Should We Still Make Things?

Marcellus Andrews: Save the Auto Industry

SHOULD THE U.S. government save its historic automobile companies? Orthodox economic theorists would say no, in large part because orthodoxy tells us that societies do best when they rely on unregulated markets to determine what should be produced by whom. The pollsters tell us that the people say no as well, though their reasoning is more hard-nosed than the cult-based mantras of too many orthodox economists. Regular folks see no reason to save the automakers from their own folly, not least because they know that saving people from themselves is a good way to insure that bad behavior continues.

Moral hazard—wherein saving people from themselves encourages them to take more risks—is anathema to orthodox economists and regular folks alike, especially in a time when Uncle Sam is shoveling endless piles of money into banks that are both too big to fail and, apparently, too big to save. The nausea of working America at this surreal situation—where arrogant and stupid bankers must be “saved” lest their demise turn our “small” depression into a bottomless vortex—reflects the citizenry’s moral health.

Yet our collective nausea, ethically upright though it may seem, is economic suicide in the case of both autos and banks. Uncle Sam must save the automobile sector because that is how the United States will make the transition to a rational, competent, innovative “green” economy that manufactures jobs for working people as well as all kinds of cars, trucks, and other things that go.

We cannot punish the automakers without destroying the lives of millions of Americans and crippling our nation’s capacity to respond to the severe technological and environmental challenges ahead of us—long after the current crisis is over. We must revive the manufacturing sector of this country because economic realism demands that our society be able to make things as well as provide financial and medical services, grow food, and make dumb action movies. The reconstruction of the manufacturing sector will mean that our nation will create and manufacture a wide range of the world’s best machines, tools, implements, and other goods with an ever shrinking labor force that is far more productive than their competitors (in the same way that this country produces vast quantities of food with a tiny and dwindling population of farmers).

We need to be very clear about the future of the manufacturing sector of this country: reconstruction of the automakers—and, by extension, manufacturing—will not resuscitate the old blue-collar road to the middle class, whereby modestly educated people were able to achieve a solid middle class life that they could pass on to their children. Those days are gone—forever—because modestly educated labor is, and will for the foreseeable future be, far cheaper abroad.

Over the next generation, most young Americans will have to find a way, under the aegis of a renewed American social contract, into the middle class via an innovative, technology-driven service economy that stays ahead of the global competition. The portion of our population that is modestly educated must shrink, because that dwindling segment located in the manufacturing sector will have to become ever more scientifically and technically literate in a sector demanding constant innovation.

Our problem now is that the current manufacturing system is obsolete and must be replaced at a time when the private companies that manage manufacturing have put themselves in a deadly economic bind. The automakers’ costs are too high when compared to those of the global competition, in part because of the private social contract between labor and capital that has assured workers of generous health and retirement benefits.

Automakers both cultivated and served the desire of their prime customers–the American auto-buying public–whose demand for big cars in an era of cheap oil has crippled the industry now that oil prices are destined to rise over the long term. But most important, the business culture of this country has so favored short-term thinking over prudent long-term planning that big risks were regularly ignored because no one with managerial authority would be rewarded for taking up-front losses in favor of a more prosperous and stable future. This “culture of the now” among our governing business class—which, in turn, became adopted by Congress, the White House, and the state houses—stripped government of its capacity to guide the corporate sector in the name of the public good.

WHAT IS the best way to rebuild the automakers and the manufacturing sector? Through a careful set of government-managed bankruptcy proceedings whereby Uncle Sam unlocks all of the contracts that currently bind the players in the industry—shareholders, creditors, workers, suppliers, and auto dealers—into the current dysfunctional coalition that has no incentive to change.

We cannot allow the market-based mechanisms to destroy these companies and coalitions because we cannot permit millions of workers to be thrown onto the economic trash heap in the middle of this depression. The hard truth is that many who now work in the existing manufacturing system are as obsolete as their companies and will not, without help, find a good place in the new system. Countless American communities, large and small, are home to people who will not be rehired once the system is rebuilt. The U.S. government must shut down the old system and help these people cross over to new jobs and new lives in different and vibrant sectors of the economy. A market-based destruction of the auto industry would lead to a meltdown of whole sections of the country, forcing local and state governments to address challenges that are simply too big for their limited resources.

In addition, there is no reason to believe that the same myopic financial system that has brought our economy and society to its knees will invest in a new auto and manufacturing sector in this country. The United States is in the midst of an economic crisis that requires the careful reorganization of the following sectors: finance, health care, manufacturing, education, infrastructure (including roads, bridges, power generation and energy use). Private capital, once it is itself newly coherent and sober, will rationally resist placements in sectors (read: the auto industry) that have shown themselves to be reckless and with no demonstrated capacity to balance short-term and long-term needs in ways that contribute to overall stability. Once we rebuild the system, private capital will have enough confidence to place its money in manufacturing, but we can’t wait that long.

The forced bankruptcy of the automobile industry must proceed with the interests of workers as the first priority. While there may well be significant parts of the contemporary industry that can be transferred in the new system—including companies and people with the knowledge and ability to rebuild the process of car-making—we all know that huge portions of this system’s capital will have to be gently killed off as the new system emerges. Government must be able to break the coalitions that currently comprise the auto sector. We need to offer generous, but economically rational, short- and medium-term help to working people so they can be placed on new roads to work and prosperity while also severely punishing managers and investment professionals whose greed, incompetence, and, frankly, lack of patriotism has led us to the abyss.
Read the symposium introduction and contributions from Dean Baker, Jeff Madrick, and Susan Helper

Marcellus Andrews teaches economics at Barnard College.