Obama and change… interrupted

The ongoing collapse of the US automotive industry – or rather, their automotive royalty, the Detroit-based Big Three – is an incredible opportunity to move the US forward, which President-Elect Barack Obama won’t take. He should take the opportunity to shore up massive adult education programs, retraining the people who will, without question, lose their jobs at some point over this issue; and he should let the companies live or die on their own merits, cushioning the impact for their employees rather than injecting money – be it loans or direct investment – into an industry which has problems that started long before the current financial crisis, and while exacerbated by it are not rooted in the same issues facing the rest of the economy. By doing nothing for the companies, Obama might be letting the most obvious US car manufacturers perish, although that is unlikely (Chapter 11 of the bankruptcy code was created to provide a way out for companies without short-term viability but with longer-term prospects). However he would not be killing the US automotive industry, and the companies that survive – including Aptera and Tesla – would come out stronger and more able to compete in the long term.

The problem he has is that it doesn’t play well at home to let giants of industry, and mainstays of national culture, go under during the current climate. If the economy weren’t in the state it was, it wouldn’t be imperative to consider bailing out three companies that are losing to their foreign competition. But right now, Americans will clamor for their government to help domestic industries other than those on Wall Street, and Obama will not want to risk going into his Inauguration with a significantly lower approval rating than he has on the back of his election victory. Although at the moment his transition team (in the voice of Chief of Staff Rahm Emanuel) seems to be recommending loans rather than a bailout, with the rhetoric coming out of the companies themselves and the automotive workers unions, it is difficult to see how the President-Elect will be able to stick this course as the situation continues to worsen for an industry which directly or indirectly employs up to 3% of America’s workforce.

The thing is, most industries are completely unlike the financial sector. If America’s banks had started folding up like used napkins then everyone would have felt it, in a major way: businesses and people depend on banks for capital, particularly in difficult times. And if savings and deposits had started disappearing, this would have further accelerated loan foreclosures, business foreclosures, personal bankruptcies: you name it. Other industries would have fallen, and so the US government (like others around the world) really had no choice but to step in and do something; the issue was always what, and what the taxpayer would get in return.

However if GM, Ford and Chrysler fold then the knock-on effects, while not small, won’t take down untold other industries; companies and individuals that buy or loan their products could switch to other manufacturers. In any case they won’t fold: they may enter Chapter 11, allowing them to restructure, prune and refocus; or they may be bought out by other auto manufacturers, which is what happened to the UK car industry, as Don Pittis points out in his argument against automotive bailout measures. Conceivably they could be bought by an investment group and broken up, although that would almost certainly be the worst outcome.

This isn’t to say that a major domestic manufacturer in severe financial troubles isn’t going to cause a lot of problems. People will lose their jobs; not just those directly employed, but people working for the supply chain companies. An estimated 3-5 million people depend on the Big Three both directly and indirectly, and government has a responsibility to them to help them continue to work, no matter what happens to their employers. That does not mean that there’s a responsibility to keep companies alive that cannot compete; it is saddening to let go a former giant, but sometimes it is the right thing to do. Providing the individuals currently dependent on those companies can be given other options, letting the market run its course would likely be the best option.

Put simply, bailing out the automotive industry in America is protectionism. This isn’t a failure of regulators causing a market crash; blame cannot believably be lain at the feet of government. This is a simple matter of companies being beaten by others with a competitive edge. Keeping them alive at this point with taxpayers’ money is possibly the worst way of spending that money to help those individuals, because it has to be funneled through companies that are – demonstrably, by their inability to continue competing – inefficient. (The reasons for those inefficiencies are complex, and not entirely of their own construction, but this doesn’t change the argument.)

Say there is no bailout. The Big Three downsize up to 30% of their workforce, and use the existing $25bn low-cost loans from the federal government to retool and focus on producing cars that are more fuel-efficient; this might require some weakening of the requirements for eligibility for those loans. Instead of the $10bn to $50bn bailout manufacturers were asking for on Friday (depending who you believe and how you count it), the government spends half that on retraining programs for up to 2 million employees who lose their jobs in the near term; that’s $5,000 – $25,000 per person, which should cover costs even at the low end. Five years down the line, one or more of GM, Ford and Chrysler may well still end up radically restructuring, out of business, or in the hands of other companies. However the focus will have been on taking care of the people who can no longer find work in the automotive industry, and so in the individual, pain will be much less.

Unions will point out, and are certainly correct, that retraining is stressful and difficult; but this is the world we now live in, and we have to accept that there will always be someone else prepared to do our jobs for less. While it was still impractical due to distance or economic effects for them to compete, this didn’t matter; but this is no longer the case, certainly in car manufacture. To continue to compete you either have to be cheaper or better, and right now it seems that the US auto industry is neither. (The workforce, however, may be better than elsewhere; if so by enough margin, or if the other economic effects are right, foreign auto manufacturers will re-employ them. Toyota already has more than ten engineering and manufacturing plants in the US, for instance, and it wouldn’t be crazy for the new administration to consider an incentive package to encourage further growth for this and other companies.)

Say, however, that Obama caves, and out of the gate in the new administration (in fact earlier, since the companies may not last that long) we see a bailout of Detroit. Based on what happened with the banking industry, the manufacturers will likely get a better deal out of this than the taxpayer: the government is unlikely to force real change on the corporate beneficiaries by restructuring out existing shareholders and current board members, and although a surprise here would be a welcome dose of reality in how taxpayers’ money should be used, putting voting rights in the US government is unlikely to result in the enormous changes required to get the country’s major car manufacturers back on their feet; it would likely prove too contentious for the government to invest in a company and then push it through a restructuring that would result in significant job losses.

Barack Obama has said that he wants “to help the auto industry adjust, weather the financial crisis and succeed in producing fuel-efficient cars in the United States”. Without incentive or requirement to change, it is difficult to see how they would achieve that; sure, it’s possible, but let’s not forget that they’ve been optimistic before, and that the current problem goes back much further. In two or three years time, Detroit will be back in the same position, and we’ll have to go through all this again.

That’s not real change.

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