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Jewish World Review
January 30, 2009
/ 5 Shevat 5769
The rise of self-defeating industrial policy
Washington can't decide whether to save or to smother the American auto industry.
A few months ago, GM and Chrysler got a federal lifeline in the form of $17.4 billion in loans, on grounds that their health is essential to the economy. Now comes news that the Obama administration is acting quickly to approve a waiver for California to impose costly new restrictions on carbon-dioxide emissions from cars.
In a move meant to combat global warming, California wants to mandate a 30 percent reduction in tailpipe emissions by 2016 and a fuel-efficiency standard of 49 miles per gallon by 2020. As many as 13 states will follow California's lead, creating a regulatory patchwork with automakers forced in practice to meet the higher standard.
Even California admits that the new strictures will add $1,000 to the cost of vehicles by 2016. The automakers estimate it will add $3,000. So, GM and Chrysler will struggle to shed labor and legacy costs, just to see new regulatory costs imposed on them by the very political authorities that are putting taxpayer dollars at risk to save them. It's the rise of self-defeating industrial policy.
The auto-emissions standards already imposed on automakers the so-called CAFE standards have heaped billions of dollars of losses on Detroit. As Holman Jenkins of The Wall Street Journal notes, the American industry takes a hit on the cheaper, lighter cars it manufactures at its high-cost unionized plants to comply with CAFE. It makes such cars profitably overseas and could import them back here to the U.S. to meet CAFE standards if Congress didn't forbid it from doing so in a naked pander to the United Auto Workers.
When Detroit came to Washington in extremis last year, the rational reaction would have been to lift burdens on it. Instead, the fashionable rap on Detroit was that it had created its own mess by making SUVs on the foolish assumption that gas prices would stay at $1.50 a gallon forever. This critique was premised on the foolish assumption that gas prices would stay at $4 a gallon forever.
As gas prices have plunged, sales of SUVs and light trucks have picked up again. In December, they were 51 percent of all vehicle sales, a return to the normal pattern of such big vehicles outselling small cars. Drivers simply like the convenience and comfort of the bigger models. Sales of the Toyota hybrid Prius dropped 48 percent in November and 45 percent in December. Even Toyota, more adept at manufacturing small cars than its American competitors, is thought to lose money on every Prius it sells.
If a normal sense of self-preservation were at work, Detroit would howl at another step toward bludgeoning it out of its most profitable line of work. But now its relationship with Washington is as important as its business model. Its executives have to drive to Capitol Hill in hybrid cars to do their begging and pretend that GM's plug-in Volt prospectively priced at an outlandish $40,000 per vehicle is the car of the future.
Political cowardice is the better part of valor. Detroit News reporter David Shepardson couldn't get a comment from Chrysler and Ford when he called to ask them about the imminent California waiver. Smart move. An Obama official told the News that "additional tools to support the auto industry will be considered" in response to California's new rules. What Washington giveth it taketh away and giveth yet again.
This contradictory policy is driven by worry over the far-off threat of global warming, the killer abstraction that hangs over all of Obama's economy policy. At the same time everyone is aflutter with the need to stimulate the economy, Al Gore called in congressional testimony for the imposition this year of a cap-and-trade system, effectively imposing a new tax on energy. As government intervention proliferates, we are about to see industrial policy run by people who don't like industry very much.
Detroit wanted a bailout, and it will get it good and hard.
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