Detroit Gets Their Bailout (kind of)

The bailout is contingent upon the Big 3 fixing themselves in three months: "The new deal threatens only to call back existing loans if the companies fail to demonstrate viability by March 31."

Anybody think there is a nonzero probability of this happening? Wanna bet? These companies haven't been viable in 25 years, as McArdle reminds us in her excellent look back at the last 50 years of the Detroit auto industry.

This statement by Bush sums up my feelings on the matter:

"Under ordinary economic circumstances, I would say this is the price that failed companies must pay, and I would not favor intervening to prevent the auto makers from going out of business," the president said. "But these are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action."

He's buying time, punting to Obama, and hoping to do so in a way that doesn't cost the government much money, if any at all. I think this is probably the correct action given the present economic circumstances, and by that I'm referring to workers in Detroit but also those outside of Detroit: to the thousands of small businesses and hundreds of thousands of workers throughout the country who depends on orders from Detroit to stay alive.

Blaming the Victims?

Help us, pleeeeez. While clearly we wouldn't be here without the financial crisis, the fact that we are here offers an opportunity. Naomi Klein calls this the shock doctrine: use a crisis to force change.

"The executives said the need for help stemmed from the current financial turmoil, and not from poor management."

Chris Dodd said "the executives’ discomfort for coming to Congress to ask for money was “only exceeded by the fact that they are seeking treatment for wounds that are to a large extent self-inflicted. No one can say they didn’t see this coming. These companies have been struggling for years. I support action as a way to minimize the possibility of a destabilizing event in the economy.”

Dodd is, to some extent, blaming the victim. The Execs are, to some extent, shirking responsibility.

What say you? It's your money. To help think about the impact of saying no, here's a good discussion of the jobs linked to the auto industry (thanks Elizabeth).

And by the way, don't expect the Volt to save GM's hide.

The Great Betrayal?

Thomas Friedman writes in today's New York Times about Toyota NA's efforts to block higher fuel efficiency standards now being considered in Congress. Friedman joins environmental groups in dismay that "Toyota, which pioneered the industry-leading, 50-miles-per-gallon Prius hybrid, has joined with the Big Three U.S. automakers in lobbying against the tougher mileage standards in the Senate version of the draft energy bill."

He also thinks he knows why: "Now why would Toyota, which has used the Prius to brand itself as the greenest car company, pull such a stunt? Is it because Toyota wants to slow down innovation in Detroit on more energy efficient vehicles, which Toyota already dominates, while also keeping mileage room to build giant pickup trucks, like the Toyota Tundra, at the gas-guzzler end of the U.S. market?"

One thing I find odd about this is Friedman's implicit assumption that better fuel efficiency by Detroit requires legislated standards, yet simultaneous recognition that Toyota has developed hybrids that beat existing standards. Ergo, innovation has occurred in the absence of and seems to be independent of legislation.

The bigger problem is that Friedman is wrong about why Toyota is lobbying against the proposed regulations. He seems to suggest that Toyota is engaged in activity intended to discourage American producers from "innovating" in order to retain their advantage (using existing technology, e.g., hybrids, is not innovating, by the way, but that's beside the point).

There seems a much simpler and less conspiratorial explanation: Toyota is trying to protect the return on the assets it holds in the United States. Friedman seems to assume that Toyota is one company with a unified balance sheet. That's probably not the right way to look at it. Toyota NA is a subsidiary of Toyota Motor, and as such has a distinct set of productive assets based in the U.S.. Toyota NA's assets (i.e., the plants located in the US) are engaged in the production of cars and light trucks and SUVs. By my simple calculations, each year Toyota produces 361,000 trucks and SUVs in its American plants against 367,000 Camrys and Corollas. About one-third of the Camrys are 6 cylinder, and very few are hybrids. This distribution of production is sufficient to meet current standards: lower-mileage trucks are offset by higher-mileage cars; on average they meet fleet standards.

Sharply increasing fuel efficiency standards will force Toyota to reduce the relative importance of trucks/SUVs to smaller cars in its US production. This is costly. Either some assets now engaged in truck production must be redeployed (at positive cost) or Toyota must make new investments in small car production in the US. Both are costly for Toyota. All else being equal, therefore, Toyota's American assets will earn a higher return without the regulation than with the proposed regulation.

In short, Toyota NA joins Detroit in opposition to the higher proposed standards because its US production structure looks a lot like "American" producers when it comes to the distribution of its productive assets across car and truck production. This is hardly surprising, given that all auto producers have built what Americans have wanted to buy (large inefficient SUVs). Consequently, Toyota's regulatory preferences are quite similar to Detroit's.

Finally, is Toyota's position treasonous to the environmental cause it supposedly champions? Friedman seems to think so (the title, after all, is Et tu, Toyota?). Yet, although the Prius may be green, Toyota did not produce it because it was green. Toyota built the Prius because it believed many people would buy it, and as a consequence it could make money. It turns out they were right. Hence, the factors that now motivate Toyota's resistance to proposed fuel economy regulations are the very ones that led them to produce the Prius. This is not treason; it's business.

Car Imports, Gas Prices, and Counter-productive Protectionism

Americans are again buying lots of imported cars. The graphic on the right suggests that Americans care more about the fuel efficiency of the cars they buy when gas prices rise (gee, who would have thought?).

Two additional facts of interest. One, the first figure (which excludes imports from Canada and Mexico) reflects increased imports from Japan and South Korea. Two, the cars that Japan and Korea produce and export from home are smaller and more fuel efficient (think Prius) than the cars and trucks they produce inside the U.S.

Conclusion? Americans have responded to higher gas prices by shifting away from large gas guzzling cars and trucks that happen to be produced in the U.S. toward small and more fuel efficient cars that happen to be produced overseas. The solution for American auto producers would thus seem to be, shift production to the small fuel efficient cars that Americans now want to buy.

Yet, in a non sequitur of massive proportions, "Senator Carl Levin, a Michigan Democrat, is...vexed," because this trade imbalance reflects a lack of market openness in Asia. "Citing Census Bureau data and his staff’s calculations, Mr. Levin argues that “immense barriers” erected by Japan and South Korea keep down vehicle exports from the United States to those countries. Car, truck and parts imports from Japan, for example, reached $60.2 billion last year, he said, while similar exports to Japan from the United States were a tiny $2.3 billion. He put the Korean imbalance at $12.4 billion versus $751 million."

Does anybody who does not represent Michigan in Congress really think that the desire of Japanese consumers to drive Hummers, Suburbans, and Excursions through Tokyo is being foiled by trade barriers? That is, do we really expect Asian consumers to behave differently than Americans when it comes to buying cars? And with Americans less eager to buy large gas guzzling American cars, wouldn't one think that Asians would also be less eager?

The broader concern is the following: Levin and other congressional trade skeptics focus on this imbalance in auto trade as reason to oppose the FTA with So. Korea. Yet, free trade with Korea (and Japan, for that matter) would, by reducing the cost of more fuel efficient cars, promote environmental objectives that Democrats favor. Restricting this trade would thus increase emissions relative to what is possible. Hence, more trade is also good for the environment (though to be sure one would have to compare the extra emissions generated by shipping from Asia to the emissions saved via the shift to more fuel efficient cars).

Restricting trade in autos, therefore, is not only bad trade policy, it is also bad environmental policy given the Dems' stated environmental goals.