There is an amiable arrogance to Philip Caldwell, chairman of Ford Motor Co. He thinks car sales in the United States could run at a rate of 12.5 million units annually between 1982 and 1985. That's 10 percent higher than the previous record in 1973 and about 25 percent higher than the average in the 1970s. But Caldwell still loudly insists that his company and the industry need import restrictions.
Caldwell's prediction may be a trifle optimistic, but it provides a key insight into the outlook for the auto industry: There's a huge pent-up demand. Cars need to be replaced and, for more than a year, sales have been running 10 to 15 percent behind their long-term average. Moreover, huge increases in fuel prices, which have dated large cars before their time, add to the demand.
In short, this is the last moment when any public official ought to be considering import restrictions. Yet Transportation Secretary Drew Lewis is doing precisely that. And he's being egged on by U.S. Trade Representative Bill Brock, who wants to get "tough" with the Japanese, and Sens. Lloyd Bentsen (D-Texas) and John C. Danforth (R-Mo.), who have introduced legislation for mandatory quotas.
The irony is unmistakable. Bentsen considers himself one of Congress' leading apostles of supply-side economics, and the Reagan administration has made supply-side policies a virtual religion. But import restrictions insult supply-side theory. They limit supply, which raises prices and keeps the economy in an inflationary trap.
Caldwell understands this perfectly. Last year Ford lost a record $1.5 billion, and Caldwell's passion for import restrictions betrays a man who yearns for salvation through a combination of high prices and constricted supply. All the auto companies have joined this chorus. General Motors Corp., under its new chairman, Roger Smith, now chants with the rest.
If President Reagan listens to them, he will be making an unnecessary mistake. The auto industry presents a magnificent test case of the proposition that economic growth can be noninflationary. The industry's deep, protracted slump reflects one simple problem: Prices are too high. When Chrysler Corp. began offering rebates in December, its sales rose in a declining market despite consumer fears about the company's survival. Now Ford and GM are adopting the same approach.
The problem for the companies is that their costs are so high that price-cutting risks deepening their losses. Little wonder they want protection. But government ought to aim at lightening this top-heavy cost structure, not eliminating the industry's dilemma with an insulated market.
The automobile industry's troubles directly relate to Reagan's overall objective of achieving accelerated economic growth simultaneously with diminished inflation. The president has some unappreciated advantages in reducing inflation. To name but three:
Oil prices: Since the end of 1978, world oil prices have tripled. Barring a political catastrophe in the Middle East -- which would make economic problems seem secondary -- Reagan probably won't face a similar increase.
Interest rates: The dramatic increase in interest rates, reflected in the consumer price index through mortgage rates, contributed more than a percentage point to the 12.4 percent increase in the index in 1980. Another similar jump isn't likely and, if rates drop at all, they will exert a downward tug on the index.
Deregulation: Congress' substantial deregulation of the trucking and railroad industries should add to price competition. More competition from nonunion truckers could restrain the size of the Teamsters' settlement in the spring of 1982.
The administration's great nemesis is an obstinate wage-price spiral. Continued large increases in labor costs (they rose 10 percent in 1980) would sustain high inflation and interest rates, frustrating healthy expansion. And few industries seem more destructively locked into the spiral than automobiles. In September 1979, the companies and the United Auto Workers (UAW) prepared for the worst postwar slump by negotiating a three-year agreement whose cost is now estimated at about 40 percent.
The seedy bargain suggested by former Transportation secretary Neil E. Goldschmidt (and hinted at by his successor, Lewis) would have the administration arrange import restrictions in return for concessions from the union. In less refined circles, this would be called a bribe. A reward for being irresponsible, it is dubious politics and dangerous economics.
The lesson of the past three years is that the UAW retreats from past gains only under the cloud of catastrophe. The more the government provides an alternate avenue of escape, the less movement there is. When Chrysler teetered on the edge of bankruptcy, the union made trivial concessions because the government rode to the rescue with a $1.5 billion loan guarantee. Only when this proved insufficient, late last year, did the union reluctantly agree to significant concessions.
Even if the industry and union now negotiate meaningful changes -- and, which is more unlikely, the companies subsequently exercise price restraint -- the bargain would probably come unstuck at the dealer level. Car sales are negotiated between buyer and seller: dealer and driver. The dealers have been clobbered in the past two years; import restrictions that result in a tight market would simply give dealers the opportunity to improve their profit margins.
The great distress of the auto industry and the industrial Midwest need not be permanent. Strong, latent car demand exists. Capacity to produce fuel-efficient cars is rising. The job of political leadership is not to offer an easy way out but to create the public consciousness that forces the industry and the union to solve their own problems. If Reagan caves in on this, he will create precisely the inflationary expectations -- the "business as usual" -- that he deplores.