Monday, March 30, 2009

Why "restructuring" the auto industry is bad policy

"We think we can have a successful U.S. auto industry. But it's got to be one that's realistically designed to weather this storm and to emerge -- at the other end -- much more lean, mean and competitive than it currently is," Obama said on CBS' "Face the Nation" broadcast Sunday.

Take a look at the chart below. Vehicle sales in the U.S. are now at their lowest level since 1982, not because the auto industry is "not viable," but because we are experiencing the worst economic contraction since the Great Depression. Judging from his remarks on "60 Minutes," our president doesn't seem to understand that.

If "lean and mean and competitive" are code words for shrinking the domestic auto sector--reducing both physical and human capital and the associated technology--then somebody in the White House ought to look at that graph, because it is telling a very important story. It is saying that at some point down the road when the economy improves and demand picks up, there will be far less domestic capacity to produce vehicles, which will result in more imports, an ageing vehicle stock and higher car prices.

From an Administration that purports to be for the middle class and workers and for reducing "imbalances" (Obama says this all the time) and protecting jobs at home, this is once again astounding.

I believe Obama has good instincts, but his fundamental mistake was to surround himself with advisors that adhere to paradigms that have either outlived their usefulness, or were never "viable" to begin with.

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