Turn Detroit Into Cape Canaveral

On Monday, General Motors spooked the entire economics community, financial and academic, when it reported that it was hemorraging $2 billion a month and might be forced to declare bankruptcy.  If their cash reserves dip below $10 billion, the company said it will be unable to pay its health care obligations or even finance its dealerships.  Shares in General Motors (GM) plummeted to $2.92 the next day, their lowest price since 1946.  As an employer of over one million people, a failure would have a horrendous domino effect on the economy.  Not surprisingly, it’s bad when an American corporation with the word “General” in its name goes under.

Although General Motors already received a $25 billion bailout from the government in September, the reality of the situation is that only further state intervention will save the troubled giant.  Democratic congressional leaders are pushing the Bush Administration to give additional funds to GM, but they have been unable to gain ground on the issue.  Barack Obama also fought for the additional bailout and pressured President Bush to that effect during their White House rendezvous.  Without altering course, the Bush Administration plans to let GM fail, much like Lehman Brothers.  It does not yet appear as though Obama has enough of a bully pulpit to substantially influence Treasury policy.  Congressional Republicans also refuse to support a bailout, on the grounds that bankruptcy arbitration will be positive for the flailing company.

The Bush Administration and Congressional Republicans are not likely to change their minds on the issue and General Motors will most likely declare bankruptcy in the next quarter or two.  In my opinion, GM deserves to fail, as their painful lack of innovation and horrendous corporate management structure is a death-knell for any company.  While Congressional Democrats are trying to get in good with Detroit, saving GM in its current incarnation would only stagnate American business culture.  It is very unfortunate that GM’s poor business practice will result in many thousands of layoffs, but it would be better to tear the band-aid off now and spare taxpayers the bill of future bailouts.  It should be noted that a large portion of GM’s fiscal instabilities have come from their extremely expensive health care plan.  As Thomas Friedman already noted in his most recent opinion column in the New York Times, “spare me”.  Universal health care probably would have saved them, but GM has previously denied support for any such measure.  In other words, they asked for it.

While certainly dire economic news, this situation also presents a major opportunity for the incoming Obama Administration.  If and when GM goes into bankruptcy, only then should the federal government present a bailout to them.  This bailout, far from the unsupervised check-cutting of Treasury Secretary Henry Paulson, should come with strict and unconditional terms that require GM to manufacture environmentally friendly and energy efficient automobiles within a reasonable amount of time. Speaker of the House Nancy Pelosi, that damn San Francisco liberal, has already voiced her intentions to make those environmental reforms a stringest component to any automotive bailout. GM should be forced to cut its production of all fuel inefficient trucks and SUVs, whose sales have tanked anyway, in order to form the manufacturing base for Obama’s energy infrastructure revolution.  GM would be highly subsidized by the government and would bear little risk in the structured venture.

John F. Kennedy gave NASA ten years to get to the moon, Mr. Obama should give GM five.  The technology is already here, GM simply has to implement it within their production structure.  Indeed, GM, through their Chevrolet line, already plans to introduce an electric car, the Volt, by 2010.  If cars like the Volt and Prius-like hybrids were to fill GM’s production schedule in post-bankruptcy restructuring, an American car company could finally compete with the foreign operations like ‘recession-proof’ Honda, which just opened another fuel-efficient automobile manufacturing plant in Canada.  Once the immediate effects of the recession have ceased and consumers start spending again, albeit at probably lower levels than before, GM will have access to a huge market share.  It could revitalize Detroit and, if the other members of the Big Three followed suit and were equally successful, the entire Rust Belt.  Ford Motors already produces the fuel-efficient hybrid Prius, but continues to engage in poor investments with trucks and SUVs.

