The glory days of the American automotive industry may have gone the way of the retired Ford Thunderbird, but there are still a few categories in which General Motors, Ford and Chrysler – the Detroit-based “Big Three” of U.S. carmakers – still lead the way. When it comes to loosing money, making unwanted cars, and generally staying uncompetitive, the Big Three have few challengers. Fortunately for the underperforming car makers, Congress is now trying to fix the problems of the companies’ own creation.
As is typically the case, they’ve found the answer in the American taxpayer. Last week, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid asked Treasury Secretary Henry Paulson to divert to American automakers some $25 billon of the funds in the Troubled Asset Relief Program, the $700 billion aid package intended to revive the slumping financial industry. President-elect Barack Obama has since indicated that he too favors an auto industry bailout.
They may get their way. Secretary Paulson and the Bush administration have cautioned against the idea, but Democrats show no sign of giving ground. Rep. Barney Frank – the same Barney Frank who encouraged the lending excesses of mortgage giants Fannie Mae and Freddie Mac and then engineered their rescue by taxpayers – has been tapped to draft legislation that would saddle the public with the costs for automakers’ decades of failure. American consumers have long avoided buying Detroit-made cars. Now they may not have a choice.
This would not be the first time that the U.S. government has stepped in to give car makers a financial push. After posting a record loss of $1.7 billion in 1980, Chrysler that same year received a $1.5 billion in government loan guarantees, courtesy of the Congress and President Jimmy Carter. Auto makers also found a patron in the Reagan administration. In 1981, President Reagan imposed import quotas on Japanese cars, freeing the way for Ford and GM to sell older and less efficient cars at higher prices without the burdens of competition. Although a boon for the Big Three, the quotas were very much a burden for American car buyers. The International Trade Commission later estimated that between 1981 and 1985, the four years in which the quotas were in effect, American consumers paid $15.7 billion in higher auto prices.
In succeeding years the government has continued to smile on the auto industry. As gasoline prices rose, automakers could continue to make gas-guzzling cars thanks to a loophole in the Corporate Average Fuel Economy standards passed by Congress in 1975, which exempted passenger trucks and sports utility vehicles from the demands of getting better mileage. Most recently, Congress this September signed off on $25 billion in low-interest loans to the auto industry. Should the bailout enthusiasts in Congress prevail, another $25 billion will soon be destined for Detroit.
There are several problems with the proposed bailout. First and foremost, it rewards U.S. car companies for their spectacular failures in the marketplace. On this point the statistics are overwhelmingly discouraging. For instance, the combined market share of the Big Three has fallen from 73.8 percent of in 1980 to just 37.6 percent in 2007. Surveys show that nearly fifty percent of new buyers will not buy their cars. Little wonder that both General Motors and Ford are on the brink of bankruptcy, with GM disclosing last week that it could run out of cash by the end of 2009. Chrysler reportedly is in still more dire financial straits.
Times are tough, to be sure. But to blame the automakers’ bleak state of affairs on rising oil prices and the recent economic meltdown is to ignore the role that the Big Three played in fueling their own decline. It is notable that this May, as the Detroit giants were posting sharp losses (GM alone recorded a 28 percent drop in car sales), their Japanese competitors, including Nissan, Toyota and Honda, all saw their profits increase. Nor was it difficult to account for the disparity. While Japanese companies were producing sought-after compact cars like the Toyota Corolla and the Hondo Civic, American automakers were still invested in the trucks and SUVs that consumers no longer wanted. In view of such systemic problems, there is little reason to think that a federal bailout would reverse the fortunes of American auto makers.
It could, however, make things worse. In proposing the bailout, Congressional Democrats have insisted that it come with “strong conditions” that car makers develop more environmentally friendly vehicles. But this reverses economic logic. Had those vehicles been profitable, it’s a fair bet that automakers already would have put them on the market. To the extent that any of the Big Three have devoted resources to “green” cars, the results have been underwhelming. GM, for example, recently introduced the Chevrolet Volt, a hybrid that would run on a Lithium-Ion battery. Not slated to be on the market until 2010, the Volt is already being talked down by GM executives. In March, GM Vice Chairman Bob Lutz acknowledged that “We won't make a dime on this car for years, and the board is OK with that.” GM’s sanguine business model notwithstanding, taxpayers may reasonably wonder why American auto makers deserve $50 billion to make cars that, by their own admission, are unlikely to sell.
Against such pessimism, proponents of federal aid insist that Americans should see the bigger picture. Without an infusion of taxpayer dollars, the argument goes, thousands of workers could lose their jobs. Not only that, but it could mean the “collapse of the American auto industry.”
As grounds for a bailout, neither argument is especially convincing. A key reason that American auto companies have lagged behind their foreign counterparts is that their “workers” – in particular the United Auto Workers union – have made them less competitive. Under its current contract, the UAW collects generous but ultimately unsustainable health and retirement benefits on top of regular wages. A government bailout would cover some of these costs, but it would do nothing to revive the companies’ long-term health and much to diminish it. Sooner or later, layoffs would have to come. Conversely, non-unionized foreign companies like Toyota have been able to pay their employees more than Detroit’s automakers, even as they continue to grow.
Rumors of the death of the American automotive industry, meanwhile, are greatly exaggerated. Japanese manufacturers like Honda and Toyota employ over 113, 000 workers in the United States and boast manufacturing plants in states like Alabama, Indiana, Tennessee, Texas and Kentucky. Unlike Detroit’s Big Three, they also are creating jobs. A 2005 study by the Center for Automotive Research found that Toyota alone had created some 400,000 jobs in the United States, when factoring in dealers and local parts suppliers. Detroit’s Big Three auto companies still employ 350,000, but that number decreases annually. Ultimately, a federal bailout would not jumpstart the American automotive industry. It would merely send the message that the U.S. government values failing American companies above their successful, foreign-owned rivals. If the early reaction is any guide, most taxpayers won’t approve that kind of deal. But even those inclined to applaud such dubious favoritism are apt to wonder: With Big Three car sales in a years-long tailspin, how exactly will the government recoup their $50 billion investment?