Maybe If the Big Three CEOs Had Driven to Washington In Their Companies' Cars ... Gabe Goldstein of Chantilly, Va., was among many readers to express outrage that the Big Three automaker CEOs flew in high-end private jets to Washington last week to ask taxpayers to subsidize them. They weren't even in the same jet, it was three separate private jets! This seems to be everything that's wrong with Detroit in a nutshell -- luxury for the CEOs combined with special-favors pleading in Washington. In 2007, Ford Motors lost $3 billion, yet Ford CEO Alan Mulally took home about $22 million. If General Motors, Ford Motors and Chrysler executives flew commercial or -- perish the thought -- drove to their destinations, and were not showered with millions, their companies would do better in the marketplace. Earning less and out of the luxo world, Detroit management would be in touch with the real world, rather than living like little kings. Detroit isn't going to recover unless automaker management cares more about the real world than about bonuses and personal luxury.
Sympathy for Detroit -- and a Fabulous Idea: The core reason the Big Three have lost so much market share in the past quarter-century is because they conceded the quality issue to Toyota, Honda and other international carmakers. In the 1980s and 1990s, a Honda Accord was so much better built than anything from Detroit, it wasn't funny. Today that has changed -- General Motors, Ford and Chrysler cars of the past five years have improved substantially in quality, to the point that many Detroit models are just as well-made as those produced by Japanese- or German-based marques. But reputation is hard to gain and easy to lose: Many consumers now take as given that Detroit builds shoddy products, and may not even test-drive the improved recent models. If you need a car, head to a General Motors, Ford or Chrysler showroom. Chances are you will be pleasantly surprised.
The hauteur of the Big Three CEOs should not cause us to lose track of several major points on which empathy for General Motors, Ford and Chrysler is justified. One is that the sterling health benefits they give workers and retirees, often mocked as an excess, saves everyone else money. Detroit spends about $1,500 more on health benefits per car sold than is spent on health care per car manufactured in the United States by Subaru, BMW and the rest. Big Three retirees are sending their medical bills to Detroit (increasingly, to a United Auto Workers trust), not to the Medicare system. This aspect of the Big Three dilemma is underappreciated, because Detroit health care spending reduces government spending, especially on Medicare.
Suppose General Motors, Ford and Chrysler went out of business. Medicare (and in some cases, Medicaid) spending would rise by billions of dollars. General Motors says it spends about $8 billion annually on health care and pensions; most of this cost would shift to taxpayers, indefinitely. In regard to pensions, failure of the Big Three would foist much of their obligations onto the federal Pension Benefit Guarantee Corporation, which in theory is an independent company supported by insurance-like payments but in practice is a pass-through mechanism for the national debt. Not only would taxpayer pension subsidies rise should the Big Three fail, we would reach the repulsive condition in which average workers who themselves have no special pension deals were being taxed to provide extra-sweet pensions for retired autoworkers.
If the Big Three are to survive, they need significant structural reform, including UAW wage concessions, cuts in retiree benefits, ouster of the little-kings management teams and enforceable restrictions on bonuses and perks for new leadership. Let some Silicon Valley entrepreneurs run the Big Three and maybe good things will happen! If structural reform can be agreed upon, then there is a case for temporary public support of the automakers. Not only because the alternative is worse -- Big Three failures would deepen the recession -- but because General Motors, Ford and Chrysler pay substantial amounts that taxpayers otherwise will be hit for. This should be factored in to the calculus of whether temporary public support is justified.
Now the fabulous idea. The fuel efficiency of Detroit products simply must go up, to reduce national dependence on Persian Gulf dictatorships and to cut greenhouse gases. Your columnist is a strong supporter of lower-horsepower, higher-mileage vehicles. But in Detroit's defense, the Corporate Average Fuel Economy standard used by the federal government to enforce mileage rules is dizzyingly complex and riddled with perverse incentives -- among other sins, the system in effect discourages General Motors and Ford from importing into the United States the high-quality, high-mileage models each builds in Europe. For years, Americans traveling in Europe have come back saying, "I rented a [Ford or GM] car in France and I loved it! Why can't I buy that car here?" Consider the Mondeo, a fabulous car Ford builds in Europe -- high-quality, fun to drive, 40 mpg with a smooth-running, clean diesel engine. Why isn't the Mondeo in U.S. showrooms? Unintended consequences of the CAFE rules are part of the reason. Here, my Brookings Institution colleague Robert Crandall summarizes his longtime opposition to CAFE, with links to details of his argument. Brookings is as liberal as the day is long; if even Brookings Institution economists don't like CAFE, there must be a problem.
So is there a grand compromise that gets rid of CAFE but preserves incentives to reduce petroleum waste? The other day on NPR, Fortune columnist Allan Sloan proposed a deceptively simple idea. Gasoline prices have fallen from $4 a gallon to nearly $2 in less than a year. Why not, he supposed, tax gasoline in such a way that it will always cost the equivalent of $4 (the amount rising in sync with inflation), and at the same time abolish CAFE standards. This is the sort of transformational insight Washington needs more of. A higher gasoline tax could be used to retire national debt or to lower Social Security taxes, which matter more to average people than income taxes. If the public knew that gasoline would always cost at least $4 per gallon, super-complicated MPG regulations would no longer be needed, because free-market forces would take care of the rest -- most buyers would choose lower-horsepower higher-mileage cars of their own free will. Those who were willing to pay the piper could purchase whatever kind of vehicle they pleased. Detroit wouldn't have to spend any time or money twisting arms in Washington, and could focus its energies on car-making rather than on regulatory lobbying.
