Detroit and the New Democrat Congress

I'm disappointed (understatement!) in the results of the mid-term elections, but I can't say I am surprised. The Republicans worked hard to screw up their party, and now have been taught a harsh lesson.

A Democrat controlled Congress will have some definite effects on the auto industry, some good and some bad. I have to play arm-chair economist for a while, here are a few examples I have thought of:

• Consumer Spending--The Democrats are likely to raise taxes to pay for more generous social programs. They are also likely to raise the minimum wage, which will increase the prices of some goods and services. I expect this to put pressure on new car sales, as the general economy slows down. The stock market seems to be reflecting this already, but maybe I'm jumping the gun. Bad for the industry.
• Oil/Fuel--It is likely that the Democrats will suppress new exploration and drilling offshore and in Alaska, as part of their environmental policy. It is also possible that they will raise taxes on oil companies, which will have various chilling effects on that industry, from reduced production to a pass-through of the tax to consumers. They may or may not support increasing refining capacity, depending on who is talking. The new Congress will also likely support taxpayer subsidized ethanol production and distribution. I expect that the price of oil and gasoline will increase, and the oil futures seem to be headed that way. Bad for the industry.
• Labor Policy--The Democrats are the party of organized labor. I expect them to take union friendly stands when the opportunity arises. It may become harder for the unionized auto makers (the Big 2.5) to reduce their union labor costs, which is a needed step to become competitive with the imports and transplants, if Congress gets involved. Bad for the industry.
• Trade Policy--The Democrats have said that they support fair trade, and will energetically pursue trade deals that remove barriers to U.S. goods, and reduce the advantages that countries like China and Korea give their domestic industries, such as undervalued currency. If they can manage to open up markets without engaging in a trade war, this could help export sales. Maybe good for the industry.
• Environmental/CAFE--There are two schools of thought in the Democratic party on automotive fuel economy and environmental regulation. One side is the California greenie side, exemplified by Nancy Pelosi, who voted to raise CAFE to 33mpg. On the other side is Rep. John Dingell, expected to chair the energy committee, who represents a heavily UAW district, and tends to be much more friendly to the Big 2.5 on CAFE issues. CAFE has both good and bad effects on the industry. On one hand, it increases the barrier to entry for new competitors such as the Chinese. On the other it tends to make vehicles more expensive to buy, due to the additional technology necessary to meet the new requirements; it may reduce safety if it forces more people into small cars. If Dingell can hold off the California wing, then the damage may be modest. Maybe bad for the industry.
• Safety Regulations--More stringent safety regulations have similar effects as CAFE, but with a more positive tilt, I think. They increase the barrier to entry for competitors, and may also increase vehicle cost somewhat, hurting sales; however, many safety advances do not have a very high cost associated with them, such as stability control or additional airbags, compared with the major powertrain changes that may be required to meet higher CAFE standards. Maybe good for the industry.
• Healthcare Costs--The Big 2.5 have been hammering on healthcare costs for some time, suggesting that the federal government may be able to help. The question is, what form will this help take? Modest improvements such as beating up the drug companies won't be a game changer, but major changes such as a socialized government medical insurance system will be so expensive in taxes they they will be destructive to the broader economy. I don't think the Democrats will be able to enact socialized medicine any time soon, so I guess I'd call this one Maybe good for the industry.
• Tort Reform--is now dead. The Democrats are long time clients of the trial lawyers, and fight tort reform ferociously. Auto companies will not see further relief from outrageous product liability awards. Bad for the industry.

Re-reading my list, I suppose I am pessimistic. I expect a more aggressive regulatory environment, higher taxes, a slower economy, and more expensive fuel and vehicles, which will translate directly into slower sales for the auto companies. On the more positive side, the automakers may get some healthcare cost relief, albeit at the expense of the taxpayer's wallet, and may get some help with foreign trade.

I hope that the now opposition party Republicans and now lame-duck President will grow some cojones, and fight off as much bad economic policy as possible. President Bush needs to buy a shiny new red veto pen. It is bad enough in Detroit as it is.