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Faculty Viewpoints

Who Needs National Champions?

Government support for private enterprises can help launch new industries, but it can also encourage stagnation and corruption. The American debate over whether the government should support private companies goes back at least to Alexander Hamilton’s Report on Manufactures. Yale history professor Jenifer Van Vleck talks about how the rise and fall of the airline Pan Am exemplifies the tricky relationship between government and the private sector.

By Conrad de Aenlle

Pan American World Airways was a symbol of American economic might and commercial and technological expertise wherever it flew, and it seemed to fly everywhere during its heyday from the 1930s to the 1970s.

But it never made those journeys to far-flung destinations alone, Jenifer Van Vleck, assistant professor of history at Yale, noted in a conversation with Yale Insights. The U.S. government was its metaphorical copilot and had been since the carrier first took off in 1927.

“Pan Am operated as a de facto national carrier until 1945,” said Van Vleck, whose book Empire of the Air: Aviation and the American Ascendancy, charts the industry’s ascent and eventual leveling-off. “It was the United States’ exclusive international airline, it had a monopoly on international routes [and] it received extensive state support in the form of postal subsidies and diplomatic assistance.”

Few airlines could have gotten off the ground, literally or otherwise, without the help, she maintains, because early planes were too small for airlines to turn a profit on ticket sales alone. But Pan Am’s status as a national champion remained unofficial.

“There was no consensus within the industry or among the general public that the U.S. should have a national carrier,” she explained. “That dates back to Americans’ love of free enterprise and skepticism about the extent to which the government should be involved in industry and in business.”

Despite that skepticism, actively rooting for the home team is a frequent feature of American policy. Opponents argue that protectionism hurts consumers by limiting competition, keeping prices high, and reducing product quality, yet support has been rendered throughout the nation’s history to companies and entire industries to cocoon them from foreign rivals or to advance other objectives.

Some of the founders, led by Alexander Hamilton, contended that American economic and commercial interests had to be protected to ensure that the country survived free of the influence of European powers. In his Report on Manufactures, presented to Congress in 1791, Hamilton maintained that when an industry is established in one country, the first-mover advantage is so powerful that for another country trying to enter the industry, “a competition upon equal terms, both as to quality and price, is, in most cases, impracticable.” Success is unlikely to be achieved, he said, “without the extraordinary aid and protection of government.”

This philosophy became known as the American System and was used to justify high import tariffs as the economy shifted from a primarily agricultural base to an industrial one between the Civil War and World War II. Government assistance to business has taken many forms since then. The Marshall Plan that helped rebuild Europe after the war led to a substantial dismantling of trade barriers, but it also provided a boon to American industry; much of the $17 billion authorized to war-torn countries went to U.S. businesses doing the work. For decades, subsidies have helped to support the oil and farming industries; in both cases, support intended to bolster a struggling industry has long has since outlived its original justification.

The debate over public involvement in private markets flared again when automakers were hit hard by the 2007-09 financial crisis. The crisis exacerbated a host of longstanding problems, many of the companies’ own making, including a stubborn failure to recognize changes in consumer habits and appetites and pay and benefit scales far higher than those of foreign manufacturers with American plants, and pushed them toward collapse.

Like Pan Am, General Motors had been a mid-century American champion; the phrase “What’s good for General Motors is good for America”—misquoted from the company’s chairman—was widely held to represent the relationship between the country and its home nation. Now, GM and Chrysler requested federal assistance, arguing that the impact of their demise would extend beyond the companies to their employees and retirees and then to their families and the communities they lived in.

The public and politicians were sharply divided. Republican presidential candidate Mitt Romney wrote an op-ed in the New York Times titled “Let Detroit Go Bankrupt.” Government support would only prop up a failing system, he argued: “Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course—the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.”

In the end, Congress shelled out about $80 billion, including nearly $50 billion for GM. The Treasury accepted shares in the company in exchange for the funds and became the majority shareholder—an effective nationalization. The shares were sold gradually as GM found its footing, but taxpayers were left more than $10 billion in the red. Chrysler received $11 billion in less complicated fashion, with taxpayers recouping nearly all of it. (Another $17 billion of auto bailout funds went to GMAC, now known as Ally Bank, which finances auto sales and makes other loans.)

The auto bailout could be seen as a path not taken for Pan Am, which was allowed to go bankrupt in 1991. Its demise can be traced back to 1978, when President Jimmy Carter deregulated the airline industry, resulting in a proliferation of carriers, many with cheaper operating models and limited route systems that Pan Am and other traditional carriers had trouble competing with.

“Seventy-eight radically changed the structure of the aviation industry,” Van Vleck said. “The commercial air travel industry has always had a difficult time being profitable. When Pan Am was financially successful, it was in the context of [earlier] regulatory structures and subsidies.”

Department: Faculty Viewpoints