NEW DEALS; The Chrysler Revival and the American System.By Robert B. Reich and John D. Donahue. Times Books. 359 pp. $17.95.
BY MOST STANDARDS, the Chrysler bailout is considered a success, even by some who viewed the prospect at the time with a good deal of hesitation. After all, it worked, didn't it? Chrysler was transformed from a company about to go belly-up in 1979 into a sleek, hungry and aggressive corporation so profitable by 1983 that it was able to pay Lee Iacocca and other executives $52 million in bonuses.
But the central theme of New Deals is that the rescue was explicitly a rescue of the company -- at small risk to the public -- and not a rescue of its workers or the communities primarily affected. The authors nonetheless pay tribute to the Carter bureaucrats who worked out the deal (especially the technical team at Treasury) for a $1.2 billion loan guarantee, to the union leaders, and to Iacocca and his management team, who exploited their many reprieves.
This is a serious book about national economic strategy, as well as the bailout itself. Robert B. Reich of the John F. Kennedy School of Government at Harvard -- the principal author -- assisted by John D. Donahue, has produced a painstaking and even brilliant piece of reportage detailing first, the genesis of Chrysler's troubles that erupted in 1979 and then the ins and outs of the massive lobbying effort that was necessary to get the rescue program through Congress.
There are many rewarding vignettes, including Fed chairman Paul Volcker's role in eliminating indexed wage increases, as a way of giving Chrysler's prospects a boost early in 1981. United Auto Workers chief Douglas Fraser is quoted as arguing that labor didn't have to be pressed that hard to keep Chrysler in business.
"But he (Volcker) said, 'Look I don't mind calling white gray or black gray, but I'm not going to call black white or white black. It's just plain not enough. You've got to do more.' He drove a goddamn hard, hard, hard bargain," Fraser said.
What Volcker began at Chrysler eventually broke the back of built-in labor cost increases for the whole industry, Reich and Donahue say.
For the most part, the authors contend that the 1979 Chrysler bailout begun during the Carter administration was imaginatively conceived, and well carried out. "But something slipped," they conclude. "Many of the claimants whose vulnerability had motivated the rescue in the first place were simply cut off. With no explicit link between workers and communities and the corporate entity of Chrysler, the primary beneficiaries of the rescue were bound to be the company's managers, creditors and stockholders.
"These are precisely the groups our economy rewards, and handsomely, for bearing risk. Protectin them from the consequences of failure -- even if that failure is largely unmerited -- is a dubious policy goal. The central object should be to ease the process of adjustment, particularly for those least able to bear on their own the risks of economic change."
Iacocca, of course, wouldn't be the flamboyant Iacocca we all know if he didn't claim credit for Chrysthe living. And the authors, who appear to have profited from a series of interviews with the charismatic and plain-talking businessman, give him high marks.
Nonetheless, they make it clear that in 1981, two years after the loan-guarantee was approved by Jimmy Carter, it looked as if Chrysler was going to go down the tubes anyway. Now, the free-market ideologues of the Reagan administration were in charge, and wanted to have as little as possible to do with the Chrysler rescue.
Yet, that's when Reaganomics came into play by providing Iacocca with huge subsidies and protective quotas, which had more to do with Chrysler's recovery than anything else. In the first place, there was the controversial big tax-cutting bill, the Economic Recovery Tax Act of 1981. One provision of that act enabled Chrysler and other firms that had no profits to sell off depreciation and tax credits to companies that could benefit from them. This "safe-harbor leasing" gimmick gave Chrysler a cash flow infusion that was critical from 1981 to 1983.
But the huge bonanza that a kindly Reagan administration -- remember, this was the free-market crowd -- provided for Chrysler and the rest of the auto industry was a twist of the Japanese arm that for four years placed "voluntary" import quotas on Japanese cars.
"The quotas let U.S. automakers raise prices without losing sales. This amounted to an automatic tax on both imported and domestic cars for the benefit of U.S. auto companies," Reich and Donahue say. "By the third year of the restraints American consumers were paying an estimated $5 billion a year in higher prices for cars. . . . But unlike the Chrysler loan guarantees, this subsidy for the U.S. auto industry was unconditional: Nothing was asked in return from the automakers, their banks, their suppliers, or their employees."
IACOCCA, as we know from more recent history, desperately tried to get the Reagan administration to push Japan into a fifth, and possibly a sixth, year of quotas. But Iacocca and executives of Ford and General Motors proved to be too greedy. When they paid themselves huge bonuses early in 1984, the Reagan administration became fed up with the monster it had created, and wisely let quotas die.
The bottom-line question as the authors put it is: Should the public now assume that it's okay for them to be asked to step in and rescue a corporate giant? Their answer, in brief, is no; that the Chrysler case should not be taken as a model for the future. In fact, they warn that the success this time (aided by the Reagan subsidies and quotas) establishes a dangerous and tantalizing precedent.
Already, they see the same network of big bankers and lawyers that pulled together for Chrysler doing much the same thing for troubled companies like International Harvester and for countries in the Third World. Even the banks that are reluctant to throw good money after bad find themselves participants as the "all-in rule" is enforced. In the wake of the Continental Illinois Bank crisis, the government has made it clear that it won't let a big bank fail.
So the concept of the "free enterprise" system which originally contemplated failure as well as success has been modified dramatically in the last half-dozen years as a consequence of the Chrysler and a few other rescue operations. Reich and Donahue are clearly unhappy with the trend. But except for a brief discussion of the need for a better "adjustment" process that would help companies and workers respond to new technology, competition, or other economic forces, they offer no clear alternatives.