Rattner Is Still Defending Cash-for-Clunkers

A blog about business, finance, and economics.
Sept. 27 2010 11:35 AM

Rattner Is Still Defending Cash-for-Clunkers

This week, Steven Rattner is in overdrive promoting Overhaul , his account of the Obama administration's auto task force. If you're expecting a bookful of bombshells like Rahm Emanuel's widely quoted profanity toward the United Auto Workers, don't bother. Rattner's book is a thoughtful, reasonably honest, and compelling story about how government reacts to economic crisis. For a general view of the issues discussed in the book, read Jonathan Cohn's New Republic interview . I asked Rattner instead about a few areas that are unsettled.

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One is cash-for-clunkers, whereby the government paid car dealers between $3,500 and $4,500 for every less-fuel-efficient vehicle that was traded in for a newer, more-fuel-efficient one. Rattner's book makes it clear that cash-for-clunkers was inserted into a March 2009 presidential speech in an all-nighter atmosphere. A meeting with members of Congress had left economics adviser Larry Summers convinced that while the original plan did a good job of restructuring the shattered hulls of Chrysler and GM (including firing GM's CEO), it didn't do enough to stimulate consumer demand, which was needed to reverse one of the worst slumps in car-buying in history. And so they banged out some late-night language to put into the president's speech. Once the program kicked in that summer, Rattner labels it "an extraordinary success, far beyond anything we had imagined ... an all too rare example of what can happen when a smart and energetic staffer [Brian Deese] develops a good idea and runs with it."

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A year later, this seems like a difficult position to defend. Using a detailed comparison of car sales in cities that had high percentages versus low percentages of clunkers, this study determined that approximately 360,000 cars were bought in the July-August 2009 period that would not otherwise have been bought. But they were almost all pulled from the very near future; by the end of March 2010, the total purchase in high-clunker cities since July were the same as those in low-clunker cities. So, the study concludes, the "relative impact on high clunker cities was almost completely reversed in just seven months."

Rattner is generally aware of this argument. His response? Pulling sales from the future is "what stimulus is all about." He acknowledges that cars sales "are not as rosy as I would have liked, but they're well up from their depressed levels of 2008 and 2009." Hmmm—that's setting the bar pretty low. August's new car sales were not only lower than July's, they were the worst August in 28 years . I don't want to make too big a deal about cash-for-clunkers; the entire expenditure was $2.85 billion, so even if every penny was wasted, it's still a fraction of, say, what went down the AIG sinkhole. But I'd be more confident if Rattner and the administration said they were studying cash-for-clunkers and figuring out how to make such consumer stimulus more effective, instead of just issuing a blanket thumbs-up.

A second area is industrial policy. Rattner's book is an extraordinary account of how government, brandishing the stick of bankruptcy, was able in a few months to accomplish tremendous restructuring of a major American industry in ways that had eluded the private sector for half a century or more. (His material on GM's clueless management is truly priceless.) Chief among these, Rattner said, was "a labor contract that allows the car companies to be profitable, and cleaning up their balance sheets." Isn't that an argument for America to practice industrial policy in non-crisis periods? Between the financial and auto sectors, and the normal disguised industrial policy we do with military contractors, that's a huge chunk of the American economy. Couldn't we have more regular and effective results if major industries regularly had supervision, loan availability, labor arbitration, etc. from the federal government, as so many developed countries do?

Rattner was having none of this. "Our mandate was to have as light a footprint as possible," he said. "It was the opposite of Vietnam: Get in, get out." In addition, he said, "there's always a de facto industrial policy, because of tax policy. By definition, there's no such thing as not having an industrial policy." Couldn't agree more; maybe if it were explicit and more consistent, as opposed to crisis intervention, it might reassure markets and put constant pressure on management for better results. Of course, if they're already calling Obama a socialist, imagine what they'd say if an American president proposed the kind of radical management of big business those scary Canadians have .

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