Government behind the wheel: more a matter of politics than of economics.

• Author: Couch, Jim F.
• Position: Essay

Closed [car] dealerships across the country deserve a transparent review of their termination and the right to get back in business if they were terminated on faulty grounds.

--Senator Richard Durbin (D-Ill.) (qtd. in "Congress Plans Remedy" 2009)

My Administration is committed to creating an unprecedented level of openness in Government. We will work together to ensure the public trust and establish a system of transparency, public participation, and collaboration. Openness will strengthen our democracy and promote efficiency and effectiveness in Government.

--Barack Obama (White House Press Office 2009)

The business of America is business," President Calvin Coolidge once famously opined, and no industry better represented American prowess than automobile manufacturing. (1) But that prowess has slowly eroded to the point that more than half of the cars Americans buy are "foreign" ("America's Other Auto Industry" 2008). (2) Domestic manufacturers--the so-called big three--have lost market share and face perhaps insurmountable financial troubles.

The big three's problems have several main sources, among others: high labor costs (for every United Auto Worker member working at a car manufacturer, three collect generous retirement benefits ["America's Other Auto Industry" 2008]); poor quality, whether perceived or real; inefficiency (in 1995, for example, a General Motors [GM] automobile required forty-six hours to build, whereas a Toyota required 29.4 ["America's Other Auto Industry" 2008]); and relatively low resale value. Escalating fuel costs worked against the sale of trucks and sport utility vehicles--something domestic producers did well and had hung their hats on. The financial crisis further exacerbated the problems Chrysler and GM faced to the point that both faced certain bankruptcy as 2008 came to a close. Domestic firms went from being the very symbol of American manufacturing strength to financial ruin.

Business has changed since Coolidge's day as well, with government stepping in to bail out struggling firms as never before. President George W. Bush, encouraged by President-elect Barack Obama, provided funds for GM and Chrysler from the Troubled Assets Relief Program (TARP) at the end of his term--a fund authorized by Congress to bail out banks and financial institutions. Bush defended his action by saying: "In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action" (qtd. in Isadore 2008). (3) Bush was simply keeping the firms afloat so that his successor could find a more permanent solution for the moribund manufacturers.

President Obama took responsibility for restoring the industry. In March 2009, he asserted: "Year after year, decade after decade, we've seen problems papered over and tough choices kicked down the road, even as foreign competitors outpaced us. Well, we've reached the end of that road! And we, as a nation, cannot afford to shirk responsibility any longer. Now is the time to confront our problems head-on and do what's necessary to solve them" (White House Press Office 2009). (4)

The president formed an automobile task force cochaired by Treasury secretary Tim Geithner and National Economic Council director Larry Summers, and Chrysler and GM were instructed to submit restructuring plans to the group for approval. Task force members included "the secretaries of Transportation, Commerce, Labor, Energy, the director of the Office of Management and Budget, the administrator of the Environmental Protection Agency, the director of the White House Office of Energy and Climate Change and the chair of the Council of Economic Advisors" (Shepardson and Trowbridge 2009).

Steven Rattner, an investment banker, was selected to head the team. Rattner acknowledged the complexity of the task and his team's inexperience in regard to the automobile industry, confessing, "We've learned a lot about how car dealers work, and how companies get paid when they sell a car to a dealer, and why there are a certain number of dealers more than are optimal" (qtd. in King and Stoll 2009).

The president seemed pleased with the automobile task force's progress. In a radio interview with Michael Smerconish, Obama criticized Bush's actions and praised his own efforts. "The only thing that we did was rather than just write GM and Chrysler a blank check, we said, 'You know what, if you're going to get any more taxpayer money, you've got to be accountable'" ("Obama Is Interviewed" 2009).

The task force rejected Chrysler's initial viability plan but later accepted its second plan. The company filed under Chapter 11 of the U.S. Bankruptcy Code and as a condition of the bankruptcy sought to close 789 of its 3,181 authorized dealerships. Dealerships received a list of all the firms slated for closure and a message that stated: "With regret, this letter is to inform you that on May 14, 2009, we are filing a motion in bankruptcy court rejecting the Sales and Service Agreement (s) between Chrysler Motors LLC and the dealerships listed above" (qtd. in Valdez-Dapena 2009).

Chrysler officials noted that the decision to close dealerships--in particular which franchises would be terminated--was difficult but necessary. James E. Press, vice chairman of Chrysler, stated, "This has been the most difficult business decision I have ever personally had to take. But the decision had to be made. They [sic] were gut-wrenching, but absolutely necessary for Chrysler's survival" (qtd. in Becker 2009). The exact criteria used to determine which Chrysler dealerships got the ax were not clear. Chrysler's executive vice president for North American sales, Steven Landry, asserted that the process was a function of the numbers: "The decision, though difficult, was based on a data-driven matrix that assessed a number of key metrics" (qtd. in Valdez-Dapena 2009).

Various observers suggested that dealership profitability, customer-satisfaction surveys, whether the full line of Chrysler products was offered to shoppers, and dealership saturation in a particular area contributed to the decision to close a dealership. Heritage Foundation researchers argued that reducing intrabrand competition should be a significant factor in the decision-making process: "A surplus of franchises means dealers for the same manufacturer end up competing among themselves, resulting in lower returns across the board" (Sherk and Gattuso 2009, 2).

Nevertheless, many dealers, facing the loss of their franchise, complained bitterly that their firms were profitable and that "the criteria being used to determine which dealerships survive is [sic] not clear" (qtd. in Tapscott 2009). Others suggested that politics influenced the decision.

This assertion gained plausibility when it transpired that all of the dealerships in the McLarty-Landers-Johnson chain escaped closure. Robert Johnson, one of the firm's owners, is the founder of Black Entertainment Television and is a heavy contributor to the Democratic Party. "Mack" McLarty, another owner, was an aide to former president Bill Clinton. Accusations spread that dealerships owned by individuals with ties to the Republican Party were being targeted for closure.

In addition, adding fuel to the fire, people whose chief concern was politics rather than economics provided assistance to the task force. "Senior aides advising the task force include ... former Obama campaign aides who are already hard at work reviewing a number of issues related to the restructuring of General Motors Corp. and Chrysler LLC" (Shepardson and Trowbridge 2009).

The Treasury Department responded with a statement claiming that the government had played no role in selecting the dealerships whose franchise agreement would be terminated. The "[d]epartment had no role in choosing which contracts would be dropped or in the number dropped" (qtd. in Valdez-Dapena 2009).

Nevertheless, attorney Leonard Bellavia, who represents a number of closed dealerships and has deposed senior Chrysler officials, told Reuters, "It became clear to us that Chrysler does not see the wisdom of terminating 25 percent of its dealers. It really wasn't Chrysler's decision. They [Chrysler officials] are under enormous pressure from the President's automotive task force" (qtd. in Tapscott 2009). (5)

Political Considerations

The...