EDITORIAL: When billions become trillions

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The Federal Reserve, the Treasury Department and the Democratic Party seem to be in a race to see who can flaunt more money at more suppliants in quicker time with less thought.

When the Federal Reserve and the Treasury Department decided to put $30 billion into Bear Stearns in March, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson said they were "pleased" with their efforts to "promote liquid, well-functioning financial markets." There were no warnings from the two financial chiefs that more trouble was ahead.

In July, Congress started asking questions about Fannie Mae and Freddie Mac. Mr. Paulson said: "Their regulator has made clear that they are adequately capitalized," even as a former Federal Reserve president warned they were already insolvent. A month later, Mr. Paulson admitted $200 billion (and maybe more) would be needed to bail out the two mortgage giants. From there the landslide began. There was $700 billion to buy toxic mortgages and other assets from banks. Another $25 billion in loans went to the American automotive industry. Taxpayers were paid $168 billion in stimulus checks in February. All told, the federal government has shelled out $1.148 trillion on top of a $454 billion-closing-budget deficit.

The handwriting was on the wall at the start of the year. While first-quarter receipts for fiscal 2008 reached a record-high $606 billion, outlays for that quarter were also a record, at $712 billion. As the situation worsened, Mr. Paulson said nothing and did nothing.

Now, Mr. Paulson has decided that Treasury isn't going to buy the troubled bank assets as he said it would do a month ago. He now plans to buy stocks and help consumers pay credit-card, auto-loan and student- loan debts. The Treasury chief said the reason he altered the focus of the policy is because House Speaker Nancy Pelosi wants to disburse $25 billion from the bailout fund to General Motors, Chrysler and Ford, on top of the $25 billion in low-interest loans extended to them last month.

Government spending is out of control, and it has been for eight years. "The federal government, led by Republicans, spent too much money, and that was not in the public's best interest. The public got tired of that and wanted change away from that unrestrained spending," said Alaska Gov. Sarah Palin at the Republican Governors Conference last week. Democrats are following and expanding upon the trend.

It is clear that, even now, Congress' solution is to continue the bailouts and loans - even though they aren't much of a solution, particularly for the auto industry. This isn't 1979. The $1.2 billion bailout of Chrysler that President Reagan expanded in 1980 "worked" because Mr. Reagan restricted Japanese imports (this is before South Korean-based Hyundai was a major exporter of cars to the U.S.). That action greatly limited the competition and led to the ubiquitousness of the Aries-K models across America in the 1980s, helping Chrysler rebound and taxpayers profit.

But Hyundai, Toyota and Nissan and their luxury classes Lexus and Infiniti aren't importing much now. They have U.S. plants in Alabama, Tennessee, California, Michigan, Texas, West Virginia and Kentucky rivaling the Big Three. More importantly, they don't have unions breaking their backs. They face competing interests of congressmen from Michigan, Ohio, Indiana and Illinois, where job losses are seemingly unsurmountable, There are also a host of other states where the Big Three manufacture cars and parts. There is now a vested interest for the congressional delegations from each of the states hosting Japanese and Korean car manufacturers in defending, not limiting, these foreign companies' competitiveness. How could they not? Americans are working on the assembly lines of Hyundai, Toyota and Nissan.

There are other issues such as Corporate Average Fuel Economy standards and how they are applied, and new technologies (hybrid-electric cars are outpacing and outperforming ethanol and flex-fuel vehicles with consumers). But the one major difference between the foreign and domestic car companies' competitiveness these days is that one is being made with union labor and the other isn't. Union labor is expensive and retirement benefits even more so. The only way to make the Big Three more competitive is by limiting their overhead. What Congress should do is let the U.S. auto companies die (or get as close to death as possible) or file for bankruptcy, forcing the United Auto Workers to either give meaningful concessions or lose every job they have.

"Spending billions of additional federal tax dollars with no promises to reform the root causes crippling automakers' competitiveness around the world is neither fair to taxpayers nor sound fiscal policy," said House Minority Leader John Boehner. We could not have said it better.

During this lame-duck session, Congress should pass legislation to eliminate capital-gains taxes to encourage investment. It should grant a "bonus depreciation" to small businesses, allowing them to invest in new equipment while simultaneously increasing the equipment's value, so that 75 percent of the cost could be deducted in the first year. And it should decrease the corporate tax rate from 35 percent to 25 percent. This is a new approach Republicans want to see, and the country would be the better if Congress acts favorably on it.