Sloan's idea is fantastic! Of course, it would require a gifted politician to sell the idea to the public; as luck would have it, the most gifted natural politician since Ronald Reagan is about to unpack his bags in the White House. And didn't Barack Obama say something about wanting change? Tax gasoline so the price is always at least $4 a gallon, then eliminate federal mileage regulations. Detroit would be more likely to recover. The Persian Gulf oil sheiks would howl.
Sympathy for Detroit -- and a Fabulous Idea: The core reason the Big Three have lost so much market share in the past quarter-century is because they conceded the quality issue to Toyota, Honda and other international carmakers. In the 1980s and 1990s, a Honda Accord was so much better built than anything from Detroit, it wasn't funny. Today that has changed -- General Motors, Ford and Chrysler cars of the past five years have improved substantially in quality, to the point that many Detroit models are just as well-made as those produced by Japanese- or German-based marques. But reputation is hard to gain and easy to lose: Many consumers now take as given that Detroit builds shoddy products, and may not even test-drive the improved recent models. If you need a car, head to a General Motors, Ford or Chrysler showroom. Chances are you will be pleasantly surprised.
The hauteur of the Big Three CEOs should not cause us to lose track of several major points on which empathy for General Motors, Ford and Chrysler is justified. One is that the sterling health benefits they give workers and retirees, often mocked as an excess, saves everyone else money. Detroit spends about $1,500 more on health benefits per car sold than is spent on health care per car manufactured in the United States by Subaru, BMW and the rest. Big Three retirees are sending their medical bills to Detroit (increasingly, to a United Auto Workers trust), not to the Medicare system. This aspect of the Big Three dilemma is underappreciated, because Detroit health care spending reduces government spending, especially on Medicare.
Suppose General Motors, Ford and Chrysler went out of business. Medicare (and in some cases, Medicaid) spending would rise by billions of dollars. General Motors says it spends about $8 billion annually on health care and pensions; most of this cost would shift to taxpayers, indefinitely. In regard to pensions, failure of the Big Three would foist much of their obligations onto the federal Pension Benefit Guarantee Corporation, which in theory is an independent company supported by insurance-like payments but in practice is a pass-through mechanism for the national debt. Not only would taxpayer pension subsidies rise should the Big Three fail, we would reach the repulsive condition in which average workers who themselves have no special pension deals were being taxed to provide extra-sweet pensions for retired autoworkers.
If the Big Three are to survive, they need significant structural reform, including UAW wage concessions, cuts in retiree benefits, ouster of the little-kings management teams and enforceable restrictions on bonuses and perks for new leadership. Let some Silicon Valley entrepreneurs run the Big Three and maybe good things will happen! If structural reform can be agreed upon, then there is a case for temporary public support of the automakers. Not only because the alternative is worse -- Big Three failures would deepen the recession -- but because General Motors, Ford and Chrysler pay substantial amounts that taxpayers otherwise will be hit for. This should be factored in to the calculus of whether temporary public support is justified.
Now the fabulous idea. The fuel efficiency of Detroit products simply must go up, to reduce national dependence on Persian Gulf dictatorships and to cut greenhouse gases. Your columnist is a strong supporter of lower-horsepower, higher-mileage vehicles. But in Detroit's defense, the Corporate Average Fuel Economy standard used by the federal government to enforce mileage rules is dizzyingly complex and riddled with perverse incentives -- among other sins, the system in effect discourages General Motors and Ford from importing into the United States the high-quality, high-mileage models each builds in Europe. For years, Americans traveling in Europe have come back saying, "I rented a [Ford or GM] car in France and I loved it! Why can't I buy that car here?" Consider the Mondeo, a fabulous car Ford builds in Europe -- high-quality, fun to drive, 40 mpg with a smooth-running, clean diesel engine. Why isn't the Mondeo in U.S. showrooms? Unintended consequences of the CAFE rules are part of the reason. Here, my Brookings Institution colleague Robert Crandall summarizes his longtime opposition to CAFE, with links to details of his argument. Brookings is as liberal as the day is long; if even Brookings Institution economists don't like CAFE, there must be a problem.
So is there a grand compromise that gets rid of CAFE but preserves incentives to reduce petroleum waste? The other day on NPR, Fortune columnist Allan Sloan proposed a deceptively simple idea. Gasoline prices have fallen from $4 a gallon to nearly $2 in less than a year. Why not, he supposed, tax gasoline in such a way that it will always cost the equivalent of $4 (the amount rising in sync with inflation), and at the same time abolish CAFE standards. This is the sort of transformational insight Washington needs more of. A higher gasoline tax could be used to retire national debt or to lower Social Security taxes, which matter more to average people than income taxes. If the public knew that gasoline would always cost at least $4 per gallon, super-complicated MPG regulations would no longer be needed, because free-market forces would take care of the rest -- most buyers would choose lower-horsepower higher-mileage cars of their own free will. Those who were willing to pay the piper could purchase whatever kind of vehicle they pleased. Detroit wouldn't have to spend any time or money twisting arms in Washington, and could focus its energies on car-making rather than on regulatory lobbying.
Sloan's idea is fantastic! Of course, it would require a gifted politician to sell the idea to the public; as luck would have it, the most gifted natural politician since Ronald Reagan is about to unpack his bags in the White House. And didn't Barack Obama say something about wanting change? Tax gasoline so the price is always at least $4 a gallon, then eliminate federal mileage regulations. Detroit would be more likely to recover. The Persian Gulf oil sheiks would howl.