# Made in Washington: The Auto Apocalypse **URL:** **By** Jack Shafer **Published:** July 1, 1981 --- “It is no wonder the Japanese have no desire to produce cars in our shrinking, regulated market.” DETROIT—The hottest retail item in the Motor State of Michigan these days is not the heralded General Motors “J” car, the Chrysler “K” car, or the Ford Escort/Lynx which somehow escaped alphabetical designation. It is an import, though not Japanese, and it costs only $2.50. It is the Sunday _Houston Chronicle_ with a classified section packed fat with employment and real estate listings. The old euphemisms — business slowdown, economic lull, recession—no longer cut it in Michigan. People all over the state are speaking the forbidden word, “depression.” Official unemployment, that is, government reported unemployment, tops 12.6 percent, beating the national average by more than 5 percent. In Detroit, unofficial unemployment hits 25 to 30 percent in some areas. State tax revenues are down 10 percent, while an unprecedented 14 percent of the population (some 1,275,000 Michiganders) is receiving some sort of welfare. Business bankruptcies and federal seizures of businesses for unpaid taxes are three times what they were in 1979. Real estate values are tumbling. In ever increasing numbers, with or without the aid of the _Houston Chronicle_ classifieds, Michiganders are migrating from the center of the beleaguered industrial Heartland to the thriving Sunbelt where jobs can be found. The causal link between the withering of Michigan and the plummet of the Big Three, General Motors, Ford, and Chrysler, is simple and clear. Though Michigan has other important industries—paper, pharmaceuticals, agribiz—it is basically a one industry state, and for good reason. Its natural economic advantages, the railroads and the Great Lakes, connected the fledgling auto industry to raw materials and retail markets, and for the better part of the century cars and Michigan thrived. So when Chrysler crawled to Washington in 1979 and threatened to die right on the spot if denied a long drink at the public trough, Michigan flinched. Chrysler got its federal loan guarantees, but that didn’t prevent the Big Three engine of profit from backfiring and belching out $4 billion in 1980 losses. Auto sales dived from a 1972 high of 11.4 million units to a dismal 6.6 million in 1980. An eventual 1,400 auto dealers nationwide closed up shop, some 300,000 auto workers were put on indefinite layoff, and another 200,000 supplier workers joined them. A good number of these jobs were lost in Michigan where Ford closed one plant and Chrysler five. As the primary producers were laid off an incalculable number of service workers they indirectly employed, like waitresses, teachers, and civil servants, joined the jobless. And there seemed to be no end in sight. In early 1981 Ford and Chrysler posted another $700 million in red ink, and Ford was rumored to be the next in line for handouts. But while scribes and politicians have been quick to match Michigan’s withering to the Big Three’s, a consensus villain responsible for the crackup of the Big Three has not been forthcoming—perhaps because, realistically, the blame is thick enough to spread on everybody. One could blame the United Auto Workers (UAW) and its $20 per-hour-including-fringe-benefit contracts for the crackup. One could blame the Big Three for not having the vision to foresee the coming auto apocalypse and build small, efficient cars like the Japanese. One could blame OPEC and Iran for stealing the 29.9¢ gallon and replacing in with the 39.9¢ liter. One could blame the Japanese, as most now are doing. Japanese xenophobia is even surpassing Iranian xenophobia. One industry insider likens the Japanese automakers to a carnivorous animal telling its victim to relax as it devours the victim alive. Most people today seem to agree: the predatory Japanese have destroyed at least two-thirds of the Big Three. But not so. When you turn the wreck of the American car industry upside down and read the bottom it does not say, ‘Made in Japan.’ It reads, ‘Made in Washington, D. C.’ In a masterfully written article in the November, 1980 _Harper’s_, ‘The Wreck of the Auto Industry,’ William Tucker sums it up: “The problem that has confronted Ford, General Motors, and Chrysler is that they have had to operate mainly in the American market—the last place in the world where consumers and politicians have been able to conspire among themselves to preserve the illusion of cheap gas.” According to Tucker, only gasoline prices and availability have any effect on the size car Americans buy. As the government has jiggled and jury-rigged fuel prices, so too has the American car industry had to jiggle and jury-rig its supply of large and small cars—not to meet the demands of a rational market, but to meet the whims of a distorted market created by the government. While the government’s meddling in the oil market goes back farther, Tucker begins his story of government intervention a decade ago, when domestic oil production peaked, and the Nixon administration decided to rescind restrictions on imported oil so that we could meet our growing domestic demand. Nixon had imposed wage and price controls in 1971 to cool the Vietnam inflation and buy the 1972 election, and the controls had created all kinds of shortages, including a gasoline shortage in the summer of 1973. Small car sales surged to 40 percent in response to that shortage, and all four American car makers shifted to increase