Cass Sunstein, a Harvard Law professor and former colleague of Mr. Obama at the University of Chicago, recently published a book with behavioral economist Richard Thaler called Nudge.  The book advocates that the government engage in a form of soft coercion with both the public and private spheres in order to gently shape behavior in a positive and progressive fashion.  For instance, they recommend legislation that auto-enrolls employees in a retirement account with the option to drop out at any time.  Because retirement accounts are unquestionably good investments, coercing people, by shifting the default option to the economically beneficial side, can have tremendously positive effects.  As long as the option to drop out is ubiquitous, there is no real mark left on our freedom of choice.  So, why do I bring this up?

Mr. Obama, already aware of the theories behind Nudge and the book itself, could use GM as a significant test case for soft coercion.  By giving GM the option to either collapse or take loans from the government in bankruptcy court with serious fuel efficiency conditions, the US could softly coerce the first stage of a multi-pronged energy revolution in the United States.  Consumers, instead of being given the default choice of gas guzzlers, would have the initial opportunity to purchase “green” automobiles.  If we were able to cut our dependency on foreign oil through the measure, in conjunction with infrastructural innovations like wind, solar and geothermal technologies to produce carbon-free electricity, there would be a chain reaction in the global political economy.  Indeed, there is a perfect storm brewing.

With the international economy is a tailspin, global demand for oil has drastically fallen off.  China and the United States have driven down consumption and forced OPEC to reduce production by as many as 1 million barrels per day in each member country. Oil prices on commodities markets plummeted to a 22-month low yesterday, hitting $52 per barrel. OPEC states, many of which are hostile to the United States and its allies, have specific requirements for the price of oil in order to balance their national budgets.  According to PF Consulting, a wholly owned subsidiary of Deutsche Bank, this fiscal year Venezuela needs oil to be priced at $97 per barrel in order to balance its budget.  Iran requires a price of $58, Saudi Arabia $62, Kuwait $48 and United Arab Emirates $51.  For the next fiscal year, Russia requires the price of oil to stay above $70 per barrel.  With oil at $52, Hugo Chavez, Vladmir Putin and Mahmoud Ahmadinejad are freaking out. Each rely on massive social programs, financed with petro-dollars, to maintain their hold on power.  Putin and fake-Russian President Medvedev are so worried that they told European Union member countries at an economic summit this week that Russia and Europe, together, “speak with one voice.”  Russia and its stock market have been rocked by the financial crisis, occasionally suspending trading to keep volatility down. Ahmedinejad has already written Mr. Obama to express congratulatory sentiments.  Every state with a large stake in oil prices has gotten quite friendly all of a sudden.  Mr. Obama will never need preconditions for diplomatic meetings with any of these leaders, as long as he keeps the price of oil down.  That price sanction, issued at the consumer level, would speak for itself.

Economic interconnectedness is a double-edged sword.  OPEC may have sway over us when oil prices are high, but man do we have sway over them when oil prices are low.  Oligarchies only work when you can fund them.  Considering our immense opportunity to permanently diminish OPEC’s resource returns with a restructuring of Detroit, globalization is looking pretty good right now.  In one fell swoop, the Obama Administration could improve environmental conditions by creating a profitable, competitive and job-producing green manufacturing base, while simultaneously draining the capital from our self-declared enemies and increasing our national security.  That’s a win-win-win-win situation.

Let’s turn Detroit into Cape Canaveral.  The Green Revolution might blow up on the launch pad a few times, but eventually, it’ll get us to the moon.

15 thoughts on “Turn Detroit Into Cape Canaveral”

  1. when i read the title i thought you intended to suggest we retool the auto industry for futher space exploration.

    but i like where you went with this instead.

  2. An additional note:

    Keeping oil prices low might harm our short-term environmental policy by allowing people to drive frequently again, but maintaining the status quo a little longer is worth it if Obama can win the scenario above.

  3. While I’m as happy as anyone about the fact that we got to the moon, I’m not sure that’s a model of innovation we want to repeat for green energy. After the sprint to the moon, the government let the space technology they developed sit around unused and resisted private space initiative because of national security implications. The green revolution needs to look like the computer revolution: spurred but not dominated by government investment, built by private enterprise and open source contributors, constant innovation, interdisciplinary, and so on.

