George S. May Business Blog

Should the government nationalize the auto industry?

There has been a ton of talk about nationalizing banks in recent weeks, but when it comes to our troubled auto industry, nationalization hasn’t really been an option. Perhaps the best fix for the car makers may be a similar approach? Some veterans of the government-coordinated rescue of six freight railroads back in the 1970’s openly agreed.

Larry Kaufman, a former rail executive and consultant, argued in a railroad industry newsletter Monday that the U.S. Railway Association, the special government agency set up in 1974 to deal with bankrupt railroads, is a good model for saving the U.S. auto industry.

“Management of bankrupt rails were spectators. They could not fix their own companies,” Kaufman wrote. “Similarly, expecting auto manufacturers’ management to fix their own companies reminds one of the definitions of insanity: the same people repeatedly doing the same things but expecting different results.”

The argument by the automakers, as to why the above option isn’t a viable one for them, is their fear that consumers won’t feel comfortable buying from a bankrupt company. But Kaufman suggested that a special government agency would help the companies continue to sell cars while they reorganize because it would assure consumers that the companies and their warranties were not about to disappear.

John Barnum, a former deputy secretary of transportation who was involved with the creation of the USRA and Conrail, not only agrees, but urged that government involvement is essentially mandatory

“You can not let the people who mucked it up to this point continue to get tax dollars,” said Barnum, now an attorney at with McGuireWoods LLP.

He argues that a government agency making the decisions during a bankruptcy reorganization would work better than having the companies trying to reorganize themselves.

“That’s the only way to get the industry slimmed down to where it can make money again,” he argues. “The bankruptcy courts can’t do it alone.”

One auto analyst thinks the idea of nationalization, while not perfect, may be the best of the available options, especially since the government has already committed billions of dollars to trying to save GM and Chrysler.

“We’re paying for it anyway,” said Kevin Tynan, auto analyst with Argus Research. “Would it be that much worse than the people now at GM continuing to make the decisions?”

Still, nationalizing GM and Chrysler would hardly be foolproof, and that the comparison to Conrail may not be completely relevant. Many skeptics point out that even though Conrail was largely a success, another government-run railroad, Amtrak, continues to be an ongoing financial drain on taxpayers.

But then again, mandates for greener cars are going to be there anyway, whether or not the government takes control of the companies. With that in mind, is nationalization of GM and Chrysler the best of a number of bad choices facing the industry and federal policymakers?

Will nationalization of the automakers prove to be the best option, or should the government leave it up to those running the organizations to use the government money to pull themselves out?

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