Ford's Rough Ride

In a couple of ways, government policies helped Ford's managers and unions make the mistakes they did.

By Clive Crook
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In most of Europe, when a big traditional manufacturer—a major employer, regarded within living memory as a national industrial champion—announces that it will close several factories and cut a quarter of its workforce, there is an outcry. If the announcement were to come just days before the country's leader made his big annual speech on the state of the nation, its timing would be seen as a gift to the political opposition and as an effort to force some kind of expensive, ill-judged policy in response. Such a response, in fact, would usually follow.

On Monday, Ford announced that it was closing seven plants and cutting its payroll by up to 30,000. It was no more than a middle-size story on the day, and its political implications are likely to be minimal. No connection has been drawn, so far as I know, with George W. Bush's forthcoming State of the Union message. There is no demand, no presumption, that he must address the issue—or even mention it, in fact. The president is quite likely to say, with little fear of the derision that would greet him in such circumstances in Europe, that the economy is actually performing well—as if Ford had never made its announcement. Democrats will challenge the claim that the economy is strong, of course ("What about stagnant living standards?" they will say); but they are not going to demand that Ford must be helped, as their counterparts in Europe would have done without hesitation.

Well, by most standards, especially in comparison with Europe, the American economy is performing well—and the reaction, or lack of it, to Ford's announcement shows why. In some ways, Ford, the archetypal American enterprise, is like a little corner of Europe, with intransigent unions keeping pay and benefits higher than the market will stand, undermining competitiveness, and, in the end, destroying jobs. And voters know this. They know that Ford's problems are almost entirely self-inflicted, with the blame shared over the relevant time span between the unions and their ultimately unaffordable demands and the managers who acceded to them. So this is not a matter for the government.

Yes, like General Motors (which announced big cuts of its own just weeks ago), Ford is saddled with heavy "legacy costs" in the form of health and pension liabilities owed to past and present workers. But who agreed to those terms in the first place? And who demanded them of the company? Those costs have not been inflicted on the firm by globalization or some other sinister outside player, but by its own managers and by the workers' representatives. It cannot be anybody else's responsibility, least of all that of taxpayers at large, to spare the company and its people the consequences of those decisions. But, as I say, Americans know that.

Legacy costs, Americans also understand, are only one cause of Ford's difficulty. As the company more or less admits, it has made plenty of other mistakes as well, such as building cars that people do not especially want to buy. "We've grown too conservative, too hierarchical, too resistant to change and new ideas; and frankly, true accountability has not been our strong suit," investors were told this week by Mark Fields, the executive who devised the company's North American restructuring plan.

American consumers are aware, as well, that the cars they prefer to those made by Ford or GM are mostly built by American workers in the United States in domestic plants operated by Toyota and other successful, supposedly foreign, companies. Lately, Ford has been beaten not by foreign competition but by the domestic kind.

America's un-European willingness to accept the market test—that firms must beat the competition or go under—has a lot to do with the remarkable vitality of its economy. And yet, I did just say that Ford's problems are almost entirely self-inflicted.

In a couple of ways, even if at the margin, the unintended result of government policy was to help Ford's managers and unions make the mistakes they did—and to worsen the consequences of those errors, once made. Coincidentally, the policies in question are more than likely going to be featured in the State of the Union address. But you can bet that the right connection will not be made and that no conclusions (or else the wrong conclusions) for policy will be drawn.

The first such policy is health care. The president might have hoped by now to be enjoying the popularity of his recent Medicare reform, a $400 billion or so net outlay over the next 10 years. That is pretty costly, especially when you recall the state of the public finances. If you are going to spend that kind of public money, you at least expect some political credit. But the administration has achieved the improbable feat of shoveling tons of new cash at a program while leaving the beneficiaries, reeling from the complexity of the new procedures, feeling cheated and furious. The president has some explaining to do. He will try to persuade the country that, once some trifling initial difficulties have been overcome, the program will be a great success.

So health care will most likely come up. But the underlying problem in health care policy is both much deeper and much broader than this. The bald fact is that America spends way more per person on health care than any other country; in return, it gets results that are mixed in terms of medical outcomes and downright bad in terms of access. The country is spending enormous sums to less than excellent effect.

What has this got to do with Ford? The firm's crippling legacy costs arose to begin with as a consequence of the country's basic approach to health care. America's tax system favors the bundling of health and other benefits along with pay: This gives firms a subsidy for taking on risky future liabilities, and workers a subsidy for locking themselves into employment at a particular enterprise. If the liabilities, years later, drive the company out of business—an entirely possible outcome for Ford and GM—the consequences for the sacked workers are doubly painful: no job, and quite possibly no health insurance or pension either.

Meanwhile, pushing consumers of health care and the people who pay for it (in the first instance, anyway) into separate corners removes a main pressure for cost efficiency from the wider health care system. The business and financial implications of this syndrome are truly vast. When it comes to health policy, contrary to what the president will say, the state of the union is not good.

Another issue likely to come up is energy security. Under this heading expect rhetorical support, and maybe a promise of new material support, for alternative energy sources, conservation, and domestic oil exploration and production. Bits of this might well be good policy—but more than likely the president will miss the main point, just as his new energy bill missed it.

If you want to take energy security seriously, you cannot start by deploring the cost of gas at the pump, the standard refrain of both parties on the subject. Maintaining or even increasing the high price of gas at the pump is an essential part of any effective long-term policy on energy—though, of course, it would be much better if the high price were the result of a gas tax that could flow back to Americans in the form of lower taxes of other kinds, and not the result of monopoly pricing that further enriches the rulers of Saudi Arabia.

In any event, on economic security grounds and on environmental grounds, America needs to consume less petroleum; therefore, petroleum has to be made expensive and kept expensive. It is that simple.

What has this to do with Ford? One of the company's more notable failures has been in the market for lighter and/or hybrid-powered vehicles (though it is hurrying now to put this right). Revenues at both Ford and GM depended on strong demand for SUVs, vehicles designed for a different era, energywise. Unlike their Japanese-owned rivals, Toyota in particular, neither company anticipated the high cost of gas and the growing demand for more-fuel-efficient cars.

And that was their fault, of course. But it would have helped if the government—this administration or any of its predecessors—had set forth a meaningful long-term plan for energy security, based on a frank admission that after-tax gas prices would need to rise, and substantially, and then stay high. Left in avoidable uncertainty about this, Ford and GM had to place a bet. They bet wrong. Now they, and their workers, are paying for it.

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