The right eloquence needs no bell to call the people together and no constable to keep them. ~ Emerson

Monday, November 17, 2008

Clutch Shift

U.S. automakers have driven themselves to the front of the line of companies asking for a handout from the $700 billion Wall Street rescue package recently passed by Congress. General Motors says it is flirting with bankruptcy without such help. Chrysler has reached a similar crisis.

Senate Democrats intend to introduce legislation today attaching an auto bailout to a House-passed bill extending unemployment benefits. House Speaker Nancy Pelosi and Financial Services Committee Chairman Barney Frank already favor helping automakers.

Senate Democrats need at least a dozen Republican votes to pass the legislation. Thus far, GOP Senators George Voinovich of Ohio and Kit Bond of Missouri have expressed support and several others, including Senator Norm Coleman of Minnesota, are wavering. Largely, however, Republicans virulently oppose an auto industry bailout.

“Companies fail everyday and others take their place,” argues Senator Richard Shelby of Alabama, the senior Republican on the Senate Banking, Housing, and Urban Affairs Committee. “It’s not the General Motors we grew up with. It’s a General Motors that is headed down this road to oblivion. Should we intervene to slow it down, knowing it’s going to happen? I say no.”

Even New York Times columnist David Brooks, usually a voice of Republican moderation, sees throwing Detroit into the fangs of economic Darwinism as the only prudent move. “If ever the market has rendered a just verdict, it is the one rendered on GM and Chrysler,” he wrote in his column last Friday. “These companies are not innocent victims of this crisis.”

This is true. The niche for big, gas-guzzling, high-polluting vans, trucks, and SUVs that U.S. auto manufacturers carved out for themselves was incredibly shortsighted. Yet American auto consumers ignored warnings about potential oil insecurities and an imperiled climate just as much as manufacturers. This is a societal problem and not just a business one.

Those arguing for a self-correcting free market might have a point if that market were healthy but the general weakness of the economy at the present – with most economists predicting a recession that will last into the First Quarter of 2009 and beyond – is exactly what has brought automakers to Washington with outstretched palms in the first place.

The collapse of domestic automakers could be devastating. A study by the Center for Automotive Research estimates that two and a half million jobs would be lost in the first year alone. The objectivity of that study is subject to question but there are compelling reasons to believe its conclusion are principally correct.

A bankruptcy by any major U.S. auto manufacturer would cause many auto parts suppliers to fail. This would result in a domino effect of failures among other manufacturers and suppliers, since car companies typically share parts suppliers.

Declaring Chapter 11 would allow automakers to suspend many existing debt payments but reorganization would also require them to acquire new loans that might not be available due to the current credit crunch. Bankruptcy by GM or Chrysler might please Wall Street analysts but would have quite the opposite effect on potential consumers. Who wants to make a major purchase like a new car from a bankrupt company?

Finally, retired General Wesley Clark, argues in a Sunday New York Times op-ed piece that “aiding the American automobile industry is not only an economic imperative but also a national security imperative.” Clark points to numerous free market solutions that have led to military success in the past. He believes current Detroit research into plug-in hybrids and electric-drive technology could solve a long-standing problem for better sources of electric power in military vehicles.

The Bush Administration has been cool to the idea of including the auto industry in the financial industry bailout. It endorses allowing car companies to take $25 billion in loans previously approved to develop fuel-efficient vehicles and use the money for more immediate needs – an incredibly short-sighted approach.

President-elect Barack Obama supports auto aid is but views it as part of a long-term plan for a “sustainable U.S. auto industry.” This is the right direction, although Obama and Congressional Democrats are notoriously light on specific mandates and oversights to ensure we actually follow such a path.

Detroit and Washington must accomplish two basic steps together and Ford Motor Company serves as an illustration of what to do as well as proof of its success. Although it is also facing rough times, Ford is probably in the best position of the “Big 3” automakers to ride out the coming recession.

The first and most immediately important step is for car companies to work with existing creditors to write down their debt, using government arbitration and assistance as necessary. Two years ago, then-new Ford president and CEO Alan Mulally lined up $24 billion worth of financing, building a bigger war chest than anyone thought would be needed, just in case. As a result, Ford is not in danger of running out of money in the coming months.

The second and most important long-term step is for Washington to define a consistent energy policy for automakers, preferably one including mandates. Congress must insist that any company receiving government money must commit to a specific plan to improve efficiency. Ford is remaking its product line into one that more closely reflects consumers’ new interests. The company is booting some of its big trucks out of U.S. factories to make room for fuel-efficient subcompact cars.

While the future rests in alternative fuels, there is no question that dramatic immediate improvements are possible simply by mandating higher efficiency. The average fuel efficiency of the American auto fleet peaked at just below twenty-six miles per gallon in the 1980s and remains in stasis since then.

Detroit waggled its $25 billion in loans out of Washington last year by promising to target a goal of thirty-five miles per gallon by 2020. Yet if domestic automakers simply made smaller cars, as European companies do, many analysts believe fleet-wide averages of fifty miles per gallon by 2020 are possible.

That is just the start, however. As Robert Goodman, a Professor of Environmental Design at Hampshire College, suggests, the Obama Administration should direct GM, Chrysler, and other car companies to begin shifting from being just automakers to becoming innovative “transportmakers.”

Some economists point out that low gas prices, which Congress also paradoxically pushes to achieve, retard consumer demand for smaller, more fuel-efficient cars. The common solution for this dilemma is a federal gas tax.

Robert Samuelson suggests in both the current issue of Newsweek and Sunday’s Washington Post that gas taxes gradually rise a penny per month for the next four years.

Daniel Sperling, Director of the Institute of Transportation Studies at the University of California, Davis, and Deborah Gordon, a transportation policy consultant, propose an alternate price floor of $3.50 per gallon on gasoline. Under this scenario, a variable tax would increase the price of gas to this price if its natural market price falls below this level. The tax disappears altogether under higher market prices.

The additional income from such a tax could help fund automakers in place of bailout money. Automakers would be mandated to build (at least some) smaller, more fuel-efficient models as a condition of receiving any money. Higher gas prices would incent consumers to purchase these new fuel-efficient cars.

It sounds neat but it also strikes me as placing the cart before the horse. Increasing prices, even modestly, without fuel-efficient cars already in place would only punish middle-class consumers at a time when they can ill afford additional expense. The move to regulate toward drivers that are more responsible is long overdue but it is an intermediate step in the long-term plan, not an initial one.

The temptation to punish the “Big 3” auto manufacturers for past sins is enticing. However, the overall impact to the general economy, in terms of jobs and investment in infrastructure lost, is too great. It is extremely risky betting that U.S. automakers suddenly develop the innovation and imagination they previously lacked to make the necessary clutch shift successful but it is also unlikely that the current economy will allow “garage start-ups,” à la Apple and Google of the 1990s personal computers boom, to become the new auto giants of tomorrow.

Indeed, we may need to save Detroit today if only so others may be able to replace it with minimal trauma in the future.

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