their small car output. Then, with the Arab oil boycott, came the 50¢ gallon and an even greater rush to small cars. Even Volkswagen and the ‘visionary’ Japanese ran short of cars. But by the spring of 1974 the small-car panic buying had ended and both domestic and foreign car sales were down about 25 percent and Detroit found itself so loaded down with small car inventory that it resorted to a cash rebate program to clear the market. Consumers had begun to drift back to a mixture of small and big cars. Why? Hadn’t the world discovered the new rules of the oil market, that is, that the foreign oil producers were starting to act like good, capitalist, maximizers-of-profit? Most of the world had, but in America, Nixon’s 1971 price controls on oil were still in effect and Americans were paying nowhere near the world price for oil. In 1975, as those price controls were about to expire, President Ford attempted to steer the price of oil toward the world price, but an economically illiterate, Democratic-controlled Congress declared the shortage a hoax and decided to buy the 1976 election for themselves by _lowering_ the price of oil. And President Ford went along. Almost overnight the car market made a U-turn. The consumer was being fed the false information that the days of cheap oil had returned. Big car sales boomed. The factories that the Big Three had converted from big car production to small car production had to be shifted back to big car production once more. Tucker’s version of the wreck of the auto industry concludes with the toppling of the shah of Iran, when the availability of gasoline was thrown into question once again, and again Americans viewed TV images of long gas lines in California. Overnight the market switched back to small cars. Consumers learned that standing in line is a non-cash price one pays. The political winds blew the price at the pump up toward world price levels and the lines disappeared. Finally, gas prices were making sense, but the ‘wild gyrations that no manufacturer could possibly keep up \[with\]’ had done lasting damage to Ford, Chrysler, and small American Motors. Only General Motors had the resources to span the entire range of the market and have whatever vehicle the government’s dislocations of the moment might cause the public to want. Today, taxpayers keep Chrysler afloat, Ford subsidizes its domestic operations with its healthy auto profits overseas, where governments haven’t interfered with the price of fuel, and American Motors has found stability under the control of the French Government-owned Renault. But Washington’s destructive intervention in the automotive market goes even deeper than Tucker’s analysis outlines. The politicial manipulation of fuel prices did have the indirect effect of so distorting the market that the domestic car makers could not keep up. But concurrently the federal government was extending the powers of regulation it had won in the Nader mid-sixties to _directly dictate_ the exact design, construction, and operation of automobiles. Not only can the auto crisis be imprinted, ‘Made in Washington, D.C.,’ the cars themselves can, too. Like any other market, the car market is complex and subject to change. Bringing a completely new model onto the market, such as General Motors’s X-car, requires at least three years planning and tooling and about a $2 billion investment. So while Detroit was surveying the rapidly-changing market to build the sorts of cars it thought would sell, Washington was using its power to force the auto makers into risking additional capital, Detroit’s capital, in another direction—to build the sorts of cars Washington thought America _should_ want. Washington mandated: • Crash bumpers, side-door beams, and roof-crush resistance, all of which added little or nothing to motoring safety. According to Jack Solomon in the March, 1978 _Reason_, what they did add was hundreds of dollars onto the cost of a car and extra weight that played havoc with the very fuel economy Washington was supposedly so committed to. • An ignition interlock system which caused such a consumer uproar that Congress ordered it discontinued after only three months of production, but not before a vital $250 million of consumer money had been wasted. • A catalytic emissions control system which required unleaded gas. Catalytic emissions controls made Detroit be-holden to unstable Soviet and South African suppliers for the platinum, palladium, and rhodium used in their production. Unleaded gas required more petroleum to produce and new refinery construction, but other federal agencies made rules hampering new refinery construction. • Nationwide speed limits of 55 miles per hour. The new speed limit, along with rising prices for gasoline and automobiles, discouraged car use and thereby extended the life span of the average car. The future car market, a market Detroit had counted on, contracted accordingly. • Corporate Average Fuel Economy (CAFE) standards. The fleet-average economy standards the car industry must obey began to tighten up just as the oil that had been made $1 a barrel cheaper by Congress and President Ford hit the market. Ford Motor Company had to ration the limited number of V-8s CAFE standards allowed them to build. The 10 mile per gallon vans, which were exempt from CAFE standards until 1979, sold like mad in this period. Rather than tooling up a complete line of economy cars to satisfy CAFE standards—cars for which there was no market because Washington was holding down the price