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Analysts: Inaction On Big 3 Would Cost Taxpayers Billions

WASHINGTON (AP) - 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.
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.
The result: 453,000 lost jobs in the first year from the Big
Three, their suppliers and spin-off jobs, Heritage estimates. Beach
said this would mean a 2009 cost to federal taxpayers of just over
$13 billion: $12.7 billion in tax collections and nearly $600
million for unemployment insurance, food stamps and other
expenditures.
"The impact is significant but not large," Beach said. "The
government has well-developed programs to handle things like
this."
A pair of Michigan consulting firms say an automaker bankruptcy
would be four times more expensive to taxpayers than a government
bailout that allows the companies to restructure.
If two of the Big Three declare bankruptcy and are forced to
liquidate, federal and state taxpayers would lose $66 billion in
the first two years alone, according to a study by Anderson
Economic Group of East Lansing, Mich., and BBK, a business advisory
firm in Southfield, Mich. That scenario - which envisions the loss
of 1.8 million jobs - includes costs of $20 billion in lost federal
income taxes, $21 billion in payroll taxes, $6 billion in state
income and property taxes, and $5 billion in unemployment benefits.
A $30 billion loan in which half is repaid and the government
gets a stake in the companies would cost $16 billion, with far less
in lost revenue and higher spending to support unemployed workers,
the firms predicted.
Warily eyeing the auto industry's problems is the Pension
Benefit Guaranty Corp., the federal corporation that insures the
defined-benefit pensions of 44 million American workers, including
autoworkers.
Even without a failure in Detroit, the PBGC has about $11
billion more in liabilities than it holds in assets. In an
interview, Director Charles E.F. Millard said the red ink could
grow, depending on what happens to the automakers' pension funds.
"It's possible that in a bankruptcy scenario, the deficit of
the PBGC could more than double," he said. "It's also possible
the PBGC would not be affected."
The PBGC receives no taxpayer funds and is financed by fees on
the companies it insures and other sources. A dramatic worsening of
the corporation's finances, along with growing numbers of people
drawing pensions from it, might force lawmakers to consider
taxpayer assistance.

(Copyright 2008 by The Associated Press. All Rights Reserved.)


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