If Detroit Goes Down, Will It Take the Economy — and the GOP — With It?

If Detroit Goes Down, Will It Take the Economy — and the GOP — With It?

November 19, 2008

In a remarkable spectacle, an Administration with a sustained record of economic blunders and failures finds itself aghast at the mistakes and mismanagement of U.S. automobile companies. Imagine Confederate General John Pemberton, after leading his forces to an historic defeat at Vicksburg, dismissing his cook for squandering the rum rations.

Yes, America’s big three automobile makers (with an assist from the auto workers’ union) have been so consistently unimaginative, self-regarding, and inept that they’ve brought themselves to the brink of bankruptcy. Now they find themselves pleading for a bailout which, under normal circumstances, most sane policy makers would dismiss out of hand. But circumstances today are as far from normal as most Americans have ever experienced, and the request requires a serious second look.

The automakers had been in deep trouble for some time; but until the economic crisis hit, their condition was far from terminal. The Bush administration’s inept strategies and incompetent management of the crisis then dealt a weak industry new, serious body blows. First, the sudden upheavals across the financial system, along with the administration’s inability to explain how it happened or how they intended to protect the rest of us from the fallout, bred such extreme caution and even panic among consumers, that most demand for Detroit’s products dried up. Moreover, much of the shrinking cohort of Americans still prepared to purchase a new U.S.-made car can’t find financing for it. That’s because two decades of deep federal distrust of regulating most financial institutions allowed them to speculate so recklessly with borrowed funds, that now, even with the bailout, their balance sheets are so precarious that they won’t provide a new loan to anybody who couldn’t pay for a new car without one. Finally, the crisis turned off the lines of credit and other routine financing that auto manufacturers need to operate. All three blows are consequences of the remarkable failures by the White House, the Treasury and the Federal Reserve to comprehend the dangers of the sub-prime mortgage market as it began to unravel and address effectively those dangers as the crisis snowballed.

So, the American auto industry now faces a kind of life-or-near-death moment, and if the President and Congress turn their backs, the results could drive down the economy much further. That’s the only reason to countenance a bailout for an old industry that doggedly resists modernizing itself — but under the current circumstances, it’s a compelling one. American businesses and consumers remain dangerously vulnerable to yet another economically bloody shock which could further shift expectations downward, which in turn could produce a depression-like state of mind and what economists call a “sub-optimal equilibrium.” That’s a very unpleasant condition in which markets produce much less wealth, jobs and incomes than they could, because consumers, businesses and banks no longer believe that the conditions to support better times can be sustained.

Since the Bush Administration is at least partly responsible for what now faces the auto industry — and now faces the rest of us, too — they should put their weight behind new help for automakers and auto workers. But the bailout shouldn’t be a handout. The industry needs both a shake-up and a technological shift, and strings tied to the federal assistance can help make both happen. The first part of the shake-up is simple: The current executive teams are out, and everybody takes real pay cuts — including some workers who at GM reportedly earn an average of $71 per-hour (including benefits), compared to Toyota’s U.S. workers at $49 per-hour. The aid also should be tied to a greater commitment to develop and produce new engines and cars with extremely high mileage per-gallon and a small carbon footprint, because that’s the market being created by high energy prices and climate change. And to provide additional motivation, the Government can conduct the kind of competition the Pentagon carries out routinely, in which the first automaker to produce a 75 or 100-mile-per-gallon, low-carbon automobile wins a ten-year contract to supply the Federal Government fleet. And the taxpayers providing the aid should not only get an equity share in return for their investments, but public-representative seats on their boards, to keep watch and keep tabs. Finally, the government should commit itself to cajoling or coercing the Big Three’s lenders to enter into debt-equity swaps with the auto companies, and so improve their balance sheets enough to attract new private investors (and so avoid a second bailout).

