The bailout of the auto industry was “throwing bad money after a bad cause,” television talk show host Larry Kudlow warned in National Review. Kudlow’s opinion was shared by conservative economists and politicians. And Tea Party types continue to cite the auto bailout as an example of the Obama administration’s unwarranted largesse toward big business and big labor. But if you compare how the Obama administration handled General Motors and Chrysler with how European leaders dealt with a similar crisis in their industry, Obama’s approach looks tougher and more realistic. That’s at least the verdict of a very surprising analysis in the Financial Times.
Both the American and the European auto industries have suffered for at least a decade – well preceding the current recession – from excess capacity. They were capable of making more cars than customers were able to purchase. At the beginning of this year, North American firms were using slightly less than 60 percent of their capacity, and European firms slightly less than 70 percent. That has meant continual downward pressure on costs and profits that assumed crisis proportions last year, but that will, in the absence of significant change in the structure of the industry, persist even after this recession ends.
The global market is no help at all. China has begun producing its own cars – and suffers from its problems of overcapacity. If anything, the problems will become more severe as China and South Korea’s auto industries grow, and as other Asian or Latin American countries enter the fray. So what is to be done?
Of course, one solution is for American or European manufacturers simply to opt out of the business, but as my colleague Jon Cohn wrote earlier. that would be a disastrous course of action that would affect over well a million jobs – not just in auto plants -- in each region. It would also further undermine America’s balance of trade. The country’s large trade deficits, sustained by Asian purchases to Treasury bills, is likely to prove unsustainable in the next decade. The U.S. can’t allow its ability to produce tradeable goods to erode still further.
The administration’s strategy, worked by out by Stephen Rattner and Ron Bloom, was to offer a bailout but to demand in exchange significant downsizing to limit the amount of excess capacity in the industry. At the same time, to help ensure that what remains of the American industry is viable, the administration has subsidized the production of a new generation of electric and hybrid cars. The Financial Times analysis doesn’t deal with the kind of cars that will be produced, but it does contrast the American and European approach to overcapacity.
The Obama administration insisted on radical downsizing. GM and Chrysler, along with Ford, closed two dozen plants in North America. As a result, excess capacity in North America is about 30 percent and is expected to decline sharply over the next four years. European administrations have also bailed out their firms, but unlike their American counterparts, they did not insist on downsizing. In France, the Sarkozy administration demanded as a condition of subsidies to Renault and Peugeot that the countries not close any plants. The German and Italian governments echoed this approach. As a result not one car plant has been closed in Europe. Overcapacity in Europe remains about where it was at the beginning of the year.
The European approach is more humane, but it might merely postpone a day of reckoning for the continent’s auto companies. The American approach, which the Financial Times generously characterizes as “tough love,” has, in comparison, lengthened the unemployment lines, but in the long run could save the American auto industry and preserve over a million jobs.