Guest Post: Too Many Cooks Spoil the Broth
This post was written by my friend Ilya Podolyako, an occasional contributor here and a third-year student (though not for much longer!) at the Yale Law School.
In the last couple of days, a few disparate news pieces attracted my interest. First, as I mentioned in my last post on industrial policy, an accelerating, worldwide decrease in consumer disposable incomes is beginning to percolate through the manufacturing sector. As a result, Caterpillar, DuPont, and United Technologies posted double-digit declines in sales. Second, reports surfaced that Fiat, Obama’s designated buyer for Chrysler LLC, was looking instead to purchase GM’s Opel division. Third, Sen. Diane Feinstein (D-CA) introduced a “cash-for-clunkers” bill that would provide a credit of up to $4500 toward the price of a fuel-efficient car for individuals or government-owned fleet operators who turn in a low-mpg “clunker.”
What do all these data points have to do with each other? In my mind, they highlight the need for a structured approach to the U.S. industrial sector. The current policies are completely random and occasionally conflicting, which is not surprising, considering that they are coming from different branches of government who seem reluctant to talk to each other. For example, the purpose of the Feinstein bill seems to be to support the auto industry by lowering the effective price of a new car while also boosting aggregate fuel efficiency. Presumably, these measures would help the ailing American automakers transition from making money on SUVs to making money on hybrids. Yet in this context, a government-financed sale of Chrysler to Fiat doesn’t make very much sense. If we are concerned about rescuing the American auto industry from the bottom up, why are we selling bits and pieces of this industry to foreign companies? Imagine if GM, Chrysler, and Ford did not exist – in this world, the government could surely find a better way of spending money to combat climate change than paying Toyota and Honda to chop 20% off the sale price of a new car. Just because other countries do it, doesn’t mean we should too.
Similarly, I am skeptical of the wisdom of helping Fiat buy Chrysler when it is also looking to buy Opel. Sergio Marchionne, Fiat’s CEO, has openly stated that the company is looking to increase production volume and break into the US market. In fact, given Chrysler’s persistent inability to make cars profitably (it has failed to do so as a standalone public company, a unit of DaimlerChrysler, and a privately owned entity), the company’s main value lies in its U.S. dealer network. At the same time, Opel has designed several automobiles that had potential with the American public, such as the Sky roadster and Aura sedan. According to GM’s 10K, Opel (which accounts for the bulk of the company’s European operations) actually had an increase in both total sales and revenue from 2006 to 2007. Basically, the unit seems to be quite capable of functioning as a stand-alone, profitable car company. There is thus a real possibility that if Fiat goes through with both the Chrysler and Opel acquisitions, it will end up selling Opels at Chrysler dealerships across America, where they would compete with whatever remains of the GM portfolio.
I don’t support protectionist trade policies, but having US government pay for the above outcome seems like an unambiguously bad idea for everyone on this side of the Atlantic. To avoid the wealth transfer, Treasury could condition the promised $6 billion loan on Fiat’s promise to avoid certain follow-on acquisitions, but then the Chrysler sale may fall through altogether, exposing the fundamental instability of the Obama auto rescue plan.
Finally, an L-shaped recovery likely means more trouble ahead for industrial manufacturers outside of the automotive sector like GE or Caterpillar. If either of these companies nears insolvency, I doubt that the Obama administration would jump on the opportunity to help sell off their operations piecemeal to foreign buyers. In the optimal case, the government would just let the companies go through bankruptcy using private sector financing and scrutinize the purchasers of any sensitive assets for national security risk using an existing apparatus. Considering that the auto bailout plan hasn’t required GM or Chrysler to preserve any particular number of jobs, I just don’t see why the Two-Out-of-the-Ex-Big-Three should be treated any differently.
The Administration’s current approach to the industrial sector appears even more haphazard than its efforts to right the financial markets. The government is spending non-negligible amounts of money on dubious short-term goals that conflict with both the acute needs of certain demographics (auto workers, residents of Michigan) and the long-term interests of the American taxpayers. Federal agencies timidly pick up the tab for corporate liabilities like pensions without proportional claims to their profits. This behavior is the exact opposite of the type of directed industrial policy I suggested could be worth trying.
By Ilya Podolyako