Past is prologue

PAST IS PROLOGUE…. In an analysis piece about the Obama administration’s plan for the auto industry, the New York Times’ David Sanger writes, “In the past, the United States government had briefly nationalized steel makers and tried to run the railroads, with little success.”

This seems to internalize Republican talking points about the benefits of government intervention. When the feds intervene in private enterprise, the argument goes, it tends to come up short, so Obama is making a mistake trying again.

But this is based on a faulty assumption.

[H]ere’s the funny thing: any honest reading of history suggests that the federal government has quite an impressive record of rescuing institutions considered too big to fail. In addition to almost routine workouts of failed banks conducted in good and bad times by the Federal Deposit Insurance Corporation and other regulators, the list includes many large industrial companies as well. In 1971, for example, Congress extended emergency loans to failing aircraft builder Lockheed and wound up not only saving a company vital to America’s national defense and export manufacturing base, but earning a net income for the Treasury of $5.4 million in loan fees.

In 1980 it did the same for Chrysler, this time extending loan guarantees in exchange for stock warrants that, after the company returned to health and paid back its loans, yielded the government a cool $311 million in capital gains. More recently, in the aftermath of 9/11, Congress granted airlines $5 billion in direct compensation for lost business and up to $10 billion in loan guarantees, again in exchange for stock warrants. That wasn’t enough to save many individual airlines from having to undergo restructuring plans imposed by bankruptcy judges, but when Americans took to the air again they found the industry intact and offering plenty of flights. Moreover, by February 2007, airline stocks had recovered enough that the Treasury was able to sell its warrants for a net profit of $119 million, with no loans left outstanding.

More to the point, the U.S intervened — twice — to re-engineer the railroad industry, and not only produced very positive results but helped turn around the industry around.

What do Conrail’s and Woodrow Wilson’s forays into socialism tell us? For one, they contradict the doctrinaire idea that government will always and everywhere mess up if it gets hands-on control of a private industry — even if in both instances other government policies largely contributed to the crisis that government control ultimately solved. The dramatic improvements to rail technology and logistics achieved by the USRA during the Great War also belie the notion that market forces alone will always be a sufficient spur to innovation and maximum efficiency. When government takes responsibility for an ailing industry, it also gets a combination of a hands-on learning experience and a strong incentive to do the job right: with public money at stake in the industry’s success, politicians pay more attention to the ways in which their own past decisions are making its problems worse.

These are vitally important truths to keep in mind as Washington considers how best to help an ailing Detroit avoid catastrophe. The auto industry’s problems, like the railroads’, are not solely the fault of arrogant, out-of-touch executives flying to and from begging sessions on Capitol Hill in private jets; government policies have shaped the environment in which automakers must produce and sell vehicles, often for the worse. Antiquated state laws forbid Detroit from streamlining its distribution networks by closing unneeded dealerships — a hindrance that advantages foreign automakers, who entered the U.S. market later and accordingly built fewer dealerships. Similarly, foreign car companies have an edge in producing smaller, more fuel-efficient cars because they have eager domestic markets for such vehicles thanks to government policies in those countries that keep the price of gasoline high. In America, by contrast, decades of cheap-oil policies out of Washington — many wrangled at the behest of the auto industry — brought it short-term profits from gas-guzzling SUVs, but long-term ruin.

Simply throwing vast sums of money at Detroit, then, is unlikely to save the American auto industry, no matter how many strings are attached to that money. Better for the federal government to take direct, if temporary, control of U.S. automakers, as it did with the railroads. Only at that point will Washington have both the leverage to force needed management reforms as well as the incentive to change its own policies — increasing gas taxes, preempting state dealership laws, and easing Detroit’s high health care costs by, among other things, passing universal health care.