Capture by “Main Street”: Was the Car Safety Regulatory Agency Asleep at the Wheel?

Plenty has been written on the role that financial institutions played in the global economic crisis and the role their influence played in their own generous rescue by the government. In the past couple of years, we have written about how the undue influence of and the regulatory capture and “legal corruption” by some Wall Street firms enabled them to take on huge systemic risks, while minimizing their own exposure.

In this capture process – however subtle or coarse – financial regulatory institutions, such as the Securities and Exchange Commission (SEC) and the Office of Thrift Supervision (OTS), failed to perform their regulatory and oversight roles. Furthermore, Wall Street institutions, through a combination of political contributions, lobbying, and the seamless revolving door with public sector executive positions in Washington, wielded significant influence over top policymakers in government and Congress.

Elsewhere, writing and commentary have also looked at last year’s less-than-successful attempts by US. automakers to secure bailout packages similar to those received by banks –specifically, the Wall vs. Main St. divide in the extent and terms of their respective rescue packages.

Yet, there has been a lack of commentary on the parallels between the financial and auto industries and their undue influence over regulatory agencies and Congress. The current Toyota safety debacle not only raises questions about safety standards at Toyota, but also about regulatory failure.  

U.S. Transportation Secretary Ray LaHood stated that he was “not done with Toyota yet”, that “they are a little safety deaf”, and that many Toyota owners should stop driving their cars. But, he has yet to admit to the apparent failure of the U.S. car safety regulatory agency, the National Highway Traffic Safety Administration (NHTSA), which LaHood oversees. 

This is reminiscent of last year’s focus on “evil banks” and the neglect of oversight failures by the financial regulatory agencies. Beyond downplaying the responsibility of the NHTSA, the government faces a further credibility challenge if it points fingers solely at Toyota since it currently owns the carmaker’s major competitor, GM.

Without absolving Toyota of its share of responsibility, it is necessary to probe further on the NHTSA’s role in this safety debacle. Having recently looked at the abdication by financial regulators, such as the SEC and OTS, of their financial regulatory and oversight role, a review of emerging evidence from the media raises some parallel questions about the NHTSA. Namely, was the NHTSA merely asleep at the wheel? In dealing with Toyota, did it fall into a lull because it viewed the carmaker as ‘too-large-and-successful-to-do-wrong’? Did it suffer from management deficiencies and soft leadership, and/or from budgetary as well as know-how limitations in an industry undergoing fast technological change? No doubt, all these factors may have contributed to the subpar performance of the NHTSA to varying degrees.

However, the contribution of these managerial and resource factors notwithstanding, the politics of influence and soft capture by the automakers may have played a larger role than so far acknowledged. Furthermore, it may have compromised the agency’s independence to conduct serious investigations and make recommendations based on the consumer’s best interest. While it’s early days to be deciding the extent to which each factor contributed to the NHTSA’s woes and the car safety crisis, some of the emerging evidence does suggest that undue influence and some form of regulatory capture by the automaker played an important role.

First, possible capture and failure of the NHTSA is suggested by the exclusion of cars from Toyota’s current recall that are the subject of a class-action lawsuit filed a few months ago, alleging faulty electronic throttles which may result in sudden unintended acceleration (SUA).

Specifically, the Charleston Gazette reports that the lawsuit from last year explicitly stated that even after the NHTSA had closed its investigation, “complaints and incident reports from Toyota customers who had experienced SUA continued to come in to NHTSA and Toyota in substantial numbers.” Both the carmaker and regulator blamed these incidents on the driver’s-side floor mats “despite evidence that floor mats were almost never the cause.”

The article continues by illustrating the close ties between the NHTSA and the auto industry, pointing to how political appointees, who included car industry lawyers, ran the agency. It cites Andrew Card, George W. Bush’s chief of staff and former lobbyist for the auto industry, as concluding that “it may be that some investigations were terminated for political reasons.”

Meanwhile, the Washington Post suggests that The NHTSA, which is charged with protecting the nation’s drivers, has long relied on automakers to help identify perils posed by the cars they make. The reliance on automakers’ cooperation, however, might have diminished drivers’ say in the safety review process. During agency reviews, officials have at times minimized or simply rejected consumer accounts of what happened in favor of the manufacturers’ assessments, records show.” The Post article gives the example of a driver who was unsuccessful in his complaint about sudden unintended acceleration to the NHTSA, and then goes on to provide further details on instances in which the NHTSA has sided with Toyota when confronted with consumer safety complaints. The article concludes that this may result from close ties between the NHTSA and car manufacturers, citing that “two top officials in Toyota’s Washington office, which deals with the NHTSA, are former agency employees”.

