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Saturday, February 28, 2009

Bailing Out the Big Three Repeats Britain’s Mistake

Uncle Sam's Support of American Auto Manufacturers is Doomed to Fail

A major reason for any kind of historical writing is to provide guidance for the present. As we read an account of the past, we may see similarities to the present and (we may hope) avoid repeating the same kinds of mistakes. In this sense historiography forms part of the collective memory of a society (which is one reason why history can be a very controversial subject). Sadly, many people lack this kind of perspective, while others who know about the past seem incapable of learning from it. Consequently, the same type of error gets repeated, often at great cost. It seems the U.S. political class, as represented by Congress and much of the commentariat, has done just that by trying to “save” the Big Three auto manufacturers. In doing this they will repeat a catastrophic series of mistakes made by British governments 30-40 years ago. It is worth recounting this sorry tale.

At one time British-owned auto manufacturers were world leaders. In 1952 the merger of Austin and Morris to form the British Motor Corporation (BMC) created the world’s fourth-largest producer of cars. By the 1960s, however, the British auto industry faced growing problems. The main firms had lost an increasing share of the market to foreign-owned competition both at home and abroad. The profitability of many firms was steadily declining. This reflected a number of problems, such as old-fashioned or low-quality products or those, like the iconic Mini, that were triumphs of design but whose production costs made them unprofitable. Also, the management of many firms was both incompetent and hindered by chaotic organization of sales and production. Most seriously, the industry was plagued by bad labor relations, with frequent strikes and disputes and rigid enforcement of job demarcation.

Faced with this, British governments intervened to encourage mergers and the takeover of the failing firms by the remaining successful ones. This led ultimately to almost all the remaining British-owned firms being brought into one firm in 1968 with the creation of British Leyland (BL) via a state-sponsored merger of BMC and Leyland Motor Company. The underlying problems were not addressed, however, and the labor relations and chaotic management in particular became even worse. In the early 1970s the Heath administration gave financial assistance despite having opposed aid to failing firms during the 1970 election. By 1975 British Leyland was insolvent and on the verge of going out of business.

To Nationalize or Not to Nationalize

At this point the British government had a choice. It could allow BL to go bankrupt, with many of its 40 plants closing and the remainder being sold off, or it could act to prevent this. The government decided to take the firm into public ownership. The idea was to invest several billion pounds in the firm, and several hundred million pounds were indeed put in. The taxpayers also took on most of the outstanding debt. This did not stop the losses, however. The firm (with various name changes) continued to decline while soaking up a steady stream of government money. Several parts of the business were sold off, and eventually the core (the old BMC) was sold by the government in 1988. It never made money and finally closed in 2005—during a general election. In other words, the British government (or rather the taxpayers) spent 23 years and a fortune trying to preserve an enterprise that went out of business anyway.

This was a classic case of trying to prevent the inevitable. The parts of the original firm that survived would almost certainly have done so in any event, as they were always profitable and would have found purchasers had BL been allowed to go bankrupt in 1975. Some might argue that at least jobs were preserved—for up to 30 years in some places. This is wrong for two reasons. First, the number of jobs actually preserved for that length of time was quite small because there was a steady loss from 1975 onward as a succession of managements made desperate efforts to keep the ship afloat.

Even more serious were the hidden costs of this bailout. All the money put into BL and its successors was capital that could have been employed profitably, creating work somewhere else. Instead it was simply wasted. The British-owned auto industry was essentially doomed by the mid-1970s. Trying to resist this did nobody any favors in the long run and simply prolonged the agony of re-adjustment to a painful and disruptive change.

Ominous Parallels

The parallels with the current position of the Big Three are not exact, but they are disturbingly close. The firms in question are also run down by a generation or more of bad management decisions, bad investments, and crippling wage, healthcare, and pension costs. It is not that auto manufacturing in America is unviable. Honda, Toyota, and others manufacture very profitably in the United States, just as Nissan does in the UK. There is nothing to suggest that giving the Big Three the massive amounts of money they want will do anything other than delay their demise and create a slow and lingering death rather than a swift one. In fact, so dire is the position of General Motors and Chrysler that even with assistance they are unlikely to survive as long as parts of British Leyland did. Meanwhile, all the money given to these firms will be money that could have been used to more effect elsewhere in the economy.

The U.S. political class is probably aware of this, even if it does not realize it will simply be repeating on a much larger scale what the British government did 30 years ago. They are motivated by two main concerns. The first is economic nationalism—the fear that if these firms and their suppliers go out of business, the United States will be weakened. The answer to this is straightforward, no matter how unpalatable it may be to nationalists: The aim of production is consumption, not national power and prestige. In the longer term policies that weaken productivity (which any diversion of capital will do) will actually reduce the power of the nation-state (if that is your main concern).

The second concern is for the many who would lose their jobs and the communities that would lose most of their employment. This comes down to an argument about whether concerns of this kind (which are serious and important) should be a matter for government action. Even if you think they should be, however, it does not follow that the right course is for Uncle Sam to support these firms financially. The example of Britain shows that the much more effective policy would be to let the firms be wound up and use the money to try to revitalize the local economy of places like Michigan. As people here in England watched the goings-on in Washington and Detroit, there was an overwhelming urge to shout, “Don’t do it!” Sadly, even if the folks in Congress had heard, I doubt they would have followed the advice of history.

  • Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.