  4. I’m nearly certain that Sunstein and Thaler wouldn’t consider offering GM more bailout money an example of a nudge regardless of the conditions imposed. As you point out, GM would have a choice. The American taxpayer/citizen, however, does not; he/she will have to pay if the company accepts the deal. That’s not to say that it shouldn’t be done, just that it shouldn’t be called a nudge.

    As for the “strict and unconditional terms” to be imposed on GM, what would happen if the company doesn’t live up to them or comes close to bankruptcy again? I suspect the government would loosen the restrictions or bail them out. In fact, I predict GM will ask for more money within 10 years of being bailed out. I wish there was a betting market for this…

    Imposing top-down commands (i.e. you must have better fuel efficiency) is an ineffective method to achieve your goals. A better, simpler, and less-distortionary method to reduce fossil fuel consumption is a Pigovian gas tax. For a primer, see here:


  5. Re: Walther

    If reference to your NASA argument, I’m not sure that’s a reason not to do it. If the technology went to waste it was because NASA didn’t have to compete for a market share. If GM garnered a comparative advantage with the technology, Chrysler and Ford would have to copy them. That would not be difficult, considering both are already ahead of GM in the production of green cars.

    Don’t forget that the internet was invented by the government. How is that instance a different kind of “spurring on” than a conditional bailout? Also, the public cannot do anything about the auto industry besides make consumer choices. I guarantee that good fuel efficiency is high on the list of requirements of anyone buying a car right now (who is not too wealthy to not care). GM would benefit in the private marketplace, while the government spares massive job loss in the short term. Your position seems to suggest that “the government is good until it is bad”; it needs to “spur innovation” while remaining hands off so as to not compromise the marketplace. Do you have a position on the bailout itself?

    Re: Chubby Funster

    In my proposal, the soft coercion would come from the governmental interference into consumer choice, not the bailout. By introducing GM back into the market with a comparative advantage, it would give an incentive for Americans to purchase better cars. I agree this probably wouldn’t be soft coercion either, except that the government already subsidizes a shift to green cars by granting tax incentives. It’s basically a payoff – I’m not sure anymore that is soft coercion haha. I’ll look into it.

    If the company failed, despite the Obama Administration’s best efforts, then the US government would recoup as much of the assets as possible and move onto Plan B. At least it would save massive short term job loss from destabilizing the already fragile economy.

    As for the Pigovian gas tax, the problem is that an increase in fuel costs right now would grind America to a halt. The only way a lot of people are getting by right now is by saving that extra 30 bucks at the pump. In order for a gas tax to be effective, like it was in Denmark after the oil embargo of the 1970’s, it has to be so substantial that people simply stop driving. That would be disastrous for the economy right now. You also say that top-to-bottom commands are not the way to go about the green revolution, but Denmark initially achieved its Pigovian tax by restricting driving on Sundays. That would be authoritarian by American standards, but it worked. A gas tax increase itself is a top-to-bottom solution. I don’t see how the role of the state can be or should be minimalized here.

  6. In order for a gas tax to be effective, like it was in Denmark after the oil embargo of the 1970’s, it has to be so substantial that people simply stop driving.

    I suppose it depends on what definition of “effective” you’re using, but this statement is not accurate. When gas prices rise, people find ways to lower gas consumption. This summer, when gas approached 4 dollars a gallon, we saw a spate of stories of how people responded to gas prices including switching to smaller cars, switching to mass transit, or in the case of the sometimes insufferable and sometimes funny P. Diddy,
    switching to first class from your private jet.

    There are lots of other ways people can reduce carbon consumption without switching to a new car that I’ve left out here. A Pigovian tax encourages the reduction of carbon consumption but lets the individual use his/her localized knowledge to decide how best to achieve that goal. In contrast, the government commands a certain path, regardless of how much sense that path makes. This is what I meant when I said the tax wasn’t top-down.

