The Auto Bailout: a Bad Deal

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Mr. Rossi is an associate professor of history at Penn State Erie, The Behrend College. He writes on business and economic history and a writer for the History News Service.

With the economy tanking and unemployment skyrocketing you'd think the Obama administration would be doing all it could to save jobs. But if its auto bailout plan is any indicator of its current direction, we're on our way to losing a lot more jobs.

Why is that? Because President Obama and his advisers are repeating the central mistake of Franklin D. Roosevelt's New Deal-contradictory programs that undermined economic recovery in his time. While the Obama stimulus package creates jobs elsewhere, its auto bailout will eliminate more than 500,000 jobs. Americans need an overall federal government recovery plan that stops job loss and starts job creation.

To rescue and revive the auto industry, the bailout must be linked to other vital American interests. We have spare workers and empty auto factories; they can be used to solve American problems of oil dependence, pollution and greenhouse gas emission reduction. Only through this kind of linkage can the Obama administration avoid the New Deal's failure to generate a self-sustaining economic recovery.

Today's Republican critics charge that government spending is why the New Deal couldn't get the nation out of depression. The real problem was that the New Deal lacked a coherent recovery plan. Its programs often worked against each other. Some, like the Works Progress Administration (WPA), created jobs for the unemployed, while others, such as the National Industrial Recovery Act's industrial policy, helped cut demand for labor.

Much like the current auto bailout plan, the New Deal's industrial policy set production to low levels of demand. Production cuts were generally successful in pushing up prices, profits and, to a lesser extent, wages, but hours worked and production lagged.

The overall result was that industrial employment did not drive recovery during the New Deal. While Roosevelt's programs did push down unemployment from its 1933 record of 25 percent, unemployment remained high -- 17 percent in 1939 after six years of the New Deal -- and recovery was elusive.

The Obama administration is repeating Roosevelt's mistakes. While its stimulus will increase industrial jobs, its auto bailout will lead to the elimination of production jobs, and close 14 factories and more than 1,000 dealerships. Despite these cuts, the auto makers and parts manufacturers say they still need about $48 billion more from the government.

Because each auto manufacturing job generates spending that supports about four other jobs, these layoffs and dealer and plant closings are going to ripple through the economy with devastating effect. A chain reaction of bankruptcies will sweep the auto parts industry, resulting in even more job losses and business closures.

Spending taxpayer billions to this end is a very bad deal. A much better investment is a smart and equitable federal policy, quickly applied, to restart the auto industry.

Here's how it can be done:

  • Use already appropriated Federal government bailout funds to make $15 billion of investments in auto manufacturer and parts supplier stock. This will keep the auto industry afloat for the next four months.
  • Require banks receiving bailout money to use 10 percent of the "aid" -- $4 billion to date -- to generate new auto and truck loans for the purchase of fuel-efficient vehicles.
  • Add $15 billion to the factory conversion grant fund legislated by Congress in 2007 to convert existing auto plants and auto supplier factories to manufacture highly fuel efficient cars, trucks and buses and their parts. Require the government to distribute these grants within three months.
  • Create a $5 billion grant fund to help poor and high-unemployment school districts and municipalities purchase hybrid buses and vans for mass transit. Impose a 120-day "use it or lose it" requirement on these funds.
  • Recycle 10 percent of the Alternative Minimum Tax "fix," which does little to stimulate the economy -- $7 billion -- and use it to fund a generous "cash for clunkers" program which buys and scraps old inefficient and highly polluting cars from their owners who in turn are required to use it to purchase new cars.

These actions will provide funds to keep the auto industry going and revive it. They will do so by stimulating demand for the auto industry's goods. This will rescue the industry and lay the foundation for economic recovery.

Instead of bailouts that destroy jobs, the Obama administration needs to integrate its recovery programs and business bailouts so that they systematically link demand for goods, labor and production capacity to employ more workers and create economic growth. If he fails to do this, President Obama will repeat one of Roosevelt's greatest economic mistakes. Even worse, the economy will continue plummeting toward depression.

This piece was distributed for non-exclusive use by the History News Service, an informal syndicate of professional historians who seek to improve the public's understanding of current events by setting these events in their historical contexts. The article may be republished as long as both the author and the History News Service are clearly credited.

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Nabil K Alkourainy - 3/29/2009

I agree with regards to the contracts. However, I find the assertion that german performance based cars are supposed to be fuel efficient, somewhat amusing. Your point is well taken though. These toxic contracts need to be renogotiated before the whole industry crumbles.

Nabil K Alkourainy - 3/29/2009

While the author did support the stop of job loss, he also mentioned what you are suggesting indirectly. I for one don't see the point of propping up a failing industry. I believe that money could better be spent retraining those workers in new Green jobs.

