When it comes to getting around, Americans love to consider the question of "what if...?"
As a result, our cars have evolved into "land yachts", our trucks have become "monster trucks", and the desire to drag our living spaces around with us has morphed into converted busses with rooms that pop out of the side, a Mini-Cooper hidden under the master bedroom floor, and self-tracking satellite dishes that fight for space on the roof with air conditioning equipment.
And for more than a few of us, "what if...?" has even extended to "what if my car...was a jet car?"
In today's improbable reality I'm here to tell you that Chrysler engineers asked that exact same question, for roughly a quarter of a century, and as a result they actually designed and deployed seven generations of cars with jet engines-and they came darn close to putting the eighth-generation design on sale to the general public.
It's a story of pocket protectors and slide rules and offices full of guys who look a bit like Drew Carey...but as we'll see in Part Two, it may also be a story of technology that couldn't be perfected "back then", but could be reborn in our own times.
The government-sponsored Car Allowance Rebate System, commonly known as "Cash for Clunkers," burned through $1 billion of funding within a week. Last night, the Senate joined the House in a decision to inject an additional $2 billion into the program before leaving for August recess. But is the overwhelmingly popular program a success or a failure? That's open to interpretation.
Senator Barabara Mikulski of Maryland was back at her old tricks this week in the Senate (where, to be sure, terrible legislation was in no short supply). Back in November when Congress was considering the auto bailout, the Senator proposed making the interest on auto loans, along with sales taxes, deductible from a household's federal income tax. The legislation is designed to save jobs at car dealerships, save consumers money, and boost sales tax revenues. The Senate voted to include the tax break in the stimulus package. In November, I pointed out:
But people aren't buying [cars] and most of them probably shouldn't be.
Certainly, they should not be buying a car if $1,500 (at the end of the year) is all that is separating them from a new Dodge Minivan. Not only does the tax break encourage early replacement of perfectly good cars (the break expires at the end of 2009), but it encourages already debt-ridden Americans to assume more debt. And it is not even clear that stoking demand for cars will be sufficient, even if higher interest rate loans appear more affordable to purchasers. Secretary Paulson has emphasized, along with the WSJ, that loan availability depends on the securitization market, which has "for all practical purposes ground to a halt."
Perhaps the shock to banking would be too great just now. I'm willing to be persuaded that intervention is necessary there. But the more I read about the auto industry, the less I am convinced.
People speak about this as if not bailing out Detroit means automobile production in America ends. That's not what failing to bailout Detroit means. Not intervening now would be these automakers would enter bankruptcy. And bankruptcy means the assets of these dinosaurs get reorganized: Someone else buys these companies, at a price the market sets, and runs them profitably, because of the price the market set.
Obviously, that change would not be painless. And I'm all for minimizing the pain where the pain is doing no good -- with workers, or others depending upon these industries. But I'm against interventions designed to minimize the pain where the pain would do good -- by radically changing how that industry is managed. The whole justification for insanely high executive compensation is, in part, so they can weather such storms. I don't see why the government should be in the business of building safety nets for the (relatively) well off.
I just don't get this amazing lack of sympathy for working people, or perhaps, the naivete at how politics actually works. Why a $700B bailout for bankers, which produce no obvious product, and not a $14B bridge loan for people that actually make automobiles? No particular reason. Oh, and the market shall provide. It's really a really remarkable sentiment in this day and age, a sort of tenured 'let them eat cake'.
... I really respect Lessig, I gave him $25 when he thought about running for Congress, and I think he's engaging in good faith here. That doesn't change the fact that I'm just kind of flabbergasted at liberals who casually throw out ideas that have really awful consequences, like a depression, and use casual discredited free market mantras as justifications while glossing over terrible terrible pain these ideas cause. And no, assistance to minimize the pain associated with economic dislocation is not part of the deal.
Do you want a depression? Because if you do, it's easy to get one. Just rail against bailing out the auto industry. Or just argue that the industry should get a blank check. Either one will bring us to a depression. Well, I shouldn't say that's definitely the case, since this is virgin territory no one really understands, I'm no expert (not that the experts know what's going on) and as a friend told me, 'You can only cry 'depression' so many times before the public gets skeptical'.
Still, this problem is really sad and really difficult. While Wall Street got a $700B bailout, the auto industry is looking for a bridge loan because auto sales just crashed in October from a run rate of around 16 million vehicles to 10 million vehicles. That's not something that can really be managed away in a short period of time, it's the equivalent of demobilizing a small war. That's overhang of factories, management, people, capital, and expertise of six million vehicles a year. The auto industry reaches into every community in America, with car dealerships, supply chains, and parts makers sustaining millions of jobs a year. Beyond that, as Wes Clark notes, there's the national security element of electrifying our armed forces, a project the auto industry is moving forward.
Yes, the auto industry has been badly managed, and labor has fought against reasonable environmental regulations. And the management doesn't really 'deserve' a bailout. But what's going on here is not a normal market failure; auto companies have done done surveys which show that consumers will not buy from companies in bankruptcy, and GM is going to be in chapter 7 not chapter 11, which means full liquidation. People won't buy from a company that looks like it'll go bankrupt, but a company without customers will go bankrupt. That's a feedback loop we don't want to see, because liquidation of the auto industry will probably cause a depression. Millions of retirees with pensions and health care will lose it, consumers with domestic cars will lose benefits associated with those cars, the secondary car market will be destroyed, and consumers will lose confidence about all major consumer purchase.
In other words, the auto industry, and really the entire economy, is in the midst of the same dynamics that take hold in a bank run. I just read Paul Krugman's The Return of Depression Economics, and this is the scenario that he draws out in economies system-wide. The temptation here from policy-makers is to cut the baby in half, which is the wrong strategy. Either the government should decide to defend the auto industry at all costs, and tell consumers their car purchases are safe, or the government should let the auto industry die. A bridge loan must be accompanied by a government guarantee,because without it the industry is just in limbo and the underlying confidence problem remains.
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