Why the car companies are failing

Holman Jenkins uses the story of the Volt as a metaphor for the failure of the car companies. It is a car that sounds great in principle, but few people want to buy a plug in car that only goes for 40 miles. Government is using subsidies to encourage the company to make the car since "green" cars are all the rage. It is only with government subsidies that we can imagine a customer wanting to purchase the car. But if there were truly a demand for such cars, they wouldn't need the subsidy. Do we really want to have the government providing this sort industrial policy?

The Big Three's mistakes lie elsewhere.

The media have been terrible in explaining how the homegrown car companies landed in their present fix, when other U.S. manufacturers (Boeing, GE, Caterpillar) manage to survive and thrive in global competition. Critics beat up Detroit for building SUVs and pickups (which earn profits) and scrimping on fuel-sippers (which don't). They call for management's head (fine -- but irrelevant).

These pre-mortems miss the point. Critics might more justifiably flay the Big Three for failing long ago to seek a showdown with the UAW to break its labor monopoly. In truth, though, politicians have repeatedly intervened to prevent the crisis that would finally settle matters.

The Carter administration rushed in with loan guarantees to keep Chrysler out of bankruptcy. The Reagan administration imposed quotas on Japanese imports to prop up GM. Both parties colluded in the fuel-economy loophole that allowed the passenger "truck" boom that kept Detroit's head above water during the '90s.

Barack Obama and Nancy Pelosi now want to bail out Detroit once more, while mandating that the Big Three build "green" cars. If consumers really wanted green cars, no mandate would be necessary. Washington here is just marching Detroit deeper into an unsustainable business model, requiring ever more interventions in the future.

The Detroit Three will not bounce back until they're free to buy labor in a competitive marketplace as their rivals do. In the meantime, private money, even in bankruptcy, almost certainly will not be available to refloat GM and colleagues. Nationalization, with or without a Chapter 11 filing, is probably inevitable -- but still won't make them competitive.

In the mortgage mess, we've seen the success of the government meddling in what should be the business of private companies. Let's not extend that reach even further into the auto business.

UPDATE: The Washington Examiner has some suggestions that would make a good starting point for requirements before Washington bails out the automakers.

The basic reason why Asian automakers make money on their U.S. plants and the Big Three don’t is because the latter must pay union wages that average $60,000 annually, plus gold-pated pension and health care benefits that double that amount per worker. A 2003 study by the Center for Automotive Research found that UAW compensation is 68 percent higher than the average for the U.S. manufacturing sector. And UAW workers who “lose” their jobs go into a jobs bank that guarantees them full salaries for doing nothing as long as they don’t accept transfers to open positions in other plants. Officials won’t say how many workers are in the Jobs Bank, but a 2005 Detroit Free Press investigation estimated the bank adds about $800 million annually to Detroit’s costs. And what about executive compensation? GM’s Rick Wagoner’s total compensation for 2007, for example, was $14.4 million, or about $40,000 per day. Those are the kinds of compensation figures that should go to successful executives, not those who come hat-in-hand to Washington for a no-strings-attached bailout. To top it all off, there are more than 540,000 UAW retirees whose pensions and health care coverage far exceed that of the average American worker.

If President-elect Obama, Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi really want to help Detroit get back on its feet, they will tell the UAW it must accept wage, benefit and pension cuts that put the Big Three’s labor costs at the same level as the Asian automakers here. That won’t guarantee the survival of the Big Three, but it will let them compete on equal terms – and give them a real chance to survive.

Of course, none of this will change because it is the UAW that is pushing the Democrats to bail out the car companies and they'll be sure to block any conditions put on the bailout that address the problems that they themselves have caused the car companies. But this is one bailout that conservatives can unite in opposing.