The current political debate over a "rescue" package for the Big Three US automakers, as well as the bailouts, failures, and continued weakness of various financial institutions despite the TARP program, seems to be completely missing the point. 

Markets actually work well - when politically motivated government intervention doesn't distort them.  Regardless of good intentions, governments consistently screw up markets when they try to use their power to distort them in favor of politically motivated outcomes.  The smaller, shorter, and more limited the intervention, the better.  Major intervention tends to breed eternal bureaucracy and waste as well as other unintended consequences.

If total US demand for new cars does not decline in the long run, then this is assumed to be a temporary market problem, whether driven by the credit crisis in the banking sector or simply by the cautious reaction of US consumers to the fear of a prolonged recession.

Those who are arguing in favor of a "bailout" or "bridge loan" or some other rescue scheme to help the Big Three insist that something must be done because millions of jobs are potentially at risk, and the social consequences of their loss could be even worse than the bailout cost.

There has been talk of $25 billion, $50 billion, or perhaps even a $75 billion or more being "invested" by the federal government to "save" the auto industry through one intervention scheme or another.

Why not let US car buyers have that $25 billion quickly instead?

The current financial crisis was precipitated by government manipulation of the housing market through Fannie Mae and Freddie Mac.  Very liberal policies to encourage home ownership imposed disastrous lending practices and led to real estate speculation and a construction boom which became an unsustainable "bubble".  This was compounded by the lack of transparency and effective controls on highly leveraged risk in complex financial derivatives.

In effect, government intervention created a house of cards in which it was assumed that government could never allow such institutions to fail, regardless of how much risk they took.  It was like a federally mandated Ponzi scheme, or a great political fraud.  Why should every American be able to afford a home at a low interest rate, regardless of personal financial conditions and creditworthiness?

Is this really the American dream, or rather an economic entitlement nightmare?  The government was basically encouraging US consumers to spend far more than they could reasonably afford at their income levels, and to leverage themselves with excessive debt at the same time.  Inflated real estate valuations created the illusion of an easy path to wealth through high leverage at low interest rates without full recognition of the risks of falling prices and rising rates.

What does the US taxpayer get if $25 - $75 billion is handed over to the Big Three now, regardless of the form of the deal?  Is there any assurance that this will "save" them, and all those jobs?  No.  Many dealers, suppliers, and others will still be at risk, just as before.

Think about it.  Divide $25 billion by 10 million new cars.  That works out to $2500 per car.  Why not give that directly to new car buyers?

In other words, suppose that US consumers were given the mother of all year-end new car clearance deals now by the federal government.  That might prompt over $250 billion in new car sales, which in turn would also generate a lot of local sales taxes, secure bank loans, etc.

Ten million new car sales in a short period of time would have a huge impact on the economy - and on those millions of jobs in the auto industry, from local dealers to automotive suppliers and service providers, including the banks handling new car loans and leases.

Let the US consumer be free to choose - first come, first served, up to 10 million buyers in 3 months.

The problem at this time is to restore a more normal economic environment of vigorous competition as quickly as possible.  It is very dangerous to assume that government policy should drive the health of our economy.  Its' main role should be to do less harm.  The failure of centrally "planned" economies should be ample proof of this.

That means reducing the tendency of government to try to dictate more politically attractive economic outcomes through interventionist social policies, regardless of good intentions and rationalizations.

Instead of creating new spending programs and new policies which reward those with the most government influence, rather than those with successful market performance, it is time to shift the focus back to both individual and corporate responsibility and accountability.

Think about it.  Not everybody can afford to buy a new car in the present economic environment - nor should they be encouraged to take on too much debt at such a time if they cannot afford it.

In other words, if they can't afford to buy a new car, then they won't be able to get the financing to do so.  That's not a political decision to be taken in Washington.  Car dealers would be highly motivated to quickly find the 10 million Americans who can still afford a new car.  First come, first served.  The first 10 million get a $2500 discount.

That may seem unfair to some who would like to take advantage of a one-time $2500 discount deal, but the bottom line is that this means the auto industry is bailed out by those individuals who have shown sufficient financial responsibility to be able to afford a new car now despite all of the problems in the general economy.

The auto industry is not alone in economic impact.  There are many millions of jobs in other industry sectors too.  There are complex supply chain relationships, and a major recession can obviously be a strain on companies of all sizes in most industries.  Is the loss of one type of job more important than the loss of another?  At the personal level, the impact may vary between an unwelcome period of minor difficulty until a suitable new job is found to perhaps severe and lasting disruption of a career and the financial stability of a family.

How could such a scheme be administered as a temporary program without creating a cumbersome bureaucracy?  Most manufacturers have administered discount programs through their dealer networks.

Let the $2500 payment go directly to the dealers upon proof of an eligible sale to an individual (one person, one car - no fleet deals like rental car companies to exploit the program, or dealers building up discounted inventories).  The usual title and registration process should provide adequate proof of sale.

The potential to stimulate market demand temporarily for new cars, as explained at right, is a very different situation than for other types of consumer spending or investments, including real estate.

Government should not be in the business of trying to stimulate consumer demand selectively in this manner.  This scenario is clearly intended to be a one-time crisis response, rather than something which would turn into an ongoing incentive program for car buyers.  Ideally, it would not be necessary at all - or on such a large scale.

Otherwise, one is essentially redistributing wealth to promote the purchase of new cars instead of perhaps encouraging responsible alternatives such as efficient and higher quality public transportation.

This approach should quickly clear dealerships of existing inventory, and thereby give them the resources to replace new car inventory with the models which are demonstrably in demand in the current market.

In other words, if consumers are genuinely concerned about fuel efficiency and want more hybrids in the wake of the recent spike in gasoline prices, then that should be reflected in dealer demand.

It is not necessary for legislators in Washington to tell consumers what type of car they should be buying for the good of the country.  That's one reason why the Big Three are already in so much trouble, and spend millions on lobbying which could be put to far better use.

There are obviously many ways that a government can intervene in an economy to try to stimulate it through fiscal policies, spending, and other measures.  It is not the purpose of this editorial to address all of these potential political responses to a perceived recession.

The point remains, however, that it really is not the role of federal government to manipulate the national economy to our liking, nor is it capable of doing so in a globally competitive environment, regardless of good intentions or the quality of leadership.

It is worth keeping in mind that it was government intervention which created this mess in the first place, or at least made it much worse than necessary. 

Why should we believe that any central government planners, regardless of good intentions, will achieve better success at economic recovery than the market?  There is very little evidence in world history to support such a proposition for intervention.  There is more evidence of the risk of unintended and lasting problems which would prolong a recession or restrain future growth.  US industry and individual prosperity at all levels of society already suffers from many self-inflicted wounds of this nature in our global competition. 

The key point of the above is that it is clearly a one-time proposition.

The consumers remain entirely free to choose what they want to buy, because they are the ones who are assuming full responsibility for the vast majority of the cost of those 10 million new cars.  They get their $2500 discount, but can expect no more from the government.

As for the car dealers and auto manufacturers and their suppliers, they know that this demand stimulus is temporary, and that once the 10 million new cars are sold, the program is over and won't be repeated.  It gets them past the "shock" of the sudden recession precipitated by the financial markets, but they have to figure out how to survive on their own after that. 

They can't keep coming back to Washington with new sad stories for their lobbyists to tell to their political friends to justify an endless windfall.  This period of stimulus gives them a few months to get their houses in order.