How to Save Detroit And $50 Billion

By Holman W. Jenkins, Jr.
Wednesday, September 10, 2008

For a sum small compared to their revenues but large in relation to their market caps, the Detroit auto makers were all over the two conventions. Their lobbyists had something to sell -- a plea for $50 billion in federal loans. Congress practically owes us this money, Ford, GM and Chrysler argue -- because Congress slammed us with new fuel mileage mandates that will cost us $100 billion to meet.

John McCain caved. The White House is in the process of caving. Barack Obama didn't need to cave. But before rushing to pass the legislation, there's an easy way to save $50 billion or whatever part of these loans wouldn't be paid back: Just repeal the fuel economy rules.

It must infuriate the auto makers how readily their critics attribute their problems to their own incompetence. Then how to explain that GM is thriving in Europe, selling small cars that get lots of miles per gallon? Buick is among the biggest selling brands in China. GM is running away with Latin America.

The Big Three's problem, to be blunt, is North America. They should have pulled out long ago.

Not only did history saddle them with a UAW labor monopoly that their foreign competitors have managed to avoid. Even that might not have been fatal had Congress not enacted its "corporate average fuel economy" rules in the 1970s.

Look at gallons consumed, miles driven, barrels imported or emissions emitted: CAFE has had no significant impact on energy consumption. Its sole practical effect has been to inflict on Detroit the need to produce, with high-cost U.S. labor, millions of small cars designed to lose money.

CAFE has to be the most perverse exercise in product regulation in industrial history. It confronted the Big Three with the choice only of whether to lose a lot of money, by matching Toyota and Honda on quality and features; or somewhat less money, by scrimping on quality and features and discounting, discounting, discounting. Rationally, they scrimped -- and still live under a reputational cloud in the eyes of sedan buyers. Yet notice that their profitable product lines, in which they invest to be truly competitive -- such as SUVs, pickups and minivans -- hold their own against the Japanese and command real loyalty among U.S. consumers.

Let us have a moment of nonflagellating realism. Toyota is as capable of poor market timing as GM or Ford -- witness its multibillion-dollar bet on the Tundra pickup. It flies in the face of human and business realities to imagine that, generation after generation, Detroit hired idiots while Toyota recruited geniuses -- though that's the usual explanation of Detroit's troubles.

Had CAFE not existed, there is no reason the Big Three today could not be competitive. As businesses do, they would have allocated capital to products capable of recovering their costs. Investments in fuel efficiency would still have taken place -- to the extent consumers valued those investments. That is, if they were profitable.

If Washington found this unsatisfactory, it could have done as the Europeans do and raised fuel taxes to coax the public to make different choices. Politically inexpedient? Well, yes, but that doesn't mean CAFE is an effective substitute. It isn't and never was.

"When exposed to the piercing light of economic analysis, the alleged benefits of more stringent CAFE standards burn away," Robert Crandall of the Brookings Institution wrote here last year. "Too bad these proposals will not be subjected to economic scrutiny before they become law."

Yup. We won't second-guess Detroit's political behavior during its 30-year fuel economy captivity, which consisted mostly of offering lip service to Congress's delusions. It might have done as Volvo, Mercedes, BMW and others did, and simply paid fines for failing to meet the targets. No doubt its friends in Congress advised that doing so would only make its political situation worse.

Having squandered the domestic auto industry's capital on millions and millions of cars that lost money, now Congress will squander the taxpayer's capital. It will lend the auto makers $50 billion to invest in fuel efficiency innovations that, by definition, won't command from car shoppers a price high enough to cover the cost of making them. Which makes it very unlikely we will get the $50 billion back.

Bottom line: Fifty billion won't turn CAFE into effective policy. It will do just fine, though, as an indicator of Washington's willingness to throw good money after bad rather than admit the folly of its own long-running handiwork.