What separates government from private industry

Obama takes step over the line that separates government from private industry
His automaker bailout plan wades into 'industrial policy,' in which government officials, not business executives or the free market, decide what products a firm makes and how it charts its future.
By Peter Wallsten and Jim Tankersley

March 31, 2009

Reporting from Washington — President Obama's plan to save failing U.S. automakers -- and make them the instruments for creating a cleaner, greener transportation system -- marked a major step across the line that traditionally separates government from private industry.

His announcement Monday of a new position on bailing out Detroit went beyond a desire to be sure tax dollars were not wasted in bailing out struggling companies. It put the Obama administration squarely in the position of adopting a so-called industrial policy, in which government officials, not business executives or the free market, decided what kinds of products a company would make and how it would chart its future.

His automotive task force concluded, for example, that the Chevy Volt, the electric car being developed by General Motors Corp., would be too expensive to survive in the marketplace. It declared that GM was still relying too much on high-margin trucks and SUVs, and that Chrysler's best hope was to merge with a foreign automaker, Fiat.

Judgments like those are usually rendered in corporate boardrooms or announced in quarterly reports. But this time they were coming directly from the White House.

The notion that it was the president, not car company executives, who would pick such a course drew immediate criticism, especially from conservatives.

"When did the president become an expert in strategic corporate management?" said Rep. Tom Price (R-Ga.), chairman of the conservative Republican Study Committee. "The federal government is famous for its mismanagement, yet this administration continues to demonstrate its certainty that Washington always knows best."

Sen. Bob Corker, a Tennessee Republican, called it a "power grab" that "should send a chill through those who believe in free enterprise."

And Rush Limbaugh declared in his daily radio broadcast, "There's always been a line, ladies and gentlemen, over which no president would cross with respect to the distinction between the public and private sectors. Obama has now crossed that line where there is no limit to government's destruction of private activity or control over it."

Rep. Jane Harman (D-Venice) defended the administration, suggesting that Detroit had had its chance. "My feeling is that we were too tolerant for too long and this is the tough medicine the taxpayer wants. And we have to reinvent our auto industry, or it will die."

Other Obama defenders pointed to historic precedents for intervening in the auto industry.

Obama's actions are "consistent with the pattern of presidents acting during economic crises," said Allan Lichtman, a professor at American University and an expert on the presidency. "And it's absolutely consistent with patterns of presidents intervening to make sure major components of the economy don't fail."

With farmers crippled by the Depression, for example, Franklin D. Roosevelt put in place limitations on agricultural production in a bid to boost farm prices. In 1971 Richard Nixon sought to roll back inflation by imposing a freeze on wages and prices. During the Reagan administration, bank regulators ousted 10 members of the board of Continental Illinois Bank of Chicago, the nation's eighth-largest bank and recipient of a federal bailout.

Nevertheless, the White House was admittedly wading into politically challenging waters Monday. Administration officials sought to downplay the notion of an Obama-led takeover of the auto industry.

"We inherited a really difficult situation, and so in that context are focused on the best options consistent with the president's goal of supporting the auto industry and being good stewards of taxpayer resources," said one senior administration official, who spoke on the condition of anonymity despite conveying official White House talking points.

The official sought to distance the auto industry assessments from the administration's environmental agenda, adding that the carmakers were "positioned to lead in helping manufacture the next generation of clean vehicles."

"The government doesn't have any interest or capacity to re-engineer these companies," the official said.

Beyond such denials, the administration's aim of reshaping the industry in what it considers a better form could be seen in documents released Monday by the White House. They summarized the conclusions of Obama's auto task force, which has spent weeks consulting with outside analysts and experts assessing the viability of plans submitted last month by GM and Chrysler.

The task force noted, for instance, that GM earns a "disproportionate share of its profits from high-margin trucks and SUVs and is thus vulnerable to energy cost-driven shifts in consumer demand." Moreover, according to the summary, "absent the successful introduction of a number of new-generation nameplates," GM is "more vulnerable" to heightened fuel-efficiency standards.

Such heightened mileage standards are being pushed by the Obama administration.

Some participants in the deliberations, speaking on the condition of anonymity because of White House restrictions on allowing people to speak freely, said the task force operated from an underlying belief that consumers would ultimately be attracted to more fuel-efficient cars despite current data showing many such cars languishing on dealer lots.

"Philosophically they blame these companies for not having produced enough responsible small vehicles," said Dan Luria, research director at the Michigan Manufacturing Technology Center, a consulting firm for automaker suppliers. "But they don't deal with the fact that the companies would have been insolvent years earlier if they had done that.

"As bad as the management of these companies has been, it's dwarfed by the complete lack of courage in U.S. energy policy, which is what created the problem in the first place."