During the 2009 economic crisis nearly all sectors experienced reduced sales and firms teetering on the edge of, or falling into bankruptcy, but only in the banking sector did the government intervene at a larger scale than it did in the automotive industry. The systemic importance of the banking sector explains the motivations for interventions there, but why the automotive industry? I believe there are six reasons:
1) Intervention is believed to be feasible and manageable: The automotive industry is extremely concentrated at the top. Lead firms are very large and few in number and the value chain is structured in a clear, hierarchical way. As a result, government officials believe they can effectively assist the industry by propping up lead firms, and in turn continue to generate business for thousands of the upstream suppliers.
2) Political sensitivity is acute: Large bankruptcies can create political reactions in any industry or country, but large, regionally concentrated employment in the automotive sector, the iconic status of passenger vehicles, and strong labor unions made it all the more difficult for politicians to let large firms in this sector fail, especially at a time when the aggregate labor market was very weak.
3) Multiplier effects boost the rationale for automotive industry bailouts: The notion of multiplier effects was frequently evoked as a justification for bailing out automakers. While it is misleading to present these as indirect job creation, bailouts can minimize the increase in cyclical unemployment over the short term.
4) Stimulating vehicle demand is seen as an effective way to stimulate aggregate demand: Customers can alter the timing of vehicle purchases more easily than most other purchases. Purchasing a new vehicle is often a discretionary decision, usually made when the household still has a working existing vehicle. While this causes sales declines to be larger at the start of recessions (triggering calls for intervention), it also makes demand-stimulus interventions quite effective, because consumers can also move purchases forward.
5) Stimulating vehicle demand has environmental side-benefits: The high fuel prices of the summer of 2008, along with rising concern over carbon emissions, awakened politicians, once again, to the importance of reducing the consumption of fossil fuels. Policy measures have included CO2 taxes, higher fuel efficiency standards, and R&D for technology development.
6) Bailing out automakers helps to solve credit problems: In most countries, the bulk of vehicle sales are financed (90 percent in the United States). Tightening credit conditions for customers made it much harder to obtain vehicle financing than in normal circumstances. The operations of GM and Chrysler are deeply intertwined with their finance companies, and often depend on them for profits. The difficulty for these firms to obtain credit themselves made it impossible for them to provide consumer financing, and hampered their usual role in financing working capital (i.e., vehicle inventories) in dealership networks.
Because the policy objectives, justifications, and motivations for interventions and bailouts have been so numerous, and the actions taken so swift and complex, it is hard to evaluate them. No single criterion – the rescue of an individual firm, the slowing of unemployment, the repair of credit markets, the reduction of carbon emissions, or stimulation of aggregate demand – can be used as a measure of success. Clearly, policies that seek to achieve multiple objectives are laudable, but the debate has been muddied because different objectives and outcomes have been emphasized by different policymakers and with different constituencies. With so many possible goals and measures to choose from, it is easy to claim success or failure based on political expediency.
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