    As for the concern about the cost grinding the economy to a halt, I think your fears are misplaced. The tax would be widely announced and would come in slowly (starting at 10 cents a year) in order to give consumers time to respond and change their behavior. Also, tax incidence theory suggests that some of the burden of the tax will fall on producers (ie Saudi Arabians, etc.) so US consumers won’t feel the full effect of it. If you still don’t want the tax to come online now, then it could just wait for a couple years til the financial mess blows over.

    I don’t see a convincing case for why GM should be the stimulus for lowering gas consumption. Consider the following:
    1) There already are a ton of options if you want to buy a fuel-efficient car.
    2) GM won’t be able to mass produce any significant amount of fuel-efficient cars for at least a couple of years. Did you know that the Toyota Prius sold something like 15,000 vehicles it’s first year? Not exactly putting a huge dent in gas consumption.

    There might be a case for saving GM, but it shouldn’t be conflated with the goal of trying to lower carbon consumption. There is a better way to do this.

  7. Re: Chubby Funster

    Let me clarify my position on a gas tax, because I wasn’t clear. A gas tax is an absolutely necessary component of any green revolution strategy. Denmark is proof of its success – they are 100% energy independent and a huge exporter of green technologies. A gas tax, however, simply cannot happen now. While high prices earlier this year certainly drove consumer innovation up, it would devastate auto manufacturers and commuters in the current financial crisis. Margins are slim – the government should take no steps right now to make them thinner. You contend that my fears are unwarranted, but I would say you are underestimated the scope of the current financial crisis. I’m not 100% on my argument, but I don’t see any net benefit from imposing a gas tax now as opposed to down the road.

    In terms of bailing out GM with green conditions on the loan, I continue to read very convincing literature about why an auto manufacturing bailout is absolutely intrinsic to preventing further economic fallout. The ripple effect of losing millions of jobs cannot be understated. Bush, in a surprise move, has even come out in favor of a smaller, $25 billion, stimulus package. So if bailing GM out is a necessary evil, why not have the government take the reins and enforce strict production standards and a timeline for higher fuel efficiency?


    You argue that there are tons of options for buying a fuel efficient car, but the waiting list for a Prius is 6 months long. Why shouldn’t GM contribute to the competition in the market? It would drive down production prices and increase manufacturing.

    In sum, you argue that a GM bailout should not be “conflated with the goal of trying to lower carbon consumption.” I fail to see any net negative for introducing green loan conditions, particularly if the bailout is impending regardless.

  8. Like I said, you could put the tax in a couple years from now when the financial mess blows over. Or you could put the tax in now and have a corresponding decrease in payroll taxes (with greater tax cuts for low income people as a gas tax is regressive). GM won’t be putting a significant number of fuel-efficient cars online for at least a few years, so the timing/cost issue doesn’t really make any sense.

    So if bailing GM out is a necessary evil, why not have the government take the reins and enforce strict production standards and a timeline for higher fuel efficiency?

    This is really the key question. My first answer would be: why so? I have a couple of other reasons, too. The first is that fuel efficiency is not the environmental goal–lower carbon consumption is. A carbon tax is a more efficient way to do to this.

    The second reason is that GM’s number one goal after bankruptcy is to return to financial solvency. As you pointed out, GM is hemorrhaging $2 million per month. If the government does bail GM out, it should leave it to GM’s executives to figure out what the best strategy is from their knowledge of the market rather than a government mandate. The best strategy might be to produce Prius-style cars, but then again, maybe it won’t. You, me, and Nancy Pelosi have no idea what the best strategy is. Letting the market decide (in combination with a gas tax) is a smarter way to achieve both your goals.

    Finally, GM will have to make more fuel efficient cars anyways as all auto manufacturers will be facing tougher restrictions through a recent change in CAFE standards as automakers must have a fleetwide gas mileage of 35 mpg by 2020.

