on the stock of such companies, in proportion to the percentage of revenue derived from green energy technologies. As a nation, we need MASSIVE new PRIVATE investment in green, renewable energy. The only way to get there is by giving green investors a long-term, permanent incentive that keeps working regardless of swings in oil prices. And investors and consumers LOVE tax free. That is how you do it.
And that is what the industry should be asking for. And it makes sense, because renewable energy does not impose the high, negative externality costs on society (pollution, global warming, foreign oil dependency) that some carbon fuels do. Therefore renewable energy deserves a significant tax advantage versus oil and coal.
So what is wrong with the industry's wish list? Let's start with the worst of it.

Cap-and-trade -- especially the Obama version -- is basically a carbon tax by another name. But you may ask, didn't I just call for a tax differential between renewable energy and oil or coal? Sure, but the effects of a green tax cut versus a carbon tax hike would be quite different. Both would promote a change to renewable energy, but the carbon tax would wreck the economy by jacking up energy prices. A Green Energy Tax Cut creates the same tax differential and will accomplish the same shift over to renewable energy, but instead with an global economic boom led by entrepreneurs keeping the cost of energy as cheap as possible through increased competition. Energy has become expensive enough as it is… do these folks want to make it even MORE expensive? What are they thinking? Do they want to bring on a depression? We need cheap energy to thrive.

It is sad to see the renewable energy industry -- which should be unambiguously protective of the common good -- calling for a policy that might benefit the industry in the short run, but would severely damage the world economy overall. Especially when there is a much better alternative at hand.
The five year extension of the production tax credit is the best item in their wish list by far. They just need to think a little bigger: Make renewable energy 100% tax free. Also, to nit pick, production tax credits (as a front end subsidy before the company has earned a single dollar or produced any energy) are questionable policy from the point of view that they can make an unprofitable or fictitious business seem profitable to the initial investors, but it really only appeals to those investors needing a tax shelter. However, if the tax incentive is on the back end, the elimination of all sales or income tax on actual revenue earned, or capital gains tax elimination, while that is a huge incentive to any and all investors, it also requires that the basic business be profitable in order to make sense. The tax benefits only kick in if there is actual revenue and profit. That is better for the taxpayer and the consumer, because is costs less here and now, and there is no subsidy for unprofitable or fictitious business models. Basic market mechanisms are preserved that allow the low cost green energy producers to thrive and win.
Two of the items, the "smart-grid" infrastructure proposal and the "renewable portfolio standard" mandating utilities increase their use of renewable energy... these are wonderful goals, but frankly unnecessary policy proposals if green energy technology becomes 100% tax free. If a company can lower the capital gains tax due on its stock, or decrease its sales and income taxes by increasing its green energy revenues, it will certainly make that shift. Utilities certainly will build the grid to reach wind and solar energy sources, and will rush to sell more renewable energy, if they have the incentive to do so. They only need the carrot, not the stick.
In fact the stick (i.e. mandates) can backfire and make enemies, if the utilities push back politically to escape the mandates. That is what happened with the EV1. But there is no reason the utilities would not become a political ally with the renewable energy industry if the proposal instead avoided mandates and provided a path for the utilities to lower their taxes by going green.
Many of the industry proposals will cost a fair amount up front. There will be great pressure on Obama to cut spending. The industry would do well to offer an alternative that will be far more effective in sparking an explosion of private green energy investment, but costs nothing up front.
The renewable energy lobby should start asking for the right thing. And it would do better to avoid asking for expensive, unnecessary stuff that places undue burdens on the public or on other industries. Making all green energy tech 100% tax free would supercharge private investment in (and public demand for) clean renewable energy, while letting the market pick the winners. It would also make the US the world leader in green investment in Obama’s first term.

Election Day: Who has the Green Energy Edge Now?

Since August, when he offered no specific tax incentives for green energy, Obama has made a significant shift in his energy policy that makes him a bit more Green Tax Cut friendly that McCain: Obama now pledges a $7,000 tax credit for "advanced vehicles," which is more than the $5,000 in the McCain plan. He also wants to extend the Production Tax Credit for renewable energy for 5 years, which is a bit more specific that McCain's call to "rationalize" the system of tax credits for renewable energy.

This gives some hope that an Obama administration is warming to the idea of green energy tax cuts -- or at least realizes that tax incentives are the most effective and popular of the existing policies to promote green energy. Of course, I can't help noting that the information on the Obama website seems to change week to week, literally, with the plan being re-written continuously. Since this blog began in July, I have read perhaps five different versions of the Obama energy plan, with very significant changes. For instance, the current version of the plan does not mention the $25 billion a year Federal Venture Capital Fund for renewable energy that I criticized in August as a foray into Venture Socialism.

So far, the changes seem to be in the right direction. However, there is still much that is unhelpful and perhaps counterproductive in both the Obama and McCain plans. Ironically, McCain's notion that his administration will start construction of 45 nuclear power plants also rings of socialism -- these plants should only be build if private investment judges them commercially viable once all insurance, risk and waste transport and storage costs have been figured in.

Obama's plan retains $150 billion in renewable Federal renewable energy investment over 10 years, and a hidden carbon tax in his cap-and-trade plan -- both ideas are problematic and have been discussed in previous posts. There is much to be wary of here. According to reporting by Deroy Murdock, as early as last January, Obama made statements indicating that he would not mind bankrupting much of the American coal industry via his cap-and-trade plan. One can only hope Obama is moving away from such unhelpful thinking, as is indicated by recent shifts in his energy plan.