Why Bush Rejected UAL
But Aided Many Others

WASHINGTON -- The Bush administration's rejection of a plea by United Airlines for taxpayer aid -- even with the specter of a bankruptcy-law filing, more layoffs and cuts in service -- suggests that the government is willing to let the free market sort out the winners and losers in the bloated airline industry.

But that doesn't mean the White House has a strict doctrine in favor of market forces. Other industries -- particularly those with more political clout than United parent UAL Corp. -- have succeeded in winning valuable favors from the Bush administration.

The domestic steel industry, for instance, recently won tariffs to thwart foreign competitors. Agriculture got tens of billions of dollars in subsidies. West Coast ports got the White House to step in to end a lockout, and Delta Air Lines and Northwest Airlines got presidential edicts to prevent strikes.

As textile makers, telecommunications companies and other industries line up for help in a weak economy, United's saga shows how the White House's approach to industrial policy strikes a careful balance between politics and economic doctrine.

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"The hurdle has to be very high for government intervention because these interventions can be very costly for the economy, although they might benefit a small group of firms," says Glenn Hubbard, the chairman of the White House Council of Economic Advisers.

One political problem for UAL: Unlike the steel industry, the airline industry was divided. Continental Airlines Inc. and American Airlines, a unit of AMR Corp. of Fort Worth, Texas, neither of which sought loan guarantees, were particularly aggressive in their opposition to a guarantee for UAL. They argued that a government bailout would allow United to keep paying exorbitant labor rates and consequently pressure the rest of the industry to match those rates. "If United gets the loan, then we and others could be dead," claimed Gordon M. Bethune, chairman and chief executive of Continental. American, Continental and Delta might be interested in buying UAL assets if the company ends up in a court-supervised fire sale.

No Easy Choice

A divided industry often strengthens the government's ability to do what officials think is best because there is no politically easy choice. The Bell telephone companies are finding that as they argue that the Federal Communications Commission should strip WorldCom Inc. of its operating licenses in order to eliminate a competitor in a crowded market for long-distance and local-telephone service.

The Bells fear that if WorldCom emerges from bankruptcy proceedings shorn of its debt, it will be able to outcompete debt-burdened Bell firms that didn't seek protection from creditors. WorldCom, of course, wants to keep its licenses and climb out of Chapter 11. Given a choice and a fractured industry, the FCC is almost certain to prefer the hands-off approach, allowing WorldCom to remain in business, if it can. (More on WorldCom)

Two other big industries -- steel and agriculture -- that also are finding competition and overcapacity painful are having more success with the Bush administration. This, in part, reflects simple political arithmetic.

Steelmakers were united in their pleas for help and had the good fortune to be concentrated in Pennsylvania and West Virginia, states that Mr. Bush's political advisers believe he needs to win re-election.

Lawmakers from steel-producing districts made clear that steel tariffs were the price of getting their votes on a bill to give the president authority to negotiate new trade deals, which eventually passed the House by only a single vote. "I think about the big picture of leading this world to a free trade world," says Commerce Secretary Don Evans. "If you don't have Congress with you, it's tough to lead."

Farmers' Clout

And farmers long have had an ace. Although they are a tiny and shrinking fraction of U.S. workers, the Constitution gives each state two senators -- including sparsely populated farm states. That gives farmers clout disproportionate to their numbers.

Partly this reflects the inertia of the political system. Farmers have been subsidized at least since the New Deal; steelmakers have won trade protection since the 1960s. Claims that food and steel self-sufficiency are essential to the national security ring true with many lawmakers, even though that notion may be outdated. The world's farms produce far more food than the world's consumers can afford to buy, and steel has been replaced by exotic ceramics, carbon fibers and depleted uranium as the material of choice for next-generation weapons.

It isn't clear how much longer steelmakers will be able to retain their political support. The tariffs produced a world-wide backlash from U.S. trading partners and may have backfired economically. Rising prices are hurting steel users, and encouraging some steel producers to add capacity -- the reverse of the outcome sought by the White House. "There's modest progress toward restructuring," says Mr. Hubbard, the White House economist. "But, frankly, not as much as I think is reasonable."