Rescuing the auto companies is, of course, a slippery slope; but the alternative may be to skip past the slope and head directly for the cliff. As it is, it still may not be enough. Home foreclosures continue to rise, and the additional losses to mortgage-backed securities and their derivatives may soon absorb much of the current Wall Street bailout. Further, the global recession has pushed a number of emerging-market and transition economies perilously close to sovereign debt defaults, which would deal another serious blow to the financial institutions that today hold the debt of those countries. At a minimum, neither the economy nor the auto industry will tread water while Americans wait for the new President and new Congress to take office. That’s why, this time, the extraordinary conditions to justify bailing out a failing industry are present. And if a Republican President and his party in Congress keep their ideological blinders on and ignore those conditions, Detroit’s demise could take the GOP with it, for a long time.



It’s 1980 again, not 1932

November 13, 2008

While nearly everyone recognizes that the current financial crisis is the worst since the Great Depression, the economic challenges and the changes in the political landscape hearken back more to 1980 than to 1932. The distinction matters, because a misplaced metaphor or inapt historical analogy that takes hold of the political imagination can produce serious missteps.

In 1932 and 1980 — and again less than two weeks ago — the country strongly rejected an incumbent presidential party, with the White House and substantial majorities in both houses shifting, respectively, to Democrats, then the Republicans, and now the Democrats again. In retrospect, it’s clear that the political realignment of 1980 and the years following was not the political upheaval of 1932 and the decades which followed it. 1932 began a revolution in the federal government’s role in economic and national life that persists today, while 1980 jumpstarted a continuing shift in political preferences from center left to mainstream right, with policy evolving within a familiar framework.

If our times were truly most like the turmoil of the early 1930s, the basic character of government, the basic path for the economy, and the country’s role in the world would all be at stake. Times like that require deep and fundamental changes in both policy and politics, with a realigned electorate eager to back seismic shifts. And that’s what we hear from some members of Congress, urging President-elect Obama to make deep and fundamental changes in the economy, the health care system, the way we use energy, and the Middle East — and do as much of it as possible as soon as he takes office. If this were 1932, we would need such basic changes to head off profound social divisions and political upheaval — and a president like Franklin D. Roosevelt who could recognize that need and take it on.

1980 provides a different model which seems much closer to the country’s present predicament. There’s no popular demand to change the government’s essential role in national life and the nation’s basic role in the world. Instead, much as in 1980, the public demands major improvements in the quality of the President’s economic performance and the success of his foreign policies. Yes, the economic crisis almost certainly will be the most damaging since the 1930s. But still there’s a profound difference between unemployment rates of 7 percent or even 10 percent, and the 25 percent jobless rates of the 1930s. One reason is that today we understand much of the sources of our economic failures — which we didn’t in 1932 — and so we can reasonably expect to be able to address them without fundamentally changing the government’s role in our lives. Similarly, we know that we face profound problems with our health care system, especially with the financing to ensure its universality and sustain its quality.

If this time were a political and economic reprise of the 1930s, the health care debate would revolve around a government-run, single-payer system with comprehensive price and wage controls. Instead, President-elect Obama — and every other serious presidential candidate this year — could and did promise to address these problems in a serious way without fundamentally changing the government’s role there, too.

If our economic and political conditions recall 1980 and not 1932, what’s the best course for the new administration? The President-elect should be able to draw on an extraordinary level of public and congressional support for some time; and he has said, so many times and in so many ways, that his presidency will tackle the country’s problems from inside the policy discussions the two parties have carried on for the last decade. If that’s the path, the new President’s best strategy is to press for change step-by-step, rather than try to drive a wave of sweeping congressional actions in the storied, first 100 days. For one thing, when a president fails at sweeping initiatives, his political support for another go at it usually disappears. Anyway, step-by-step change doesn’t mean marginal or modest changes. Rather, it can describe a political process where the President’s initial round of reforms in, say, health care, regulation, energy and tax policies over the first year are followed by a second round of reforms the following year. And if the nation is lucky, there can even be a third and fourth round after that. This is the time for an Obama administration and Congress to finally fix the systems we have — and not, as it was for FDR, the moment to invent wholly new ones.