The federal government’s investigation of General Motors’s recall due to faulty ignition switches comes as it has just completed a settlement with Toyota over its 2009-10 recall to fix accelerator problems. The automakers’ awareness of potentially fatal problems well before alerting consumers has generated controversy. These instances also provide useful case studies for what is typically a vague, theoretical argument waged in the midst of political campaigns over the proper role of government in an otherwise free market.
General Motors (GM) announced a recall in February of 1.6 million cars from model years 2003-07 because of defective ignition switches that can turn engines off and disable airbags. At least a dozen deaths have been linked to the problem. GM’s internal reports indicate its engineers knew of the ignition switch issue when testing the Saturn Ion in 2001 and the Chevrolet Cobalt in 2004. The ignition switch in the Ion was redesigned, but nothing was altered to address the Cobalt’s issue even though an engineer proposed changes. In 2005, GM sent a service bulletin to dealers warning of the issue and asking them to alert customers, but a recall was not issued. After at least one death was linked to the ignition switch problem in 2009, GM made changes to the 2010 model year cars.
As a result of the delayed recall, the FBI and U.S. Attorney’s Office in New York have begun a criminal investigation. According to the TREAD Act passed in 2000, car manufacturers have five days to contact the National Highway Traffic Safety Administration (NHTSA) with an early warning report about any defect that is related to deaths and injuries. GM has admitted fault over its handling of the situation; according to GM North American President Alan Batey, “The process employed to examine this phenomenon was not as robust as it should have been.” The consequences of GM’s sluggish response may include a $35 million fine for violating the TREAD Act and additional monetary losses because of numerous civil lawsuits.
Toyota faced a similar recall scandal a few years ago. From late 2009 to early 2010, Toyota issued recalls for two issues that caused cars to unintentionally accelerate: floor maps that got wedged under gas pedals and gas pedals that got stuck in the depressed position. These issues forced Toyota to recall over seven million cars. Like the GM situation, internal correspondence proved Toyota failed to act despite knowing of the sticky pedal issue. In a statement made five days before the January 2010 recall to fix malfunctioning pedals, a Toyota executive wrote an internal email that said, “We need to come clean. We are not protecting our customers by keeping this quiet. The time to hide on this one is over.”
In 2010, Toyota agreed to pay a $16.4 million fine for failing to notify the NHTSA of the sticky pedal problem in a timely manner, and after more than three years of a Justice Department investigation, Toyota has agreed to pay $1.2 billion to settle the matter and avoid criminal charges. Toyota has also paid millions of dollars in additional fines and settlements to individual states and plaintiffs.
The fact that one only needs to look back four years in history to find the same episode is telling of how the invisible hand of the free market works in real life. According to the invisible hand theory, a business’ desire for profits will cause it to self-regulate, and thus, government regulation is unnecessary. If this theory held true, GM and Toyota would have recalled their cars the instant they learned of the safety issues so as to prevent tragic accidents, damaged reputations, and lost sales. However, in the real world, even with some degree of government regulation, GM and Toyota ignored safety issues, lives were lost, and then the companies made safety changes to salvage their tarnished reputations and encourage future sales.
This analysis is not meant as a wholesale disparagement of conservative economic thinking or as a total endorsement of the liberal fondness for government regulation. Rather it is merely to note a core problem of extreme free market ideology: while market forces may put out fires, they are not guaranteed to prevent them. Toyota’s rebound from its 2009-10 recall debacle shows that a business will take steps to correct a problem, but the changes have been made reactively after the loss of life whereas the point of government regulation is to proactively prevent accidents. Thus, when some conservatives, such as Senator Ted Cruz, make vague statements of a need to “get back to the free market economic principles,” the limitations of the free market must be kept in mind.
Actually, there is more bipartisan consensus on the regulatory role of government than political speeches reveal. Conservatives often use anti-regulation language, but they aren’t making a widespread call to abolish the NHTSA. Additionally, hearings in the House of Representatives’s Energy and Commerce Committee have been initiated by Congressman Fred Upton, a Republican (who also sponsored the TREAD Act).