of fuel— Detroit companies imported foreign cars under their own labels—Colts, Fiestas, and Isuzus. But then Washington banned imports from being figured into the fleet average—a move contrary to the government’s own stated goals of conservation. The paradox Detroit faced was it had to retool, at a cost of tens of billions of dollars, to build cars the distorted market had no use for in order to satisfy the CAFE standards. • Continuing antitrust pressure. Antitrust legislation prohibited the auto makers from collaborating on safety, emission, and economy standards. Each company had to invest separately in research. Ironically, Father Washington, who for so many years made sure His children in Detroit weren’t playing footsy with one another, later tried to arrange a shotgun marriage between troubled Ford and Chrysler. Chrysler’s loan guarantee required it to seek a merger partner as a condition to the bailout—but Ford quickly rejected merger talks. The government’s destruction of money and credit has also contributed to Detroit’s slide. The average new car buyer comes back to the showroom about every three years. Each time he returns he finds a sticker price hundreds or thousands of dollars higher, due to inflation and regulation. And those still brave enough to try for auto loans have found that the refusal rate has jumped from an average of 10-15 percent to 50 percent. You can’t buy something you can’t afford. Meanwhile, the Japanese have continued to make cars from their relatively inflation-free base. To look at the headlines one would think that those clever Japanese had mounted a takeover of our car market just as our guys got winded from a little regulation. But actually, there was no takeover—the American car market collapsed. In 1978, the Japanese sold 1.4 million cars in the U.S. and American firms sold 9.3 million. In 1980, the year of the Japanese “takeover,” the Japanese sold 1.9 million cars, or a mere 500,000 more, while American car sales nosedived to 6.6 million. The headline-makers merely parlayed these numbers into percentage figures to show the Japanese market share jumping from 12 percent to 21 percent in two years. The supposed Japanese takeover is nothing more than a shell game played with percentages. But Washington threatened trade restrictions. And fearful of a trade war that might extend to the other goods—TV’s, motorcycles, electronics, steel—that Japan must sell to survive, the Japanese meekly agreed to cut car shipments to America by 7.7 percent for one year. Quickly, Canada, and then Europe, the world’s largest car market, pressed the Japanese for similar export restraint. But no one is helped by curbs on trade. Reduced Japanese imports will only drive up the costs of all new cars, foreign and domestic, and all existing used cars, instead of giving a boost to the domestic new-car market. That there are trade barriers to American products around the world is a moot issue. In the long run, foreign markets can only sell as much to us as they buy from us or their currencies will go to hell. Besides, until recently the Big Three made no car which could sell in Japan, and Detroit has traditionally exported automobile _plants_ rather than automobiles. In the lucrative European market, GM and Ford subsidiaries control 21 percent of the market, or roughly what the Japanese “takeover” share is here. Ford has been, with the UAW, one of the most insistent promoters of trade curbs. Yet the very same Ford is putting the finishing touches on a $400 million engine plant in Mexico. Those engines will be exported to America to be fitted into American-made Fords. One wonders if Ford wants to apply those trade curbs universally or just against the yellow automotive peril. Lee Iacocca, chairman of Chrysler, was among the first to pinpoint Washington as the source of the industry’s problems, but that didn’t prevent him from going to Washington for loan guarantees. And who could blame him? More than $409 billion in federal loan guarantees to ship builders, steel companies, airlines, farmers, the railroads, and New York City were already in place. With such ample precedent Chrysler would have been crazy not to get in line. Iacocca and others, like Felix ‘the Fixer’ Rohatyn, insist that federal rescues of bankrupt firms save taxpayers money, but as Murray Rothbard writes in _Inquiry_, (April 27, 1981), this is “a fascinating inversion of the obvious fact that it is the federal rescue of inefficient and insolvent corporations that will cost the taxpayer — and the consumer, because it perpetuates the inefficient use of resources — all too dear.” Iacocca and Rohatyn doublethink has it that government intervention is both the problem _and_ the solution. Their call for a “new” partnership between business, government, and labor to solve our industrial ills ignores the fact that a similar old partnership, which is still in place, is exactly what got us into trouble in the first place. In addition to fueling the $409 billion loan-guarantee gravy train, the old partnership already shapes this country’s industrial development. The Defense Department purchases half of all aircraft, televisions, and radios, one-fourth of all engineering and scientific instruments, and one-third of all electron tubes and non-ferrous forgings produced in America. The government funds 35 percent of all U.S. research and development and employs, directly and indirectly, 30 percent of all our engineers and scientists. While the old partnership benefits from this orgy of consumption, our