    You argue that there are tons of options for buying a fuel efficient car, but the waiting list for a Prius is 6 months long. Why shouldn’t GM contribute to the competition in the market? It would drive down production prices and increase manufacturing.

    A common misconception is that only cars with fuel efficiency approaching that of a Prius will help reduce oil consumption. While I am excited about the future of Hybrid cars, this is way off. In fact, getting a number of people to switch form 10 mpg cars to 20 mpg cars would do more good than getting the same number of people to switch from 20 mpg cars to 50 mpg cars. A gas tax would encourage both and do so way more quickly than getting GM to make fuel-efficient cars.

  9. We need to invest in transitioning our transportation industry to electric drive as quickly as possible.If GM survives and produces 70 thousand Chevy Volts in 2010-11 that is a drop in the bucket of the 15 million vehicles produced globally. One million PHEV’s by 2015 doesn’t help much either since global vehicle production is expected to double to around 2 billion by 2018-2020.

    There is at present almost no capacity to manufacture the lithium ion batteries needed for plug-in electric cars and renewable energy storage in the US. We need to be spending billions on both R & D AND investing in building the lithium-ion battery factories next door to where the electric drive vehicles are produced.

    Detroit has failed to accurately assess the changes in transportation manufacturing needed to remain competitive. Government help should be contingent on accelerated transitioning to electric drive vehicles powered by electricity produced from renewable sources, and integrating electric vehicles with the grid. For more information on electric grid infrastructure development options to recharge electric vehicles see http://EVtransPortal.com/cerip.html

  10. Re: Chubby Funster

    The difference in timing the taxation is not for the benefit of GM’s production schedule. The point is that higher gas prices will continue to drive automobile sales down and, more importantly, decrease profit margins for the rest of American businesses that require fuel (taxi companies, airlines, car rental services, shipping companies, etc).

    Also, how is your suggested gas tax regressive? Isn’t it a blanket tax? Lower and higher income families would still see the same increased price at the pump. What am I missing here? I support the eventual tax regardless, but I fail to see how it would be regressive.

    You ask, why include any green standards in the bailout? Fuel efficiency is certainly a part of reducing carbon emissions and it would send a massive signal to American industry that the times have actually changed. Rhetoric would be replaced with action. There is also no additional risk involved, but a significant increase in the chance of an increased return. If GM’s future green car line was hugely successful, both the US government would recoup their investment and GM would thrive as a private company once again. Also, developing hybrid technology through government financed R&D is an essential step towards securing non-carbon transportation. That is a huge part of decreasing carbon output, not just increasing fuel efficiency.

    “If the government does bail GM out, it should leave it to GM’s executives to figure out what the best strategy is from their knowledge of the market rather than a government mandate.”

    GM’s corporate structure, as it exists today, would be definitely wiped out by the government intervention (at least, one would demand that outcome). All of those incompetent, non-innovating executives would be sent home. While Nancy Pelosi and myself are not automobile production strategists, I fail to see why we couldn’t hire people who are. There are, in fact, successful car companies that have competent corporate leadership. I’m sure that $25-50 billion could buy us a win in Detroit. Clearly, GM, as it currently stands, has no idea what the “market” should tell them to do.

    Finally, I agree that a 10mpg to 20 mpg shift would accomplish the same thing as a 20-30, but why is that a reason not to do both?

    Re: Peter

    Thanks for the info. Good stuff.

  11. I didn’t explain the timing issue very well. What I meant was that with a gas tax could be enacted now to come into effect 2 or more years into the future. Consumers would not be hit by the price increase in the next two years but would know that it’s coming and could change their purchasing behavior (i.e. making sure their next car is fuel efficient or that their next home is closer to work). In this form the tax would not have any negative effect on consumers or automakers in the present and encourage consumers and producers to think about how to be more fuel-efficient in the future.

    The tax is regressive as a percentage of income, all other things being equal. If you make 100 grand a year and I make 10 grand and we both drive the same number of miles then the tax will take a lot more, percentage-wise, of my income than it will of yours. Obviously, this assumes the same number of miles driven and same fuel efficiency.

