Sunday, January 04, 2009
Opinion

What’s wrong with the Detroit bailout?

Fresh from her Dec. 23 appearance on MSNBC’s “Hardball,” Stephanie Ramage has the answers

By Stephanie Ramage

Last week, General Motors and Chrysler received the first installment on a $17 billion bridge loan—or bailout, depending on how you look at it—from the American taxpayers.

As President-elect Barack Obama and his advisors plan a massive all-purpose bailout with a taxpayer price tag of almost $1 trillion, those who support such measures have adopted a mantra about the U.S. economy returning to the glory it enjoyed in the three decades after World War II.

They like to talk about how America’s unions and factories allowed the U.S. to dominate world markets during that period, as if our country had some special knack that others didn’t. The truth is less romantic. Our manufacturing base was the last one left standing after WWII. Europe’s was decimated. Ditto for Japan’s—which had only been nascent compared to its Western counterparts, anyway. China was living in suspended animation. The Soviets’ Communist system made quick innovation and production impossible. We also benefited from Europe’s brain drain. As their thinkers fled to the U.S., we put the new immigrants and refugees to work.

 Inevitably, as Middlebury College economist David Colander has explained, the rest of the world would recover and catch up. In the meantime, the U.S. would feast on foreign orders, growing jobs in the process, feeding its own booming consumer economy and forgetting that the rest of the world was on the mend. At the same time, previously undeveloped economies would develop. By 1979, competition from Japanese car manufacturers had begun to make a dent in the American Big Three’s domestic market, thanks to Japanese sensitivity to the fuel economy that Americans desperately needed. Detroit’s reaction was to pressure Washington to invoke import limits. President Jimmy Carter, focused on the effects of the OPEC embargo, wouldn’t play ball. His successor chose a slicker approach: While outwardly preaching free-market values, President Ronald Reagan quietly sent a trade emissary to Japan in 1981 and used diplomatic counterweights in the region to pressure Japan to adopt voluntary export restraints, or VER. He had, without being widely known for it, instituted a form of protectionism and, ultimately, it would not be good for America.

In his 2006 book, “International Competition Law,” Martyn D. Taylor writes that between 1986-1990, “the automobile VER caused the prices of Japanese cars sold in the U.S. to increase by an average of 14 percent. While U.S. manufacturers were able to sell more cars, increasing their profits by about $4 billion per year (an increase of over 8 percent), U.S. consumers suffered an estimated loss of $25 billion. The U.S. economy also suffered net welfare losses totaling some $8.5 billion. A Brookings Institution report calculated an annual consumer cost of $300,000 for each job preserved in U.S. industry by the VER during that period.”

The notion that Detroit could continue doing things as it has always done them, if only it were protected from the effects of the world market, is an old and persistent one. When I debated President George W. Bush’s auto industry bailout with well-known protectionist and isolationist Pat Buchanan on MSNBC’s “Hardball” on Dec. 23, his arguments and angry viewers’ comments on The Sunday Paper blog were like a blast from the past. They were furious that I drive a Mazda, never mind that it’s 13 years old, has more than 340,000 miles on it and runs like a clock as long as I keep the oil changed. They were angry that I suggested, as GOP Senators had, that Detroit’s salaries be brought in line with those at Honda and Toyota plants here in the U.S. as a condition for the bailout, so that taxpayer money would be soundly invested in a real recovery.

Though much of the bailout talk has centered on wages, union wages are not the biggest obstacle to Detroit’s competitiveness. As James Sherk, a labor policy analyst at the conservative Heritage Foundation, has noted, “The UAW has also saddled them [the Big Three] with complex work rules that allow only certain workers to do certain tasks, and no one else.” John Cunningham Wood, in his 2003 book, “Henry Ford: Critical Evaluations in Business and Management,” noted, “A number of ‘unproductive’ practices, especially union protective rules, have developed due to the labor-management-conflict orientation inherent in this model. Furthermore, the model requires that management renounce any use of the innovative potential of employees. But there is, particularly among the production workers, who are most familiar with the technology and work organization, a rich potential for innovation that can result in considerable productivity gains.” Detroit’s workers themselves are not the problem, the unhealthy relationship between the UAW (United Auto Workers union) and the Big Three is.

Still, the UAW and Detroit's CEOs have historically gotten what they wanted from Washington. In 1981, they wanted protection from foreign competition. In 2008, they wanted protection from the effects of that competition and faulty decisions they had made in addressing it.

However, as Douglas R. Nelson said almost presciently in the 1996 book, “The Political Economy of Trade Protection,” ultimately, “the result is a global auto regime. The continued viability of GM, Ford and Chrysler depends on their ability to adjust to this new reality and to participate in the creation of a political-economic regime that does not rely on the policy actions of a single national government, even one as powerful as the United States.”

The bridge loan extended by taxpayers via Bush and the U.S. Treasury includes some strings—pay cuts for workers and salary caps for executives—but with Detroit’s automakers in their present union-management configuration, some experts warn this is likely to lead to a string of such loans totaling about $100 billion by 2010. A better answer, as I said on “Hardball,” would have been to allow the Big Three to declare bankruptcy in order to get out of their contracts with the UAW, but also to get shed of their present CEOs and, most importantly of all, to allow Detroit’s autoworkers to see themselves as individuals first, rather than merely the minions of a union that has spared no thought for their future.

That would take some time, and that would have meant using taxpayer money to expand and extend unemployment benefits for the workers. But ultimately, it would have been a better use of $17 billion. SP

Stephanie Ramage is news editor of The Sunday Paper.