To Bail Or Not To Bail?
The question of GM’s impending collapse, and the need for a possible bail-out, is a great example of the transition from an economy of industry to an economy of innovation that features in so much of the RSA’s work.
The problem is quite simple: GM projects that it could be out of money by the end of Q1 2009. Along with Ford and Chrysler, GM has appealed to the federal government for $25 billion worth of loans to see them through their impending liquidity problem.
A portion of the problem is not GM’s fault. GM negotiated labor agreements decades ago that provide health benefits for their workers; this was all to the good, but it has resulted in the company spending over $5 billion per year providing health benefits to 1.1 million people when its own workforce is around 300,000. GM can not be blamed for failing to foresee how expensive health care would be any more than the United Auto Workers can be blamed for negotiating for the benefits.
That said, GM’s (and Ford’s and Chrysler’s) problem is that it manufactures vehicles that belong in a time when gas was cheap and the environment not considered a serious national concern, much less a major international crisis. To get a sense of how far the problem has gone, consider the question of hybrid cars.
Hybrids are clearly the future of the automotive industry. The Big Three (GM, Ford, Chrysler) make them all. So do Toyota and Honda. Price comparison for a new hybrid vehicle:
GM - $35,000
Ford - $38,000
Chrysler - $45,000
Toyota - $22,000
Honda - $23,000
More comparisons: GM pays $71 per hour in labor; Toyota pays $47. The GM Volt is coming out this year; the Toyota Prius debuted worldwide in 2001. GM Volt – 40mpg (although this under some debate). Prius – 48mpg. This, however, does not cover the entire problem. The Volt was originally to debut at $18,000, then be reduced to $10,000-12,000. Instead, GM introduced it at $35,000 and said flatly that it would never be profitable, requiring government subsidy to make it affordable.
Meanwhile, Toyota builds better hybrids for less and sells them cheaper. We can see the problem here.
This does not mean that Toyota is a paragon of production, or that GM should be left to its potentially gruesome fate. What it does mean is that any bailout to GM must be a bridge-loan to somewhere, to quote the President-elect, rather than a bridge-loan to nowhere.
What options are on the table? It is possible simply to let GM go, but the cost would be incredible. Michigan’s elected officials essentially argue that this would cause the implosion of the US auto-industry, with the result that somewhere between 2.5 and 4 million Americans would lose their jobs (and their health insurance).
Taking Erin Burnett’s figure that $1 billion in infrastructure-projects stimulus creates 20,000 new jobs, it would take $200 billion in stimulus to replace those lost, almost ten times what the industry is asking. More than that, the shock to the economy of losing 4 million incomes at once would likely be more than it could bear.
It’s time to let the innovators have a go. Venture capital firms have backed the technical geniuses behind hybrids for some time, and the advances in technology have been profound – Hybrid Technologies of Nevada, for example, collaborated with Mullen Motors, an LA-based performance-car company, to release a 200mpg carbon-fiber hybrid in 2006. It retailed for $125,000, impractical as a consumer car but not unreasonable considering that it is based on new technologies and did not benefit from being produced under an economy of scale.
It does not take a successful venture-capitalist to see the opportunity here. There is a wealth of innovative spirit and intellectual capital in the hybrid design industry – it is, in a sense, all design and no production capacity. Detroit, meanwhile, has been all production capacity and no design. Under normal economic conditions it might not be unreasonable to let the market take its course – were this to have happened in 1999, innovators could probably have purchased the Detroit-production-capacity they needed with venture capital. There is, however, doubt as to whether this impending collapse would have happened under normal economic conditions. In any case, with the credit market being what it is, raising capital to buy production capacity during or after the fall of GM is simply not an option.
The only actor with the clout to arrange this is the federal government, which is certainly in a position to say that any bailout saving the Big Three should be predicated on letting people with new ideas have a crack at making an unprofitable industry profitable.
