Saving the Auto Industry: US Industrial Policy 2.0

Overview

It's now time for a new US Industrial Policy. I am calling it "Industrial Policy 2.0." If you’ve been following the news recently in the US, you’ve noticed that there is some debate afoot as to whether or not the United States auto industry should somehow be “saved” or “rescued” or “bailed-out,” or not. Well, in typically annoying academic terms, I say the answer is both “yes” and “no.” Yes, the US auto industry does need to be saved—based on a rationale I hope to demonstrate below—but, no, the auto industry that comes out of that rescue package should not resemble the one that previously got rescued.

In other words, in the language of the World Bank, it’s now time for some deep "structural adjustment." This structural adjustment should apply to both the US auto industry, as well as to the US economy as a whole. As with any type of significant change, there will be benefits and costs, winners and losers. But before we get to that, let me give some brief background, in terms of how we got into this mess.

Background

- The United Auto Workers (UAW) and auto industry management joined themselves at the hip, strategically (building those stupid “dinosaur” cars!), before painting themselves into the corner in which they now find themselves

- Consumers followed them there, believing the hype that told them they could drive gas guzzling, dinosaur cars indefinitely—even as both global markets and geological conditions were (literally and figuratively) shifting underneath their feet

- Nobody in the US seemed to be paying attention to the fact that rising demand for oil on world markets was driving up prices—thereby raising the price of everything else, but especially fuel prices

- US politicians enabled the entire process, giving incentives to consume, consume, consume like there was no tomorrow . . . and, true to form, there may now not be a tomorrow for some sectors of that industry (and by extension, some other sectors the broader US economy)

Where We are Today

Okay, so what’s done is done. Ours has been (and continues to be) a society-wide affliction, based upon the “evil twin concepts” of minimally-regulated capitalism from the top, and barely-disciplined consumerism from the bottom. The examples are now legion: housing bubbles, credit bubbles . . . you name it. Now, the party’s over. The floor is a mess. All the intoxicating drinks have lost their little bubbles, and have gone flat. Hangovers are setting in.

The socio-economic impact of world oil price spikes have once again run their bloody course. “Demand destruction” has set in. That’s just a fancy economics term for destroying business activities (in this case due primarily—but not exclusively—to the very high energy costs of 2008). Supply and demand economics then go into effect: Since many business activities were killed off, the demand for the energy to run those now-extinct businesses has been reduced, or “destroyed.” Hence, the recent drop in world oil prices.

In the meantime, Europe is now exploding. China (currently our favorite creditor in the world) is looking somewhat fragile. Mexico is spiraling down into its own version of “Mad Max” on drugs. And the US ain’t lookin’ that great either. All of this roughly repeats the same pattern we saw in the 1970s, wherein all the governments of Western Europe fell, and Africa and Latin America went into a deep debt crisis, from which they’ve still not recovered. New York City went broke. All of this came, like clockwork, on the heels of the energy crisis of the 1970s. All of this has returned, once again, like clockwork, in the first decade of the 21st century.

Prescriptions for the Future?

To what extent are we willing (and able) to incur costs today, to lay the foundation for a more stable economic future tomorrow, for our children? That is the key question, I think. That has to be weighed off against simple muddling through, for short-term expediency, which we see so much of today. In the waning days of the Bush Administration (may it burn in Hell for all the evils it has heaped upon our world), we’ve seen a lot of muddling through, recently. This is the natural by-product of an inherited legacy of de-regulation of our markets—a policy of “no policy,” if you will.

Today, we need to do the same thing with the US auto industry (and by extension, the banking and finance industry) that the IMF has done with entire countries in times past: debt for equity swaps. This is a fancy economics term for “Yeah, we’ll loan you enough money for you to stay in your house, this year; but in exchange for that, we get to have a stake in your front lawn, using it as we deem necessary. Political scientists call this “government-controlled industrial policy.” Conservatives in the US call it “socialism.” Socialists (and others on The Left) call it reigning in the excesses of free-market capitalism. I now call it “appropriate.”

The best way to avoid the social costs of major civil unrest (a la Europe, today) is to keep people working at a “livable” wage. Therefore, we need to save the auto industry—if even to save it from its former self. That newer (and lighter and “greener?”) industry needs to build reasonable cars which consume less fuel per unit of distance traveled. Full stop. Furthermore, we should not think that re-tooling the US auto industry will be pain free. The adjustment process will be a cause for some pain, as some workers in old redundant sectors are shifted to newer sectors.

Many displaced auto workers will need to be re-trained in other blue collar (and “green collar”) jobs. This is what I call WPA 2.0. We will need many of them, working in large teams, to repair / upgrade / retrofit our crumbling national infrastructure—for our new, high-performance energy efficiency standards. Investment would come from the newly reorganized banks that would be “directed” by the gov’t. to invest a small percentage of their revenues (as moderately priced loans) in local gov’t-controlled utilities and other public utilities.

This, then, forms just a part of what I would envision as a subset of a New Industrial Policy for the 21st century. The US auto industry would be a part of that new policy. What I am really advocating is significantly changing the rules of the game of American capitalism. This will happen in three time scales, and in three domains, focusing on three overlapping goals. Wresting de facto control of our economic policy from the hands of financial capital would be the short-term goal. Restoration of some power to newly reformed, and more green, industrial capital would be the mid-term goal. The gradual reformation of American society, toward a more “sustainable” and “people-oriented” growth trajectory would be the long-term goal.

Capitalism as we've known it (e.g., capitalism of the high-flying 1990s) is now over. We now have a brief window of opportunity to remake our society in a way that could be more humane, more people-oriented, as opposed to being more greed and capital accumulation-oriented. This process will take time. It will not be easy. But, it must be done.

Ready or not, our future is in our hands. Ready or not, that future started yesterday!

Dr. Blaine