Cold Steel

The U.S. steel industry needs massive failure, not another bailout

"We have an answer for the crisis in American steel," Robert S. Miller Jr., the recently installed CEO of the bankrupt Bethlehem Steel Corporation, tells The New York Times. "It is the consolidation and the rationalization of the integrated steel industry by a combination of four or five companies to come together as a large integrated steel company."

The plan on the table is for the merger of USX-U.S. Steel Corp. and Bethlehem Steel Corp., with the possible inclusion of Weirton Steel Corp. and Wheeling-Pittsburgh Steel Corp. The new company would account for roughly 30 percent of U.S. steel production.

That would certainly help things in the notoriously fragmented and oversupplied industry. But, as usual, there's a catch. Miller, who according to the Times helped craft the 1979 government bailout of Chrysler, needs the government's help: The federal government has to protect the new company from imports. Taxpayers must also pick up the $13 billion tab for the industry's pension and retiree health-care benefits.

It's a gutsy offer. The captains of this floundering industry are asking for nothing less than national industrial socialism, a government-protected cartel that benefits a few producers at the expense of the rest of the country. Treasury Secretary Paul H. O'Neill is already acting as if he were an OPEC production minister. "O'Neill has been seeking greater balance among global steel makers by encouraging countries and companies to reduce production to stabilize prices," reports the Times. "He has also threatened to restrict the entry of steel imports to the United States."

The steel industry has long been helping itself to federal largesse. The old-line integrated producers, for example, cut deals with the union that it couldn't afford to keep. To stay afloat, the producers turned to Washington, lobbying for some of the nation's most protectionist laws. As of June, the industry enjoyed 103 anti-dumping orders, which impose tariffs on specific products from specific countries. It enjoys federally guaranteed loans, too, because investors deem few of its firms to be worth private investment. And come Friday, industry analysts expect the U.S. International Trade Commission to tell the Bush Administration that it ought to punish foreign producers even more.

Yet even with all this government benevolence, the industry's largest firms are unable to compete in world market, or even the domestic market. In recent years, no fewer than 25 such firms have filed for bankruptcy. The question is, why should Congress care? The industry, which is well represented on Capitol Hill by the steel caucus, argues that Congress should care because of jobs, the costs to taxpayers of letting firms fail, and national security.

None of these reasons holds water. Fewer than 170,000 Americans work in the steel industry, and thus have an interest in government keeping the price for steel high. But six to eight million Americans, by contrast, work in industries that rely on steel as a major input, and therefore have an interest in the lower price for steel that would be reached if markets were free. And don't forget the rest of us consumers, all 286 million of us, who purchase these products day in and day out.

The union argues that past government guarantees of pensions and loans would cost billions if the firms fail. But those costs are sunk, and are the result of bad policy subsidizing ill-conceived private agreements. That's hardly an argument for putting taxpayers on the hook for billions more in health care and retirement benefits, and passing higher costs on to consumers.

As for national security, the U.S. military uses very little steel, 0.02 percent of domestic steel delivered. "The military argument is not only bogus," notes Dan Griswold, associate director of the Cato Institute's Center for Trade Policy Studies, "but in so far as it's significant it cuts the other way." Why, after all, would we want our military to spend more on a major input than necessary?

"The steel industry is a dysfunctional, fragmented industry," says Griswold. "We need more bankruptcy and mergers in the steel industries." Griswold says that the consolidation plan "is a sign that instead of trying to keep these uneconomical companies on life support, they are being merged. The bad news is the price we're being asked to pay for the steel industry to conform to the market."

The industry has no intention of actually conforming to the market, which is why it's seeking more protectionism and money. And once the money is in hand, do you really think the union and steel caucus will let thousands of jobs disappear?

The steel industry doesn't need Congress or the Bush administration to help it consolidate and rationalize. That's a job that belongs in the bankruptcy courts.