Nabil K Alkourainy - 3/29/2009

From what i understand about the auto industry difficulties, it is the existing contracts for retirees that is really making things difficult. Why isn't more pressure being put on the uaw to renegotiate these contracts? Afterall, if the auto industry goes down then those people will get nothing.

Andrew D. Todd - 3/26/2009

The basic fault of Rossi's proposal is that it is geared to attempting to subsidize the automobile industry in producing private goods-- automobiles-- rather than public goods-- transit systems. The problem is that he is trying to put the clock back to a time when automobiles were expensive, and the man in the street was boastfully proud of his new car. The reality is that nearly all consumer goods are now manufactured in China. Retail prices are falling to Chinese levels as successive tiers of intermediaries are cut out. Trying to reinflate the economy through consumer goods would involve something like prohibition, with the authorities spying on practically everyone in an effort to detect contraband goods. Reinflation has to be based on public goods.

One obvious problem is that the automakers have long since ceased to be primarily in the transportation equipment business. They are mostly in the comfort and style business. The automobile's engine and transmission represent only a small portion of the automobile, at a whole series of levels: cost, labor inputs, employment creation, weight, and bulk. The bigger the automobile (or other vehicle), the more true this is, and the more feasible it is to convert the vehicle to some other system of power. To take an extreme case, a railroad passenger car might cost twenty times as much as a freight car of the same size, and you can convert it to a different kind of power by coupling up a different kind of locomotive. This is obviously some distance from the boxcar labeled "40 Hommes/8 Chevaux."

Automobile engines are often imported. Thus, an "American car" may very well have a Mexican, Brazilian, or Chinese engine. Transmissions, in recent years, have also joined the import market. The capacity of the American automobile industry to supply new power systems is relatively limited.

The case for buying more new automobiles is inevitably the case for more comfort and style, which is a rather thin case. A more practical business proposal would be to buy up glutted, recently produced automobiles from bankrupt dealers at distress prices, ship them to Mexico, convert them to hybrid power with Chinese or Indonesian parts, bring the automobiles back to the United States, and resell them at prices which undercut new automobiles. The replacement parts need not cost more than five thousand dollars, inclusive of installation, and probably considerably less. The same applies with even more force for buses, delivery trucks, etc., and for these vehicles, engine mountings are customarily standardized between manufacturers, so that the engines are interchangeable on about the same level as tires. For years, the Post Office has been testing various kinds of power systems in its standard mail vans.

Of course, one can build small cars. However, a small car has substantially all the bits and pieces that a big car has, and therefore costs just about as much to produce, given an equal efficiency of labor. Buyers do not show any great inclination to pay for small cars-- they expect them to be much cheaper than big cars. They are especially not keen on small cars of reduced performance, eg. the Tata Nano. A typical buyer expects to sell a car in three or four years for a small fraction of what he paid, which means that eventual fuel consumption is largely someone else's problem. The auto industry is a fashion industry, resembling, in many respects, that of women's clothing. It is organized around the customer who feels he will be looked down on if he buys a used car, as fiscal prudence would dictate. The fiscally prudent majority of the population, of course, takes advantage of the opportunity to buy a cheap used car, and does not enter into the automobile industry's calculations.

A more substantial proposal for dealing with the energy crisis would be to build out commuter railroads. The idea would be to focus on the kind of commuter who drives fifty miles to work, and uses a disproportionate share of gasoline. Obviously, by preference, we should arrange for this commuter to telecommute, but if that is not feasible, we can at least arrange for him to drive five miles to a train station instead of fifty miles to work. For historical reasons, the newer cities, such as Atlanta, Houston, Phoenix, etc. do not have as good public transportation as older cities. In most cities, the available public transportation routes go downtown, and it is difficult to get from one suburb to another. This can be corrected by building lines along the "ring roads." There need to be systems of express services, operating at higher speeds over longer distances. The automakers can play a role in building such systems.

