Bailing out Detroit

Being able to manufacture and export a motor vehicle is considered, for many very good reasons, the hallmark of an effective industrial power. Not many countries can do this: India, Japan, Korea in Asia; the United States in Americas; Germany, France, Italy, the UK and Sweden in Europe. Countries that once had car-export businesses that were allowed to die don't make an encouraging list: Yugoslavia, Russia, East Germany... you get the picture. Without getting into the details of what automanufacturing means to the U.S. economy, the symbolic salience of the industry is enormous. And that's the context for the proposed bailout of Detroit.

But the thing is, it's clearly a bad deal for taxpayers. How do we know this? Because if it weren't a bad deal -- that is, a deal almost certain to lose money not just in the short but also in the long run -- then the auto industry execs would be flying their private jets to New York, Houston, or London to meet with private equity investors, not to Washington to meet with Congress. The sad but almost certain fact is that throwing wads of cash at Detroit to unblock that indusrty is unlikely to be any more effective than it is to throw wads of cash in a toilet when you want to unblock that.

The larger issue is that the U.S. auto industry, in terms of the way it is structured, the products it produces, and now the way it is attempting to save its sorry ass, is a symptom of everything that is wrong with the U.S. economy, and above all, with what you might call our economic culture. Michael Moritz, the legendary Silicon Valley investor, provides a long backgrounder on the history that led Detroit to its current sorry impasse, and puts paid to the arrant claims that this bailout is what will finally bring Detroit around to producing greener cars. Money:

No American politician – particularly any that have eyed the rustbelt’s 121 electoral college votes – have ever been able to summon up the courage to say that cheap petrol is not America’s birthright.

It has been a deadly curse. Except on rare occasions Americans have had no need to stop buying high cholesterol vehicles – pimped out vans in the 1970s, out-size SUVs in the 1980s and trucks in the 1990s. The only times that consumer excess was tempered was when petrol prices spiked following the 1973 oil shock, the fall of the Shah of Iran in 1979, the first Iraq war and this past summer. In current dollars, the price of petrol in the US has barely moved since the late 1970s.

As a nation we have lived well beyond our means and nowhere is this more apparent than at the petrol pump – where the extent of our national dissolution is on full display. The future of Detroit, the battle for the future of the US economy, the effort to wean ourselves from the teat of foreign oil and the attempt to clean up our air are all irrevocably linked. Just imagine what today’s American automobile fleet would look like if since the second world war – or even since 1980 – we had been made to pause before we filled our tanks. In 1999, for example, while we luxuriated in $1.26 for a gallon of petrol, Germans were paying $3.62 and the Japanese $3.26. It is no surprise that the Japanese, German or Korean manufacturers came to perfect the production of smaller, more fuel efficient engines and vehicles – their customers could not afford to run thirstier vehicles.

I have tried to make the case for a sizeable petrol tax to a number of politicians but have yet to encounter one who wants to discuss the idea seriously. It is just too dangerous to their future livelihood. Instead, in less time than it takes to switch on the ignition, they will say that this would be unfair to low-income Americans, or that it is the last thing the country needs in a time of recession, and then the conversation is steered to safer topics such as the virtues of carbon credits, the noxious ways of coal-powered generating plants or the pipe-dreams of hydrogen-powered cars.

The $25bn of low cost loans given recently to the auto industry to encourage the development of “greener” cars is the result of this woolly thinking. On the surface it seems laudable. Who would argue against more fuel efficient cars? But it is just a bailout in presidential clothing. The money would be far better used if it were directed towards basis research and development within our universities.

Amen. One of the first tests for Obama is whether he is willing to say no to Detroit.