In fact, the NHTSA has had ample warning and detailed information on the safety troubles of a number of Toyota vehicles for years.  In spite of Toyota’s opacity regarding defects, the regulatory agency regularly receives detailed information about possible defects resulting in crashes from car insurance companies. For instance, State Farm says that it first warned the NHTSA about Toyota accelerators back in 2007. Furthermore, Toyota’s problems were documented and reviewed in a 2008 independent analysis conducted by consultants with the available consumer complaints data. Finally, last week’s report by the Safety Research & Strategies Inc. points to thousands of instances over the past decade where Toyota and Lexus owners reported their sudden unintended acceleration problems to the NHTSA, media and courts.

In paper, the NHTSA has major powers over the automakers, such as subpoena, yet it did not use them with Toyota, in spite of the latter unresponsiveness regarding the agency information requests. And in the few instances in which the NHTSA investigated these complaints, it tended to side with the conclusions reached by the carmaker; namely that no identifiable problem existed, that the likely determinant was driver error, or in very few instances, that there was a simple floor mat problem. In fact, the NHTSA does not actually conduct car tests, but relies significantly on paperwork from automakers (which has been likened by some as the ‘fox guarding the hen’).  Furthermore, to this day, insufficient attention has been paid by the NHTSA and Toyota to the possibility that the source of SUA may in fact be in their complex electronics rather that in the simple pedal mechanics, which would require a different, and likely much more expensive, remedy from Toyota.

In a well functioning democracy, as in the U.S., the legislature provides an additional layer of checks and balances, and accountability. It is no surprise then that on such a politically charged issue as car safety and within it a potentially lethal ‘sudden unintended acceleration’ problem, Congress is rushing to hold hearings regarding the oversight role of the NHTSA as well as the direct failures of Toyota. 

Consequently, the NHTSA and Toyota may end up facing the scrutiny of at least three Congressional Committees. It will be important to closely monitor these hearings since the undue political influence exercised by carmakers obviously do not stop at the regulator’s door – it also extends to lawmakers. Notably, thus far no member of any of these Congressional Committees appears prepared to recuse themselves from the hearings, even though some come from states and districts where Toyota has ‘strategically’ placed factories and jobs, while others have financial interests in Toyota.  Some members of Congress (and Committees) have been open champions of Toyota (while other members have been champions of other automakers), raising questions as to how objective the hearings can be.

This developing story of safety failure in the auto industry is in its early investigative stage. Further evidence is needed before conclusively stating that this is a case where the “regulated” carmaker fully captured the regulator. Yet, no stone should be left unturned in investigating the facts and ramifications of the past cozy relationship between the regulator (NHTSA) and the regulated carmaker (Toyota), and whether car safety suffered as a result. 

Just as in the case of high finance, the role of the politics of influence by an industry over the government, regulators and Congress, and the revolving door between regulators and industry cannot be ignored. Also as in the financial crisis, failing to probe into this politically sensitive issue may produce a temporary technocratic fix to this safety saga, one which would merely point to managerial, budgetary or technical lapses at the NHTSA, without addressing the more fundamental role of political influence. Consideration should be given to placing serious limits in the common ‘revolving door’ practices whereby there is a seamless movement of high level car executives to the Government (including the regulator) and back.

Finally, the set of existing political incentives needs to be kept in mind in transparently monitoring the stance of members of the Congressional committees holding the hearings, so as to mitigate conflicts of interest. 

In fact, further transparency regarding exposure of conflicts of interest between senior government officials, regulators and legislators, on the one hand, and the industry they oversee, on the other, is warranted. Likewise, full and timely public disclosure of data on car crashes and defects is called for. The analysis with such data ought to avoid the mere trivial statistics and ought to emphasize the importance of a defect’s impact on severe crashes (including fatalities): it is inadequate to rest on the laurels of a stellar simple statistic showing a lower percentage of user complaints for Toyota than for others, for instance, when a small proportion of drivers may face a particularly severe risk of a severe crash.

With further transparency and timely disclosure of crucial information and data, public interest groups, expert consultants and researchers, as well as investigative journalists would effectively serve as a check and balance on the performance of the executive and legislative bodies in their regulatory and oversight functions. In the throes of the recent Supreme Court decision doing away with remaining constraints on direct political contributions by corporations, such timely disclosure and dissemination is even a higher priority to guard against capture.