What does Varieties of Capitalism have to say about the bailout of the U.S. auto industry?

By Kristin Makszin

The different perspectives on whether or not to bailout the U.S. auto industry vary according to the alleged cause of the ‘crisis’ for the auto industry. Was this crisis caused by recent economic events (i.e. financial crisis, fall in consumption), bad decisions by the big three company leadership over time (producing SUVs, not fuel efficient automobiles), burdens of health and pension commitments to retired auto workers (a result of organized labor), political decisions, unstable oil prices, …?



Obviously there are multiple reasons why the auto companies are in the situation that they are currently in. But the problems in the U.S. auto industry are not new. Arguably, the current challenges are a continuation of a thirty year story – or perhaps an even longer one. The many events on this thirty year time line suggest that the U.S. auto industry is fragile. Which raises the question: can it be saved? And what would it take to save it?

Analysis of the current situation of the U.S. auto industry emphasizes the importance of the political and economic institutions that form the context in which businesses are embedded. Auto production began to move away from Detroit (to other countries and even other parts of the USA)—many argue—because of the high level of organization of auto workers in Detroit. But the decline of the auto industry in Detroit was also assisted by shifts in the global economy that allowed car production to increase in other parts of the world (the U.S.A. lost its comparative advantage in car production). Further the big three auto producers (GM, Chrysler, Ford) fell behind in the newest and most important innovation: greener cars. The reason that the U.S. auto industries fell behind in the ‘greening’ process could be blamed on the decisions of company executives, the American consumer, U.S. foreign policy, … But it is clear that NOW is time for the auto industry to innovate and the big three are already behind.

According to the Varieties of Capitalism (VoC) framework, the U.S. economy relies on complementarities between deregulated labor markets, innovative product markets, competitive relationships between firms, a financial system where firms raise money from equity markets, and an educational system promoting general skills. The auto industry seems to be the exception to the liberal market economy framework. The strength of labor is impossible to ignore, thanks to the United Auto Workers. It would be hard to describe anything that happened in Detroit in the last 30 years as a part of innovative product markets. The big three have formed a ‘cooperative’ relationship in begging for the bailout. From a Varieties of Capitalism perspective, it does not seem surprising that the U.S. auto industry could not survive without the complementary institutions. Now that the equity-based financing is not sufficient and the executives of the big three (and many others in Detroit) argue that government funding should be used to keep these business alive-- because they are "too big" to fail.

Some Republican Senators (among others) have suggested that part of the bail out should demand pay cuts from the United Auto Workers and that innovation should be forced towards a more environmentally friendly car. Interestingly, the Republican Senators are addressing two other dimensions of the auto industry that seem to be mismatched with the liberal market economy capitalism that is predominate in the USA. But, from the lens of the varieties of capitalism framework, it is clear that the bailout package (even with all potential additional stipulations) would be incapable of making the auto industry work in the absence of complementary institutions. So perhaps it is time for Schumpeterian ‘creative destruction’ in Detroit.

From the streets of Detroit, the need for a bailout for the auto industry is clear. Too many lives and companies depend on it. If the big three are allowed to go bankrupt, Detroit will suffer and there will likely be strong ripple effects. But it seems clear at this point, a short term bailout is not enough. Drastic changes will be needed if the auto industry will survive in Detroit. If the big three stand a chance, they must use the advantages of their (supposed) institutional context to be the leaders in innovation towards greener cars. But it might already be too late. The only thing that seems certain for Detroit is that everything will change. Either the big three automakers will face real reform or they will continue their slow descent until U.S. auto production is only a memory.

The effects of this for Detroit are clear. But what will this mean for automakers in Europe and Asia?

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Sharing the pie in CEE: Welcome to the Welfare and Inequality section

The transitions that took place in the postcommunist countries of Central and Eastern Europe (CEE) brought about significant changes in all aspects of these societies and in the lives of the people living in them. Yet the challenges and struggles of transition were not evenly distributed. Here is a space for reflection on welfare in the societies of CEE. Among other questions, we will ask:
• Which groups and people face substantial welfare struggles?
• What approaches improve welfare and who benefits?
• What is the state’s role in welfare provision in these societies and amidst these struggles?
• What are the welfare issues that matter today in the societies of CEE?


The transitions that took place in the postcommunist countries of Central and Eastern Europe (CEE) brought about significant changes in all aspects of these societies and in the lives of the people living in them. Yet the challenges and struggles of transition were not evenly distributed. Here is a space for reflection on welfare in the societies of CEE. Among other questions, we will ask:
• Which groups and people face substantial welfare struggles?
• What approaches improve welfare and who benefits?
• What is the state’s role in welfare provision in these societies and amidst these struggles?
• What are the welfare issues that matter today in the societies of CEE?

For some, the struggles of transition inspired an incomplete, but nevertheless real nostalgia for the old system. This type of nostalgia can be seen in this quotation from a Romani woman from a village in Western Ukraine: “In the old system, we had money, but there was no bread to buy. Now the store shelves are filled with bread, but we have no money to buy it.” The questions re-emerge:
• Who can and cannot afford ‘bread’ in the new system?
• How can more ‘bread’ be provided or how can the ‘bread’ be distributed differently?
• What is the state’s role as a provider of ‘bread’?

In some ways, the struggles causing and caused by poverty and inequality are similar around the world, from the most developed to the least developed countries. In other ways, the struggles and approaches to poverty are unique to their context. The historical legacies from pre-communist and communist times create distinct perspectives of and approaches to poverty and inequality. For example, the role of the state in the previous system sets expectations and limitations for the role of the state in contemporary society. The political and economic dynamics of transition present unique challenges for poverty and unique conditions for welfare provision. Decisions made in transition do matter, whether those decisions were made by domestic politicians, international advisors, voting citizens, or others. This blog looks at issues of poverty and inequality in CEE with a particular emphasis on how the state’s involvement in these issues matters and varies from country to country. The key question is: who decides and what determines outcomes of poverty and inequality in CEE?

By looking at the faces of poverty and inequality in this region, reviewing publications and reports on these topics, and accessing the current debates about welfare reform in various countries in CEE, we will have a glimpse the great social struggles that remain in these societies and the various proposed solutions.

Kristin Nickel Makszin
nickel_kristin@phd.ceu.hu

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