My Yale Law School colleague Ilya Podolyako comments on the Obama administration’s plan for the auto industry and the tension between public goals – preserving jobs, increasing fuel efficiency, etc. – and private goals – profitability.
By now, the dust seems to have settled around Obama’s rescue plan for two-thirds of the long-ago “Big 3” (in 2007, Chrysler ranked 12th in the world in total auto sales; GM has ranked 2nd; Ford, which is not receiving government assistance, was 4th). The policy itself seems prudent enough. The President’s Task Force on the Auto Industry recognized that due to its small scale, reliance on light trucks, and objectively low product quality, Chrysler is not viable as a stand-alone company. On the other hand, General Motors has large economies of scale and makes certain well-received products (the report mentions the Chevy Malibu and Cadillac CTS by name, though one could add the Cavalier, Corvette, and Escalade to those lists), but faces exorbitant legacy costs for its nearly one million retirees and low margins on its fuel-efficient vehicles. Given this fact pattern, the plan does as good of a job as anyone could in offering a helping hand to iconic American manufacturers while preserving some incentives for efficient private-sector operation.
My problem with the restructuring proposal comes not from any one of its details, nor even its general spirit. At this point, I feel fairly neutral about heavy-handed government involvement in US industrial policy. Admittedly, I am from Michigan and really like cars (despite consistent problems, I keep driving Fords, though I am not sure why), so I have some emotional connection to the industry to balance against the gross, obvious inefficiency of pouring money into enterprises that, by their own admission, will at best break even by 2014. I also do believe that a GM bankruptcy would lead to the net loss of a significant number of jobs that would permanently cripple Michigan’s already desperate economy.
I am concerned, however, with the absence of any apparent long-term vision for the “American” automobile industry within Obama’s proposal. A New York Times story provides a nice contrast to our own state of affairs when it explains that “Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.”
Mechanically, the Chinese policy does not seem to be that different than that of the United States. If anything, it is facially less intrusive into the affairs of the automakers, though the fact that the government continues to own a controlling stake in most such entities makes this difference illusory. The national government will provide research funds for the development of alternative-fuel vehicles, coupled with direct subsidies for consumer purchases of such products. The PRC’s policy motivations look similar to those present on our shores too: cut down on pollution, preserve national stability in the face of shrinking foreign oil supplies, and foster industrial excellence.
The issue is that whereas the Chinese government is content with spending public money for an indefinite period to promote these well-defined (and fairly reasonable goals), the U.S. executive branch cannot be. American leaders are directly accountable to voters, who generally dislike state-directed industry. Yet this feature of our political system runs counter to the motivations for the automaker bailout. These seem to be, in order of importance:
- National pride: The United States of America became a superpower while leading the world in car manufacturing; people in and out of government associate the two phenomena with each other. Accordingly, they want to retain the symbolic value of GM or Chrysler.
- Job preservation: No explanation necessary, though the jobs in question are localized. No one has made the argument that the collapse of GM or Chrysler would pose a systemic risk to the national economy as whole.
- Environmental considerations: The President appears to believe that U.S. automakers can play an important role in the larger effort to reduce greenhouse gas emissions by manufacturing fuel-efficient cars.
The above considerations are fundamentally political; they are not the ingredients of a profit-making business. With these goals, inquiry into the potential viability of GM or Chrysler as a private enterprise matters only as a way to distract voters frustrated with selective government handouts.
But this strategy is both unsustainable and unwise. First, if Obama intends to keep the auto-companies as a federal jobs program, he shouldn’t pay large, institutional investors in the process. That’s what TARP II, EESA, and PPIP are for. Second, one would think that for both the employment and the environmental goals, there is no need to combine the bureaucracy of the Department of Treasury with that of General Motors. I am willing to accept that, given the track record of private sector management at the Big 3, the government may have at least as good of an idea of what consumers want as the people who designed the Pontiac Aztec. Of course, if that is the case, members of the Auto Task Force should be managing the R&D and Manufacturing divisions directly instead of making a slightly reshuffled deck of top executives drive back to Washington every two months for progress reports. Third, selling off GM’s relatively well-performing European operations, along with its prized partnership with China’s SAIC, would diminish the company’s stature as an American powerhouse while undercutting the very economies of scale that give it remaining strength.
So, where do we go from here? If Obama’s goals for the intervention are actually those that I identified, he should be frank with the population, if only because the current plan is so clearly incompatible with business logic. The proposal should function for now and buy the Administration some time to recoup political capital, but in these tumultuous times, the notion of a gently nationalized car industry may not do too poorly. On the other hand, if Obama wants to see GM and Chrysler survive as smaller, profit-making companies, he should write off the $20 billion in aid that, under the current plan, would stick with the “good” GM, let the bondholders go through bankruptcy, and use his stature to negotiate some sort of a politically favorable but economically sustainable agreement with UAW.
By Ilya Podolyako