It is important that we should understand just how the "Arsenal of Democracy" worked during the Second World War. When the automobile industry sat down with the various military industries to discuss war production, they discovered that the military industries were still back at about the year 1880 in terms of production technique. This was understandable, as in peacetime, there were not regular orders for weapons. The auto industry brought the state of weapons production up to about the same level as automobile production in 1910. The situation in shipbuilding was even more drastic. Henry J. Kaiser dragged the shipbuilding industry, kicking and screaming, from the best practices of the year 1750 to those of the the year 1850. In 1941, the capacity of the automobile industry was about five million vehicles a year, perhaps three-quarters of a million of that being trucks. Not all of this was in use, of course, owing to the depression. During the four years of war mobilization (1942-45), the automobile industry built about two-and-a-half million trucks, and six hundred thousand jeeps. This was more or less normal civilian production, in short. However, it suspended the production of something like seventeen million passenger automobiles. In lieu of these, the industry produced large quantities of simple objects such as helmets and artillery shells, about six million small arms, and, more importantly, about 80,000 tanks and fighting vehicles, and 27,000 aircraft. The automobile industry was, on the whole, better at building tanks than at building airplanes. Thus, the scale of production for the key war manufactures was about hundred times less than normal peacetime automobile industry production, even though it was also ten or a hundred times greater than the normal production of the aircraft and munitions industries. The automobile industry took large numbers of assembly line workers, and large numbers of new entrants ("Rosie-the-Riveteer"), and trained them to function, within limits, as skilled workers, at apprentice-level, producing small quantities of parts for aircraft and tanks. What the automobile industry can do is to "pinch hit" for a small, economically stable mechanical industry which has severely limited powers of expansion. (Ref: John B. Rae, _The American Automobile_, 1965).

The firms which build railroad cars are like that-- small, stable, and with only limited powers of expansion. They cannot deliver the specialized equipment for radically expanded commuter rail service on very short notice. However, the container/intermodal shipping industry is in a state of depression. Apart from reduced imports of automobile parts, it is heavily affected by the housing crisis. There are whole range of moderately heavy, comparatively low-value manufactures, such as refrigerators, air conditioners, plumbing fixtures, etc., which are largely incidental to furnishing a new house. People do not wake up one day, and say, "Oh, I must have a new refrigerator to feel good about myself." Rather, when they move, they decide whether the refrigerator is worth taking along with them. Given its weight and bulk, the answer is usually no. Now, this means that the railroads have a surplus of intermodal cars, designed to carry shipping containers at fairly high speeds (60-70 mph), and the locomotives to pull them. At the "40 Hommes/8 Chevaux" level, there would be no problem, but of course modern commuters cannot be expected to sprawl out on the floor of a shipping container like so many World War II GI's.

What the automakers can do is to manufacture conversion kits to transform intermodal cars into passenger cars for commuter service. This would take advantage of the automakers' actual, as opposed to ostensible, manufacturing capabilities. The seats in a railroad car are not so very different from those in an automobile, nor is the upholstery, nor the windows, nor the doors, nor the electrical systems. There would of course be lesser requirements for things like prefabricated track components. Such a program of manufacturing would involve the upgrading of automobile workers' skills to a considerable degree. Unemployed construction workers could be trained to build track, the other significant component of a railroad. All of this would of course be paid for with public money--federal money.

Donald Wolberg - 3/23/2009

There is a mad set of assumptions, largely based in fiction and not fact that makes life almost miserable for those of us out here in the real world of no mass transit, long distances between places we need to go, and a way to get most of what America eats to market. Cars and trucks work and are the mechanical backbone of America and the world. The interstate highway system of Mr. Eisenhower, connected all Americans to each other, and brought all that good food to American tables. The internal combustion "idea" (either gasoline of diesel)works efficiently and best of any options in terms of cost of manufacture, pulling power in horses and torque, and ability to get frm point A to B. Most American trucks are better than almost all foreign options in terms of economics.
The entire world, all of it, will continue to build and use trucks (and cars) for a long time. Assumptions of options such as Mr. Pickens' gas or others' electric cars, or hydrogen fuel cells or any of many other options are not new, have been tested, modified and over-engineered and found wanting in any of several aspects (the idea of an electric car with very toxic batteries is as impractical as the notion of a hundred million hydrogen fuel cells puttering around--remember the Hindenberg). American vehicles are clearly as efficient as a whole, vehicle class by class, as any foreign equivalent. A big V-8 Toyota Tundra pickup is actually less efficient or well built as our classic GM, Chrysler or Ford, 1/2;3/4 or 1 ton trucks. A Cadillac or Lincoln is just as efficient as a Mercedes of similar size, and a lot less expensive. Toyota and Nissan and Honda and BMW generally make money. But they are not weighted down by ever expanding and ridiculous labor contracts, and when they operate elsewhere, they are free from governmental interference. There is no lack of talent or capability in the U.S. auto industry; there is damaging union interference and worse government interference.

Jonathan Dresner - 3/23/2009

The assumption that preserving employment in failing industries is a productive use of government funds is absurd: the orderly transition of workers from dying businesses to viable ones should be the focus of policy, and both the New Deal and (to some extent; not enough yet) the current program did just that.

Job training, WPA-style jobs in new sectors, education and unemployment support will help people find new careers; propping up the overemployment in shrinking sectors just delays the transition.

John Nicholas - 3/23/2009

Your thoughts make two assumptions, one minor and one major:

Minor) Credit is available, and people will borrow to buy new cars.

Major) The demand for additional cars on the road will be the same during and after the recovery as it was before the recovery.