Of course, government involvement is not a panacea. The NHTSA has faced questions about whether it should have investigated consumer complaints about GM's ignition switch problem sooner. Nevertheless, GM’s and Toyota’s delayed recalls, and the NHTSA's potential fault, indicate there is a need for more vigorous and effective oversight, not less. Therefore, as the midterm elections approach and the political rhetoric heats up, economic debate that centers around how to most effectively implement government regulations will be more constructive, and honest, than sound bites that challenge the efficacy of regulations at all.
What can be done to prevent automakers from delaying recalls in the future? Leave a comment.
As a result of the delayed recall, the FBI and U.S. Attorney’s Office in New York have begun a criminal investigation. According to the TREAD Act passed in 2000, car manufacturers have five days to contact the National Highway Traffic Safety Administration (NHTSA) with an early warning report about any defect that is related to deaths and injuries. GM has admitted fault over its handling of the situation; according to GM North American President Alan Batey, “The process employed to examine this phenomenon was not as robust as it should have been.” The consequences of GM’s sluggish response may include a $35 million fine for violating the TREAD Act and additional monetary losses because of numerous civil lawsuits.
Toyota faced a similar recall scandal a few years ago. From late 2009 to early 2010, Toyota issued recalls for two issues that caused cars to unintentionally accelerate: floor maps that got wedged under gas pedals and gas pedals that got stuck in the depressed position. These issues forced Toyota to recall over seven million cars. Like the GM situation, internal correspondence proved Toyota failed to act despite knowing of the sticky pedal issue. In a statement made five days before the January 2010 recall to fix malfunctioning pedals, a Toyota executive wrote an internal email that said, “We need to come clean. We are not protecting our customers by keeping this quiet. The time to hide on this one is over.”
In 2010, Toyota agreed to pay a $16.4 million fine for failing to notify the NHTSA of the sticky pedal problem in a timely manner, and after more than three years of a Justice Department investigation, Toyota has agreed to pay $1.2 billion to settle the matter and avoid criminal charges. Toyota has also paid millions of dollars in additional fines and settlements to individual states and plaintiffs.
The fact that one only needs to look back four years in history to find the same episode is telling of how the invisible hand of the free market works in real life. According to the invisible hand theory, a business’ desire for profits will cause it to self-regulate, and thus, government regulation is unnecessary. If this theory held true, GM and Toyota would have recalled their cars the instant they learned of the safety issues so as to prevent tragic accidents, damaged reputations, and lost sales. However, in the real world, even with some degree of government regulation, GM and Toyota ignored safety issues, lives were lost, and then the companies made safety changes to salvage their tarnished reputations and encourage future sales.
This analysis is not meant as a wholesale disparagement of conservative economic thinking or as a total endorsement of the liberal fondness for government regulation. Rather it is merely to note a core problem of extreme free market ideology: while market forces may put out fires, they are not guaranteed to prevent them. Toyota’s rebound from its 2009-10 recall debacle shows that a business will take steps to correct a problem, but the changes have been made reactively after the loss of life whereas the point of government regulation is to proactively prevent accidents. Thus, when some conservatives, such as Senator Ted Cruz, make vague statements of a need to “get back to the free market economic principles,” the limitations of the free market must be kept in mind.
Actually, there is more bipartisan consensus on the regulatory role of government than political speeches reveal. Conservatives often use anti-regulation language, but they aren’t making a widespread call to abolish the NHTSA. Additionally, hearings in the House of Representatives’s Energy and Commerce Committee have been initiated by Congressman Fred Upton, a Republican (who also sponsored the TREAD Act).
Of course, government involvement is not a panacea. The NHTSA has faced questions about whether it should have investigated consumer complaints about GM's ignition switch problem sooner. Nevertheless, GM’s and Toyota’s delayed recalls, and the NHTSA's potential fault, indicate there is a need for more vigorous and effective oversight, not less. Therefore, as the midterm elections approach and the political rhetoric heats up, economic debate that centers around how to most effectively implement government regulations will be more constructive, and honest, than sound bites that challenge the efficacy of regulations at all.
What can be done to prevent automakers from delaying recalls in the future? Leave a comment.
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