New York Times to Buy GM?

Today's New York Times has an editorial with its take on an auto bailout. It makes what is now the obligatory points on firing management (which may or may not be a good idea, depending on the willingness of capable executives to step forward in these awful circumstances); not paying dividends to shareholders (they will have to eliminate dividends under any plausible scenario); and limiting executive pay (if the Times wants new management hired, will limiting their pay result in the best people getting hired?).

But the most interesting item of note is the Times' central point, which is that any bailout must require the auto companies to pursue a specific, aggressive plan to improve fuel efficiency. This perfectly demonstrates the Times' hubris, as well as the multi-decade effort to impose public policy objectives on the auto companies which itself has contributed to their current predicament.

For the Big Three to have any chance of survival, they must be solely focused on returning to profitability. Perhaps that does mean building the most fuel efficient cars they can, if that is what consumers want. But if it means building trucks and SUVs, so be it.

Consumer demand is fickle, and the enthusiasm earlier this year for fuel efficiency was clearly influenced by record high gas prices. The recent drop in gas prices has already led to a shift in demand toward trucks/SUVs. Misjudging this is costly. As example, Ford indicated the other day it cut truck production too much in the third quarter, adding to its losses.

For decades, the auto companies' role in the economy led to the imposition of many regulatory constraints to achieve public policy goals, the most prominent of which has been government imposed fuel efficiency standards (known as CAFE). Adding to this burden, and in a less well-known aspect of CAFE, the CAFE rules count each company's fuel efficiency for its domestic production separate from its imported production. This was done to help the UAW keep jobs in the U.S. by giving auto makers an incentive to make smaller, more fuel efficient cars in the U.S. to offset the lower fuel efficiency of truck/SUV production- since without this rule, the auto companies would have had an incentive to shift production of smaller cars overseas where they could be made more cheaply (and hence more profitably).

In other words, this rule cut into auto companies' profits, and encouraged them to substitute cheaper components in these unprofitable cars to lessen the losses imposed on them. This only exacerbated their reputation for making lower quality cars, further adding to its woes.

If the Big Three have a chance of survival for the long-run, these constraints and others need to be revised or eliminated.

It is remarkable that the Times' ideological commitment to an environmental agenda is so strong that, even with the Big Three teetering on bankruptcy, it believes that is the most important issue to push at this time. As to the Times' hubris, perhaps its controlling shareholder, the Sulzberger family, wants to make an investment in an auto company. Then they can put their money where their mouth is and run GM anyway they see fit.