    A tax is a much simpler way to signal to the American auto industry that times have changed. I don’t know what you mean when you say there is no risk involved in bailing out GM. No risk for GM, maybe, but taxpayers will have to continue to support the company in the future. If it’s too big to fail now, what makes you think the government will just let it fail in the future?

    Also, developing hybrid technology through government financed R&D is an essential step towards securing non-carbon transportation. That is a huge part of decreasing carbon output, not just increasing fuel efficiency.

    If the government is going to subsidize R&D, shouldn’t this be public knowledge rather than the knowledge of just one company? Toyota, Honda, and a variety of other companies have proven much more capable of producing fuel-efficient cars at low cost—why give research money to the one company that has consistently proven it has no idea what it’s doing in this area?

    While Nancy Pelosi and myself are not automobile production strategists, I fail to see why we couldn’t hire people who are.

    She and her pals did pretty well with Fannie Mae and Freddie Mac. But seriously, my point is that if you get smart auto executives and then allow politicians to tell them how to run their company then you do get a Fannie Mae/Freddie Mac situation.

    Finally, I agree that a 10mpg to 20 mpg shift would accomplish the same thing as a 20-30, but why is that a reason not to do both?

    Switching from 10 mpg to 20 mpg is actually way better than switching from 20 mpg to 30 mpg. In fact, it saves way more gas than switching from 20 mpg to 50 mpg. I’m not saying not to do both, I’m just saying don’t subsidize GM to achieve this goal. I’ll elaborate this in a new post shortly.

  12. I did not realize that the tax plan you were advocating was an income tax. How would you keep track of miles driven? It seems like the tax requires an unmanageable enforcement mechanism or the honor system. Denmark didn’t use an income tax, they simply heavily taxed the purchase of gasoline. In terms of fairness and reducing carbon output, that just seems to make more sense to me.

    When I said that there was “no risk”, what I meant was: if the government is bailing GM out regardless, there is no additional risk in forcing green standards on their production. There is certainly risk in bailing out the company, but I was addressing the issue as if the Bush or Obama Administration was planning on doing so anyway.

    You’re right in pointing out that government subsidized R&D should be available to the entire marketplace. I don’t know how quite to resolve that. I would assume that the best way would be to grant all American auto manufacturers access to the technology. That might create a conflict of interest, however, within GM. Shareholders would need to be stripped of their equity stakes prior to the bailout, so that the government would not be held to the standards of fiduciary responsibility. If they were, they would be unable to share the technology developments across the market, as it would diminish the competitiveness of GM.

    Fair enough about Pelosi and the Macs. In my defense, I was never suggesting that politicians had the final say, but rather that they would hire someone who would. Whether or not that is tenable, I suppose, remains to be seen.

    I’d love to see some stats about the 10/20 mpg vs. 20/30 mpg shift. If that’s true, it would certainly make carbon reductions easier to accomplish.

  13. The gas-tax I’m talking about is like the one in Denmark (i.e. per gallon). It is regressive insofar as it hurts lower income people more than higher income as it would amount to a greater percentage of their earnings. It’s not like the tax actually takes your income into account, it just ends up taking a bigger percentage of your income if you’re poor (assuming the same gas usage).

    10/20 mpg vs. 20/30 mpg comparison would be more clear if we went by gallons per mile (as they do in Europe) rather than miles per gallon. There’s an easy way to show that the first shift would save more gas than the second. Consider how much gas each of the cars would need in order to travel 1000 miles.

    10 mpg car: 100 gallons
    20 mpg car: 50 gallons
    30 mpg car: 33.3 gallons
    50 mpg car: 20 gallons

    As you can see, switching from a 10 mpg car to 20 mpg car would save 50 gallons. Switching from a 20 mpg car to a 50 mpg car would save 30 gallons. The first switch saves more fuel, which means lower emissions.

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