Big steel's long alliance with the auto industry is also cracking. For years, the two industries worked in lockstep in seeking protection, with auto makers' Midwest power base complementing Big Steel's strongholds in the East. "They thought they had to stand together," says Gary Hufbauer, a trade analyst at the Institute for International Economics in Washington.

But like a married couple that grows apart, the two industries have become estranged. Over the past decade, the auto industry has become increasingly international. Chrysler is now a unit of DaimlerChrysler AG of Germany, Ford Motor Co. bought big stakes in Volvo of Sweden and Mazda of Japan, and General Motors Corp. has become a large shareholder in several Japanese firms and Fiat SpA of Italy. At the same time, the Japanese and Europeans built huge plants in the U.S. that now produce about 22% of the 18.5 million cars and light trucks made in North America, according to the Center for Automotive Research in Ann Arbor, Mich.

Steel hasn't gone through a similar transformation. U.S. Steel Corp. owns a foreign steel plant in Slovakia, but few other U.S. makers have branched out from the U.S. market. The result: auto makers and auto suppliers no longer knock on the White House's doors seeking trade protection -- after all, the tariffs would hurt their foreign units.

At an auto industry seminar in Traverse City, Mich., in August, Tim Leuliette, chief executive of Metaldyne Corp., a big auto-parts maker, made the break formal. Higher steel prices were killing parts makers, he complained. "This remark is directed to the steel industry. We expect you to reduce prices next year," he said to gathering applause. "If you want to push us, we will go to Washington and force a showdown."

Since then the auto parts makers have lobbied lawmakers to end the steel-tariff program, and are pressing the National Association of Manufacturers to drop its neutrality and oppose steel tariffs. Commerce Secretary Evans says he doesn't expect to change the steel program, but he is planning to exempt more steel imports from tariffs.

Pete Peterson, automotive marketing director for U.S. Steel, says the auto makers would be worse off if the tariffs were scrapped because foreign steelmakers would gain clout in the U.S. and eventually that would drive up the price of steel used in autos. "If [parts makers] become dependent on Japanese and European steelmakers, their purchasing departments wouldn't have any power," he says.

High Hurdle

With the airline industry -- plagued with overcapacity and costly airplane leases and labor contracts -- the hurdle for government aid was set deliberately high from the start. Even as the White House rushed to assist the airlines after the disruptions caused by the Sept. 11 terrorist attacks, Mr. Bush's economic advisers were particularly uneasy about moving toward interfering with competition and reregulating an industry they consider a deregulatory success story. And the politics weren't so clear cut.

The decision to turn away UAL was almost preordained by the details of the legislation that created the $10 billion loan-guarantee program in the fall of 2001. The law gave the White House budget director, Mitchell Daniels, the job of crafting the rules. Those rules gave the board plenty of maneuvering room. They require airlines to provide a "reasonable" assurance that they would repay the loans -- a major stumbling block for UAL -- as well as evidence that the guarantees were necessary for a "safe, efficient and viable" aviation system.

The UAL decision doesn't end the airline industry's efforts for government help. Airlines are expected to continue pushing for federal reimbursement for certain security duties imposed after Sept. 11 and for changes in federal law that would make it easier for them to settle contract disputes with their unions. While Congress and the Bush administration have been reluctant to reimburse carriers for security costs, prospects for changing the labor laws are stronger now that a key proponent, Sen. John McCain, the Arizona Republican, is heading the Commerce Committee. Airlines are also likely to get some form of government assistance -- possibly tax relief -- if any war with Iraq sends oil prices soaring.

Chicago-based UAL played every political card it had. It enlisted its home-state congressman, House Speaker Dennis Hastert of Illinois, to beseech President Bush directly. It also recruited workers and suppliers to lobby hard so that the airline could avoid bankruptcy court. But the law giving the decision to the board -- headed by a governor of the Federal Reserve -- with its carefully crafted rules insulated the White House and Mr. Bush's top political appointees from some of the political heat over the rejection. "They've been pretty smart the way they've done it," said a congressional aide involved in last year's negotiations over setting up the loan-guarantee program. "They managed to walk through a minefield."

Write to Stephen Power at stephen.power@wsj.com and Bob Davis at bob.davis@wsj.com

Updated December 6, 2002

          

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