This would likely mean drastic reductions in the Detroit-based workforce – innovators are not known for wanting to work in huge bureaucracies – but the preservation of some of the workforce surely beats letting the whole thing come crashing down, or preserving it without plan for the future only to let it crash at some undetermined time in the future.
All of this is centered around one unpleasant fact: the American auto industry, as we know, is dead. It is no longer competitive and shows no signs of getting there. It is time to give people with new ideas a chance to create a new American auto industry – leaner, faster, better. The bailout does not have to be a bailout at all – it can become an Innovation Fund, using federal dollars to support the transition from industry to innovation.
No commentsOffice of the Innovator General?
Apologies for the technical difficulties on this page; I didn’t get to do the updates that I’d hoped to leading up to the election, but the essential question I posed last time remains: how will the next president manage the ongoing transition of the United States from an economy of industry to an economy of innovation?
Mark Goyder, the founder of Tomorrow’s Company, asked me recently under what office in the Obama Administration ‘innovation’ would fall. I was stumped, and frankly still am (any help from readers would be greatly appreciated). As nearly as I can tell from knowledgeable sources, innovation would be spread across several government departments – Commerce (and the Patent Office contained therein), Education, Small Business Administration, among others – with no one particularly charged with developing and executing a policy for incubating new ideas.
I wouldn’t expect the Obama Administration to tackle this problem head on and immediately – the building is, after all, on fire, and it’ll take a while to work through a long list of problems before ‘innovation’ gets its turn. Yet if President-elect Obama leaves office in four or eight years without establishing a framework for identifying, nurturing, and promoting innovative ideas in business and civil society, America will have lost a tremendous opportunity.
So the question remains: how can the new Administration manage and encourage innovation?
No commentsHow Will The Next President Stop You From Driving Your BMW?
The RSA is a nonpartisan organization; our Fellows include professionals of all political persuasions. That said, it would be reductive to think that the RSA has no relationship with government and politics at all. No institution has the power to change as much about society as quickly as central government.
One of the chief questions the RSA explores is how the relationship between citizen and state shapes our ability to achieve social outcomes. Implicit in this (and made explicit in the past by RSA Global Chief Executive Matthew Taylor) is that the relationship as it stands is not working - effectively, citizens expect government to solve a series of social problems (and now crises) but are unwilling to offer it the tools needed to do so because their use would infringe on a preferred way of life.
My favorite examples of this comes, again, from Matthew, who tells a story of being on a BBC Radio 4 call-in political talk show and fielding a call about global warming, which featured this question: “what will the government do to stop me from driving my BMW?”
As absurd as it is, this question demonstrates beautifully the fault in the current citizen/government relationship, and the failure of the classic party approach to politics in the U.S. If we dismiss the admittedly hilarious lack of personal agency implied in the question - that the woman is helpless before some maniacal, obsessive need to drive her BMW - and expand this to a broader need, the question clarifies. We have a social need for people to stop driving their BMW’s - the economic and security costs of importing foreign oil, the consequences to the environment, etc.
The classic American conservative answer to the question, ‘how will we get people to stop driving their BMWs’ would be a simple - we won’t. The market, through price of oil and the cost of cleaning up the environment, will make that choice for us. We saw a shadow of that effect this year, in fact - fewer people are driving and they are driving less, and hybrid cars are more common. With the price of oil collapsing, however, it’s hard to predict where this trend will go.
A traditional American liberal response would be to restrict the driving of BMWs through statute, and we’ve seen a version of this as well in the form of mileage standards. Yet they (and their ilk) are still driven.
The challenge of government in the 21st century is to move away from these extremes, but not, oddly enough, by taking the radical middle. Government’s challenge is to create the conditions under which citizens can make good decisions. This is not as simple as it sounds, because it involves moving away from the very economic and social design that delivered the Western world into the modern era - the industrial model.
I’ll be writing on what this means for US politics during the run up to and after the Presidential election.
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Frank A. Spring
National Director
RSA-United States
