Thursday, November 20, 2008

Good for GM = good for USA?

Business Times - 21 Nov 2008

A poll shows lots of Americans seem to think so - but saving the Big Three US automakers isn't so straightforward

By LEON HADAR
WASHINGTON CORRESPONDENT

THE option chosen by the Bush administration of providing emergency assistance of US$700 billion to Wall Street in the aftermath of the collapse of Lehman Brothers and other financial institutions was compared at one time to the decision to invade Afghanistan and to oust the Taleban regime and destroy the power base of Al-Qaeda that had masterminded the 9/11 terrorist attacks: a costly but right response to what was perceived to be a clear and present danger.

Indeed, with the exception of ideologues on the political left and right, most members of Congress and the media ended up approving both the war in Afghanistan and the Wall Street bailout plan. The expectation in Washington was that then defence secretary Donald Rumsfeld would help win the war by capturing and punishing Osama bin Laden and his top deputies, and that Treasury Secretary Henry Paulson would help restore calm in the financial sector buying up those 'toxic' mortgage assets.

In retrospect, it seems that in both cases, those of us who had backed those two expensive policy decisions have to admit that we were duped by US officials. At best, they didn't know what they were doing.

The leaders of the Al-Qaeda and the Taleban haven't been brought to justice. Instead, America found itself engaged in a questionable 'nation building' scheme in Afghanistan while the Bush administration transformed the war on terrorism into a messy military adventure in Mesopotamia. The terrorists have yet to be defeated, but Washington has been able to expand its power over US citizens in the national security arena.

Similarly, the Bush administration shifted the focus of a massive financial rescue plan, scrapping plans to buy up toxic mortgage assets (and then supposedly returning the profits to taxpayers) and calling for help in restoring credit outside the banking sector, as the US$700 billion Troubled Asset Relief Program (TARP) was transformed into a huge government-controlled instrument that injects capital not only into struggling banks, but also to the 'non-bank' financial sector and even to non-financial sectors of the economy.

The credit crunch continues to threaten the US and global economies, but Washington is gradually replacing Wall Street as the place where choosing the economic 'winners' and 'losers' is going to be done.

Hence, if under President George W Bush, the Imperial Presidency has tightened its control over America's national security apparatus, then under Barack Obama - a powerful president backed by an accommodating Congress - it is going to be in a position to expand government power into many sectors of the US economy.

Indeed, if the decision to go to war in Iraq demonstrated the ability of a US president to manipulate Congress and the public and force them to provide him with almost unfettered authority to use military power, the expected choice by President-elect Obama to keep the three big US automakers alive and provide government assistance to other ailing economic sectors, reflects the way the financial meltdown and a devastating recession are going to make the US economy look more 'like France' - as one critic, Republican Senator Richard Shelby of Alabama, put it.

He suggested that saving the Big Three would be just another step in the drive to introduce the instruments of industrial policy and national economic strategy into the US free market system. Congress is already starting to debate this week whether General Motors, Ford Motor and Chrysler will, indeed, be next in line for a federal bailout.

The automakers are asking for about US$25 billion in loans to help them survive until 2010 and they, together with the powerful United Auto Workers (UAW) union, are spending millions of dollars on a lobbying campaign in Washington.

The Big Three and their supporters on Capitol Hill argue that the auto industry supports one of every 10 jobs in the United States - or about 14 million jobs, and that if this industry is allowed to fail, there would be a ripple effect throughout the entire American economy.

Senator Shelby, together with other free marketers in Washington, are warning that a taxpayer bailout of Detroit's Big Three would be a terrible mistake - a form of 'corporate welfare'. It would reward the failed management and labour practices of the three companies while putting at a competitive disadvantage the more than 100,000 Americans who have jobs building cars for Nissan, BMW and other auto companies operating in the US, including in Mr Shelby's own state, Alabama.

Moreover, such a government bailout would only provide disincentives for GM, Ford and Chrysler companies to fundamentally restructure their failed labour and business practices, they argue.

In addition, there are broader reasons under free-market principles for opposing industrial policies, including bailouts of troubled industries in the name of 'national economic interests', that are favoured by France, Germany and Japan.

These policies of interfering in the free markets come in response to political pressure from interest groups and tend to hurt the overall economy by misallocating resources and eventually retarding economic growth.

And if the Wall Street bailout encouraged other industries to request government handouts, a government intervention in support of the auto industry is going to ignite demands from every weak sector of the economy that government - in the name of protecting so-called public or national interests - come to its aid, they say.

From that perspective, the government - and not the 'invisible hand' of the market - helps pick the winners (those that receive government assistance) and the losers (those that don't).

The trouble with that argument is that Washington has always played a role in helping certain sectors of the economy to grow, based on pressure from interest groups as well as on consideration of national interests during times of national emergency and war.

Hence, Washington was responsible for a booming housing market by providing tax exemptions to home owners and by granting huge subsidies - and protection from foreign competition - to farmers, steel workers, and, yes, the auto industries (the Chrysler bailout of 1979) or even foreign economies (the Mexican bailout of the 1990s).

And there is the (in)famous Military-Industrial Complex, under which the federal government contracts the manufacturing of its military arsenal to the private defence industry.

Indeed, during the 1950s and the 1960s, policymakers and lawmakers insisted that having a dominant manufacturing sector, including powerful auto and aerospace industries, was in the US national interest. Hence, president Dwight Eisenhower's defence secretary, Charlie Wilson, previously of General Motors, declared: 'What's good for America is good for General Motors, and what's good for General Motors is good for America.'

These sentiments seem to be shared even today by large segments of the American public. According to a poll conducted by Peter Hart, 78 per cent of Americans believe the US auto industry is highly or extremely important, while 90 per cent of Americans believe the death of the US auto industry would do great damage to America's economic future.

And by 55 per cent to 30 per cent, Americans favour federal loans to save it.

Free marketers would counter this evidence by suggesting that if Americans really wanted to help the American-owned auto industry, they should buy more American-made cars. The fact that so many of them prefer foreign-made cars is a clear sign that they really don't have any confidence in the Big Three.

But in any case, President-elect Obama and the Democrats in Congress believe that they would be able to count on public support for a massive bailout of these companies, especially at this time of economic downturn when a collapse of, say, General Motors could help turn the current recession into a depression.

The debate that would take place under an Obama administration would not be about whether to assist the Big Three but over what to ask from them in return. Perhaps Mr Obama and his aides should demand that the CEOs and workers in these companies take a close look at how car plants in the US owned by Nissan, BMW, Honda and others are manufacturing efficient vehicles even though they aren't beneficiaries of Washington's corporate welfare.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

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