Think restructuring banks is hard? The US car industry’s problems are even harder to solve. Undaunted, the Obama administration seems determined to take on this formidable task.
Monday’s auto rescue package is rightly aggressive. It demands much steeper cost cuts than Rick Wagoner had been contemplating for General Motors before he was ousted as its boss this weekend. The once mighty carmaker now seems destined for bankruptcy – a fate Wagoner fiercely resisted. Smaller and weaker Chrysler has only a month to secure foreign support. In the meantime, US taxpayers will guarantee the two makers’ vehicle warrantees.
The US government is taking charge of the finances, strategy and management of two of the three domestic auto producers. It sounds like an Old Left dream, or a free market nightmare.
President Barack Obama is already wrestling with industrial policy in the financial sector. Taxpayers are underwriting deposits and providing big slugs of equity, while the authorities decide how banks and similar institutions will conduct their business. But banking is a pretty straightforward affair. Capital can be created by the stroke of a governmental pen. Once the institutions have enough of it, they can be left on their own to borrow and lend. Banking remains a viable business in the US.
Cars are another matter. The capital of a successful automotive industry is not primarily financial. It needs skilled workers, engineering know-how and efficient factories and distribution arrangements. This industrial capital cannot be rapidly replenished.
For decades, the US carmakers have been eroding their industrial capital, even when they were reporting profits. Now their workforces are too large and too old, they generally lag in technology and they have far too many dealers. The sharp recession has turned these longstanding problems into a cash flow disaster. Obama will struggle to reverse such a well entrenched decline.
While the US companies stumbled, other producers have gained steadily, both in the US and around the world. The UK car industry once faced a similar challenge. It ended up almost entirely in foreign hands. The US may be heading in the same direction.