Setting the Record Straight

November 3, 2008

Detroit’s Money-Guzzlers

Is Our Auto Industry Relevant?
     The U.S. Congress and the Bush administration arranged to give the U.S. auto industry, which now numbers three companies, $25 billion in its own version of the much more massive financial meltdown. Now the industry is back asking for $25 billion more, because the first 25 was only half of what they originally asked for.
     Following the original $25 billion, General Motors and Chrysler began using the money to concoct a merger, which would lower a once-proud industry back to just two members. The other would be Ford, and some mixture of a merger from within the three has been talked about since earlier this year.
     Sorry, but so what? Why do we need them any more? Even if we helped them, what would the American people get out of it? The government’s money and efforts might be better spent preparing the current employees for the fallout of the U.S. auto industry’s collapse, with retraining, adult education, financial help and guaranteed health care.
     Recent U.S. history tells us a bailout of Detroit would be folly. We would be ignoring George Santayana’s admonition: “Those who don’t remember history are condemned to repeat it.” So let us remember, beginning with the fact Chrysler has been at that federal trough before.
     In late 1973, with the U.S. automakers gloating over recent victories over congressional efforts to force them to make their cars safer and with better gas mileage, the Organization of Oil Exporting Countries slapped an embargo on oil exports to the United States. That pushed a growing supply-and-demand into a crisis that led to miles-long lines of cars queuing up for gas from draining pumps.
     Unknown to U.S. automakers, their victories over regulation efforts already were beginning to cripple them as Americans turned to safer cars made abroad. With the OPEC embargo, their victory over tough gas mileage efforts was about to bite U.S. makers in the rear.
     In 1979, as the Carter administration and Congress struggled to overcome the financial damage of the embargo, Chrysler, still U.S. born and bred, said it was facing bankruptcy and needed a $1.5 billion bailout from the federal government (that’s more than $9 billion in today’s dollars).
     Instead of bailing out Chrysler, the administration and Congress worked out an arrangement guaranteeing a $1.5 billion loan from the private sector and required the company to raise another $2 billion to cover its operations, but without federal backing. Chrysler also was required to make certain commitments, but none required the firm to make cars that would match the subsequent success of foreign-made models.
     The Carter administration also launched with Congress a series of energy-conservation and alternative-energy initiatives to reduce the stranglehold foreign oil had just placed on the United States. They included requiring all automakers, including the three domestic ones, to meet higher mileage standards.
     A year after the Chrysler loan, Ronald Reagan ousted Carter and it didn’t take long for the country to return to its fuel-wasting days and a large-scale ignorance of the need for conservation. The U.S. automakers merrily went along with that mood and began manipulating the mileage standards so they could continue building ever bigger vehicles getting relatively low mileage and spending billions in advertising to convince the American public bigger was better and pooh-poohing the need to conserve newly abundant gasoline. Eventually Chrysler recovered enough to make it attractive to a German automaker, which swallowed it up, reducing the U.S. automaker number to just two.
     Volvo, Toyota, Honda and several other foreign car makers continued with their business models of the early 1970s, continued to make ever-more reliable, safe and fuel-efficient models and exploring alternatives to the old-fashioned combustion engine that still ran all cars. U.S. automakers could have done the same thing, but they did not; all they were interested in was getting around the regulations, getting their friends in Congress to eliminate them or at least weaken them.
     Prodded by the U.S. auto industry, Americans began buying bigger and bigger cars, moved to SUVs and macho trucks, such as Hummers, so big some psychologists termed them penis substitutes. They also moved much of the manufacturing of the parts for their vehicles to Mexico and other countries, so most of the elements of their cars ended up foreign-made.
     As Detroit advertised its way to a return to its old profligacy, foreign automakers began making cars in the United States (notably in states antithetical to labor unions), research alternative fuels and gas-conserving models and, particularly Toyota and Honda, building reputations as makers of the world’s best-made cars.
     When the new gas crisis hit the United States, motorists found themselves driving gas guzzlers as the average price of gasoline more than doubled. Foreign makers had joined in some of the mad rush to gas-guzzlers, but kept their eyes on the prize, so they weathered the new crisis in much better shape than U.S. automakers (Chrysler had returned to U.S. ownership) and well-suited to move U.S. automakers all the way out of the title of the “big three.”
     Therefore, the government needs to focus on helping auto industry employees at this point, as well as the state of Michigan and the city of Detroit and all the other towns across the country that depend on Detroit and its suppliers. But help the automakers themselves? Why?
     We already know how the U.S. automakers are going to behave after the current financial crisis begins to ease in a year or two. The same way they did after the previous crisis, and guess how the executives of those three firms fared during the relatively plentiful years.



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