Obama and the Government Can Save Detroit, If History Is Any Indicator

Administration bailouts have worked wonders before for rail and air industries and even a car maker.

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It has become an axiom of American politics that government will always and everywhere screw up if it gets hands-on control of a private industry. In reporting President Obama's big plans for General Motors and Chrysler on Tuesday, even the nominally liberal and learned New York Times bought into the notion, observing that, "In the past, the United States government had briefly nationalized steel makers and tried to run the railroads, with little success."

Perhaps many of us simply need to believe this about government to preserve our worldview. Yet even the most casual follower of the business pages, let alone of American economic history, should know better. The federal government has a staggeringly successful record in not only bailing out industries deemed to be too big to fail, but in making money doing so.

During the Nixon administration, Congress extended emergency loans to failing aircraft builder Lockheed. The investment not only saved a company vital to America's national defense and export manufacturing base but earned the Treasury $5.4 million in interest.

In 1980, Jimmy Carter did the same for Chrysler and the taxpayers, this time extending loan guarantees in exchange for stock warrants. After the company returned to health and paid back its loans, government pocketed a cool $311 million.

In the aftermath of 9/11, George W. Bush and Congress granted airlines $5 billion in direct compensation for lost business and up to $10 billion in loan guarantees, again in exchange for stock warrants. By February 2007, airline stocks had recovered enough that the Treasury was able to sell its warrants for a net profit of $119 million, with no loans left outstanding.

Then there is the example most directly analogous to today's failing Detroit. This mother of all bailouts started in 1970 with what was at the time the largest corporate bankruptcy in history—one that involved lurid accounts of call girls and Swiss bank accounts, and that quickly spread to competitors, threatening to take down the entire industry, along with its suppliers, many of its customers, and the nation's credit markets. It ended with government bureaucrats taking over the company and managing it with such skill that when the Reagan administration decided to re-privatize it, the deal was the largest public offering in Wall Street history.

That's the story of the old Penn Central Railroad, and it provides very useful lessons for dealing with Detroit. The Penn Central was a colossus, controlling most of the rail network throughout what was becoming America's Rust Bowl. It was also a colossal mess beset by mounting competition from trucks, prevented by government regulation from raising rates high enough to cover costs, forced to run money-losing passenger trains, and stymied by politically entrenched unions that extracted two days' pay for half a day's work.

Yet here was a company way too big to fail, and even more central to the economy than General Motors because without it, carmakers could not get the steel and other materials they need to make an automobile. The solution: a new government entity called Consolidated Rail Corp., or Conrail for short, whose government bureaucrats took over the Penn Central and other railroads in the Northeast and Midwest in the mid-1970s and earned such profits that they later became the subject of case studies on corporate turnarounds.

How did they do it? A funny thing happened once politicians in Washington found themselves owning a gigantic, money-losing enterprise. They started listening hard to what Conrail and other railways were saying about the public policies that were driving the industry toward ruin. This is a key to understanding why the Conrail "bailout" worked so well, and to why the bailout of Detroit could as well.

Politicians could grandstand all they wanted about the sordid legacies of Penn Central's management, but now they had ownership of the problem and had to concentrate and all on the ways in which public policy contributed to it. In short order, Congress passed, and Jimmy Carter signed, legislation that brought substantial regulatory relief to the rail industry, while also relieving it of responsibility for money-losing passenger trains. Soon, the entire freight rail industry, after decades of decline, began a renaissance of profitability, luring more and more gas-guzzling trucks off the highways and rebuilding, at its own expense, much of the nation's once-abandoned rail infrastructure. Call it industrial policy if you like, call it socialism, but it was a typically American solution that worked spectacularly.

Phillip Longman, a senior fellow at the New America Foundation, is the author, with Ray Boshara, of The Next Progressive Era: A Blueprint for Broad Prosperity.