Building The Cars Of The Future

For the moment, it appears that the auto industry bailout is dead.

WASHINGTON – The Senate's top Democrat has called off a planned vote this week on a $25 billion auto industry bailout. Senate Majority Leader Harry Reid said that he wanted to figure out some way to help Detroit's struggling Big Three but that efforts to do so had stalled.

The White House and congressional Republicans rejected Democrats' plan to dip into the $700 billion Wall Street rescue fund to finance loans to U.S. automakers.

Obviously this wasn't a favorable environment, with 49 Republicans and a skeptical GOP President in the lame-duck session and an unpopular bailout of the financial industry in the rear-view mirror. Treasury was against it from the beginning, and the public was uneasy about it as well. The White House's quick fix, to allow carmakers to access federal loans by dropping their requirements on fuel-efficient vehicles, was a non-starter and the opposite of what we should be doing.

The financial bailout and the proposed auto industry overhaul are very different beasts. With the auto industry you have millions of factory jobs on the line, as well as the support industries that feed them. Believe it or not, autos are made here with a far cleaner process than those made abroad, too, so allowing, say, the Chinese to buy GM, would have dramatic consequences for climate change, not to mention the fact that losing GM would mean losing the Chevy Volt, which is the most promising electric car in production, using a lithium-ion battery instead of nickel, which is the key to a sustainable transportation future. And from an economic standpoint, you're looking at a near-total decimation.

Still, this problem is really sad and really difficult. While Wall Street got a $700B bailout, the auto industry is looking for a bridge loan because auto sales just crashed in October from a run rate of around 16 million vehicles to 10 million vehicles. That's not something that can really be managed away in a short period of time, it's the equivalent of demobilizing a small war. That's overhang of factories, management, people, capital, and expertise of six million vehicles a year. The auto industry reaches into every community in America, with car dealerships, supply chains, and parts makers sustaining millions of jobs a year. Beyond that, as Wes Clark notes, there's the national security element of electrifying our armed forces, a project the auto industry is moving forward.

Yes, the auto industry has been badly managed, and labor has fought against reasonable environmental regulations. And the management doesn't really 'deserve' a bailout. But what's going on here is not a normal market failure; auto companies have done done surveys which show that consumers will not buy from companies in bankruptcy, and GM is going to be in chapter 7 not chapter 11, which means full liquidation. People won't buy from a company that looks like it'll go bankrupt, but a company without customers will go bankrupt. That's a feedback loop we don't want to see, because liquidation of the auto industry will probably cause a depression. Millions of retirees with pensions and health care will lose it, consumers with domestic cars will lose benefits associated with those cars, the secondary car market will be destroyed, and consumers will lose confidence about all major consumer purchase.

In other words, the auto industry, and really the entire economy, is in the midst of the same dynamics that take hold in a bank run. I just read Paul Krugman's The Return of Depression Economics, and this is the scenario that he draws out in economies system-wide. The temptation here from policy-makers is to cut the baby in half, which is the wrong strategy. Either the government should decide to defend the auto industry at all costs, and tell consumers their car purchases are safe, or the government should let the auto industry die. A bridge loan must be accompanied by a government guarantee,because without it the industry is just in limbo and the underlying confidence problem remains.

If it sounds unfair, well, tough. Liquidating the industry is a terrifying scenario, even if it was only GM, which is the closest to collapse right now. And let's be clear about what the right really means when they claim to want to allow the carmakers to fail - it's not about "letting the market rule" or "not rewarding failure", they're talking about union-busting.

All this screaming about bankrupting GM has everything to do with a conservative philosophical imperative that the free market will set all these things right, that unions are bad and they are an affront to free enterprise. It's a moral position not a rational one, and it persists despite all evidence to the contrary. It should have been thoroughly discredited by this point, but alas, some continue to cling to it. The problems being suffered by the auto companies right now are nothing more than a shock doctrine opportunity to destroy the UAW to them. They either have not come to terms with the fact that one in every twelve jobs in this country have income that is tied to the Big 3, or they simply don't care.

Or, like Alabama Senator Richard Shelby, they come from right-to-work states that would benefit from Detroit's demise. Shelby may carp about "the uncompetitive structure of [the Big Three's] manufacturing and labor force," but as Marcy Wheeler notes, his state is home to the non-union plants that make M-Class SUV, GL-Class SUV, Pilot SUV, Santa Fe SUV, plus engines for Tacoma and Tundra pick-ups and Sequoia SUVs.

Not exactly a vision in green.

This is the time to use this crisis to boldly push forward green technologies that change how we get people from point A to point B. But the US auto industry can be a part of that solution rather than an impediment to it. And in order to accomplish that we need more than oversight, but a clear vision, buttressed by a say in management decisions, of how Detroit can go forward. As Jeffrey Sachs says here, we can support the auto industry and support our own future at the same time.

This is an opportunity to embark on a major industry restructuring to position the United States to lead the world in producing cars that get 100 miles or more per gallon. This achievement is closer than many suppose, with the pathbreaking plug-in hybrid Chevy Volt set to arrive in 2010 and several new hybrid models on the way. American-made fuel-cell cars may be a large-scale reality within a decade. Success would dramatically improve energy and national security, climate security, and U.S. global competitiveness, and a public-private partnership is needed to bring about this transformation [...]

And a transformation of the type that's required for long-term sustainability of the automakers will require both the market and government. Public policies and funding are needed to support the research and development of high-performance batteries and fuel cells and, especially, to modernize the national power grid and other infrastructure. These are steps that individual auto companies (and even the industry as a whole) could not accomplish on their own.

Some want to see the industry punished for its neglect of energy and environmental realities, but we should acknowledge that the SUV era reflected poor judgment across society. Yes, the industry ignored warnings about energy insecurity and climate, but so did the public and politicians. Rather than kill the auto industry, and destroy the U.S. economy in the process, we should fix the industry with a sense of national responsibility and purpose. (We should also fix our ramshackle health-care system, which has burdened the industry and the economy with punitively high costs.) [...]

We face an unprecedented financial calamity, energy crisis and environmental threat. A vibrant, growing U.S. automobile industry should play an essential role in solving all three. The technologies that will win the day are in sight; industry has already made important advances. A partnership with government is vital and should begin this week.

Sadly, conservatives have won this round. I hope the carmakers are still alive when we have the numbers to set this right.

John Amato has more.