industrial economy is steered away from producing consumer goods that could be competitive with goods from Japan and Germany where there is no such defense stance. A recent study by Pentagon critic Representative Les Aspin (D-Wis.) shows that defense plants can hire machinists—the experts who set up our factories — away from consumer industries because the military budget will always allow extra money for that purpose. The Reagan administration claims to oppose any socialistic industrial policy, but by calling for an increase in defense spending the administration is setting into motion a chain of events which will further damage our consumer industries. By directing investment to the defense industries, capital and labor will be bid away from consumer industries. And because most of the defense industries are in the Sunbelt this dislocation of our economy will scuttle any possible resurgence of the battered and abused Heartland. Perhaps the best years of the automobile industry are better seen through the rear-view mirror rather than the windshield anyway. In the last decade one out of every six jobs was auto related, but because of demographic, economic, and cultural upheavals it could be that any government move to keep auto king is doomed. Consider: • America has become a zero population growth country. The average household has fewer than three people and most households own at least two vehicles. The market is saturated. • As the size of the family drops and the expense of owning a car rises, three-car families are becoming two-car families, two-car families are becoming one-car families, and some are giving the car up altogether. • The American market demanded large, comfortable cars to travel the long distances cheap gas and subsidized highways encouraged. Costly gas and downsized cars have made those trips expensive and uncomfortable. This means that consumers are wearing out their cars at a slower rate. • Big cars cost only slightly more than small cars because the major costs in making a car are in manufacturing, not material. Many buyers can’t get excited over small, costly cars. It is no wonder the Japanese have no desire to produce cars in our shrinking, regulated market. But that hasn’t prevented Washington from staking Chrysler so it will have the capacity to build cars nobody will buy. It is assumed that General Motors needs to sell about 5,000,000 cars a year to remain profitable. Even if the Japanese weren’t in the picture that would leave only 3,000,000 or so cars at present for Ford, Chrysler, American Motors, and Volkswagen America to make a profit on. It is dubious if all the domestic makers can survive for long on that low figure. The only way out of the mess is for Washington to let Detroit compete. Instead, Lee Iacocca calls for something called “fair trade” over free trade. Fair trade, it seems, is loan guarantees like the ones that have made the ship builders, steel, airlines, farmers, and railroads captive industries of Washington. Fair trade is tariff regulations and a National Recovery Act which would recast the ad hoc old-partnership of government, business, and labor into a statist “new” partnership with the force of law and the stench of fascism. Fair trade bears the same relationship to free trade as “fair speech” does to free speech, or “fairdom of religion” does to freedom of religion. That is, none at all. Fair trade bailouts will only bring us closer to the British abyss. A Glasgow auto plant built with government subsidies has sunk three auto makers: Rootes Motors, Chrysler, and Peugeot. The political decision to make jobs and an industrial base in Glasgow has proved a poor substitute for a business decision. Taxpayers were milked to provide temporary jobs for workers and three owners went broke, plus capital was stolen away from businesses that might have thrived. The Reagan administration is prepared to reject 35 regulations, a move that could save the auto makers $1.4 billion and consumers $9.3 billion over the next five years, but that only scrapes the top of the iceberg of regulation floating in Washington, the 1,500 regulations that add $1,125 onto the average 1981-model car cost. It may be too little help, too late, to save the industry. Washington must get out of the car business altogether. Reagan has said nothing about future CAFE standards which will once again put Detroit to the financial wall and force it to retool its entire line of cars. The CAFE standards are not a business decision to meet consumer demand. They are a political decision. Washington’s energy policy is to reduce oil consumption and to make Detroit pay the price for that policy whether it drives Detroit under in the process or not. Even in Europe, where gas topped $2 a gallon in the mid-seventies, no car maker’s fleet-average exceeded 25 mpg because none of them could make any money by blindly throwing tens of billions of dollars at fuel economy. At some point the cost of retooling for greater fuel economy becomes greater than the cost of the fuel that will be saved. In the economist’s parlance this is the point of diminishing returns. We passed that point with the CAFE standards, the safety standards, and the emissions standards, long ago. Unless we want to completely destroy what car industry we have left, we should abolish all of them immediately and free Detroit to invest its capital as it sees fit. The auto apocalypse was made in Washington, D.C. It can only be unmade in Washington, D.C. □ Jack Shafer is a contributing editor of _LR_.