By now you know that, aside from naming his cabinet, President-elect Barack Obama must come to terms quite quickly with what he will and will not do to help the Detroit auto industry. The choices he makes will tell us a great deal about other choices to follow.
The present Congress already has authorized a $25 billion "modernization" package for Detroit. But now the industry and the United Auto Workers union want a big chunk of financial bailout money for a generally unspecified rescue.
The UAW president declared Saturday that the industry's ills were not due to poor company management or excessive union compensation, nor to health care and retirement costs (which make the average compensation for the Detroit Big Three worker almost three times as large as that of a Toyota or Honda worker in the U.S.). These ills were, he said, solely due to recent high fuel costs. Earlier General Motors' president had stated that industry bailout money should be delivered with no strings attached, to be used as the companies wished. GM is burning cash at a rate which will leave it at zero early in 2009. Accordingly, the fear by industry analysts is that the Big Three will use any money for operating costs rather than undertaking fundamental restructuring.
Both the UAW and Big Three argue that the companies, unlike airlines and others who have done so, could not go into bankruptcy without causing chain effects throughout the entire economy. Who would buy a car from a company in bankruptcy, they argue, when there would be doubt if it later could be serviced or repaired? The answer, one guesses, is that they would be the same people who bought tickets from airlines in bankruptcy, presuming they would restructure, merge, or work themselves out.
When Obama failed to knock out Sen. Hillary Clinton early in the Democratic primary season, he shifted from a general message of national unity and reconciliation to a standard Democratic interest-group litany. He feared that, if he did not, Hillary would defeat him decisively in industrial states such as Michigan and Ohio, where the auto industry is vital. That call helped him in the presidential primaries; Clinton might well have swept him so decisively in those and other blue-collar states that she, rather than he, would have won the Democratic presidential nomination.
Those promises, though, have created residual trouble. The auto industry and UAW believe Obama owes them bigtime. Not only did he promise an industry and job rescue but he also took a position against trade liberalization that pleased Detroit. In the midst of global financial crisis, such a protectionist posture will be impossible to sustain. Already European Union and other countries are pledging to bring World Trade Organization complaints against the U.S. — and retaliations if necessary — if special subsidies are extended to the U.S. auto industry. They would be fully justified in doing so.
The present lameduck Congress is unlikely to give Detroit what it wants. The present effort is mainly to show Detroit that Democrats care about them and that outgoing President Bush and congressional Republicans do not. The real test will come in January, when Obama is president and both houses of Congress will have solid Democratic majorities. At that point the politics of the issue will become complicated.
Obama, a Columbia College and Harvard Law graduate, knows enough economics to fear the domino effects of an auto bailout — beyond the difficulties it would create with important financial and trading partners. But how can he gracefully back off his earlier promises?
One option, of course, is to let the auto companies go into bankruptcy and thus shed themselves of financial obligations they could not otherwise escape. Alternatively, Obama might appoint a special board to oversee bailout monies and assure they were spent for the right purposes. The track record in prior instances has not been good. Before taking either course, he likely would appoint a bipartisan commission to examine the matter and give him political cover.
The whole matter revives a debate of 30 years ago about "industrial policy" — that is, government financial, and other intervention to pick economic winners and losers in the economy. The original Chrysler bailout, centered on federal loan guarantees, was thought a forerunner of other such federal interventions in important sectors. But it never fully came to pass, especially after Ronald Reagan became president and shunned such approaches.
Beyond this issue, there is the matter of federal interventions in general. If the federal government is to bail out autos, with or without strings attached, what about the newspaper industry, textiles, and others headed downward? It already has taken equity positions in financial institutions. Is this to be extended to industrial corporations? Would we, intentionally or otherwise, transform our economy into one more approximating European economies where government is a major partner in many big enterprises?
Obama has yet to appoint a Treasury Secretary, Council of Economic Advisors chair, Commerce Secretary, Labor Secretary, and U.S. Trade Representative. Already economic officials in prior Democratic administrations, including former CEA member Alice Rivlin and former Treasury official Fred Bergsten, have warned strongly against employing protectionist policies to pacify Detroit and other weak industries. It was, after all, the Kennedy, Johnson, Carter, and Clinton administrations which attempted to keep global trade liberalization going — although President Clinton barely was able to gain approval of a North American Free Trade Agreement and did so only with Republican congressional votes. /p>
So big issues and small are involved in the auto rescue decision. It is only one of many awaiting Obama as he seeks ways and means to keep the economy going and get people back to work. Will he go for short-term political actions or choose more painful longer-term policy options? His financial/economic policy appointments will tell us the way he is headed. Then, within days of his inaugural, he will be called upon to make definitive decisions in a crisis environment. No one said it would be easy.