Until just recently, the automobile has seemed the birthright of every American—and the bigger and shinier the car the better. That expectation has made the auto industry the biggest in the U.S. But with the gasoline shortage that followed the Arab oil embargo and the skyrocketing price per gallon, the whole cult of the big car is being questioned. One answer is the smaller, more economical compact—and the leader in small car sales among Detroit's Big Three is the Ford Motor Company. The man primarily responsible for Ford's record is Lee Iacocca. The son of an Italian immigrant, Iacocca (pronounced eye-a-coke-ah) earned a mechanical engineering master's degree from Princeton before joining Ford, where he was spotted by president-to-be Robert McNamara. In 1964 Iacocca made his mark in spectacular fashion by pushing hard for the Mustang. Six years later, Chairman Henry Ford II bestowed the presidency on him, making Iacocca at 46 the youngest of the Big Three presidents. It has proved a prosperous relationship; last year alone he earned $865,000 in salary and bonuses. At Ford's Dearborn headquarters, Iacocca recently discussed the auto industry and its future with Christopher P. Andersen of PEOPLE.

Car prices on the new models are slated to go up around 10%—or between $400 and $500 a car—for the second year in a row. Why?

I am stunned to see how much basic commodities have gone up, and what is a car but an assembly of 15,000 commodities? And as necessary as some of the mandated pollution and safety controls are, a number of them—the 1975 emission-control system, the 1973 and 1974 bumper, the harness system and seat belt interlock—all add to the weight and cost of a car. Right now we are playing catch-up ball after the artificial restraints of wage and price controls.

Aren't price increases inflationary?

The only way to break inflation is by rolling back costs. We've got to get back to fundamentals. The federal government is spending $30 billion more than it's taking in, and you can't do that for long. But it has become a way of life. Now, I'm one of those free-enterprisers. I can't deficit spend. If I don't make a profit—and I don't mean the measly 2.6¢ per dollar of sales we've seen lately—I don't last for long. That's the name of the game.

Repair bills also hit hard at the consumer pocketbook. Isn't there room for improvement?

In the service area, we've done a spectacular job. Required maintenance costs per vehicle are coming down hundreds of dollars annually. I don't see flat tires anymore. Why? Steel-belted radials are now standard equipment. The flat tire has been replaced by electrical failures as the No. 1 service problem. The building of modules and printed circuits that can be replaced relatively easily seems to be the only way to get this service problem in hand.

The pollution-control deadline has been set back one year. Given this grace period, can Detroit meet Washington's pollution deadline?

We can't make it under any circumstances. Nobody can meet the law—there's universal agreement on that. We've come such a long way in such a short time that I think it's time for a moratorium. We've got to pause and ask ourselves: how much clean air do we need? How much are we willing to pay? Since the cost is being passed on, this has become a tax to drive—and a stiff one.

The Environmental Protection Agency has gone so far as to propose banning cars from downtown districts. How do you feel about that?

Anybody who thinks people are going to give up their cars and hop on bikes or walk...well, it'll never happen. I sure don't think the answer is to have only guys with even-numbered licenses drive on Wednesdays, either. If you want to close off certain areas and make them into shopping malls, that's all to the good. But on the whole, it's not a rational approach to the transportation problem.

What is the outlook for mass transit?

The track record from mass transit looks pretty bad. We haven't technically and economically worked out a feasible system that people want. The new systems like BART [San Francisco's Bay Area Rapid Transit system] have flopped. If a small bus line is going under, that doesn't mean that the government should bail it out. That's a bottomless pit. A balanced transportation system is the answer. We've had enough artists' sketches of people going overhead in computerized trains. In the next 10 years, we're not going to see any wholesale mass transit. Those concrete ribbons are just going to keep tearing up our landscape until we can find something better.

For the first time the new small cars—imported and U.S.—are expected to constitute a majority of new car sales. How far will this swing go? And how long will it last?

I happen to be bullish when it comes to small cars. They're not a fad. There will be no return to the days of the big car. Small cars will probably make up 60% of the market in 1975, and we're prepared for that. We made plans for this long before last winter's oil crisis.

Small cars have traditionally been considered poor vehicles for profit. Will the industry be able to make as much by selling compacts?

Frankly, that's now cliché. People want economy and they're willing to pay for it. A kid will say, leave out the spare tire, for God's sake, but don't leave out the second speaker for my stereo. People want a nice, tight package, but they won't forego any creature comforts. You can sell smallness, but you can't sell austere smallness.

Can Detroit dictate what styles people will buy?

Well, the ultimate compliment to businessmen is to say that we can sell anything to anybody. Anybody who really believes that is nuts. You can't lead the public by the nose. No way. And when you're wrong, boy are you wrong! You remember the Edsel. I was for safety back in the '50s, but that's not what sold cars. We don't want to be left at the post, but we don't want to get ahead of our market either.

So far this year profits are down. Is the industry in as tough shape as it's ever been?

This has been one hell of a year for getting nervous.

Will the size of the car market change? Does the drop in the birthrate worry manufacturers?

Even at zero population growth, there will be no major change. People may drive less with high fuel prices, but they will continue to drive. We'll be reaching an annual scrappage rate of 9 million automobiles, and those are cars that have to be replaced. That's one hell of an underpinning for sales right there.

Sen. Philip Hart (D-Mich.) has conducted hearings on the size of Detroit's Big Three. Does it bother you that big is becoming something of a dirty word?

Big Business and Big Labor pale in comparison to Big Brother in Washington. Who says how big is too big? Funny, during World War II, they thought we might not be big enough to turn out the required number of tanks and aircraft engines but we were, thank God. You reach a point where somebody looks up and says, "Those guys are too damn good." What if they broke us up? Then they'd have to have 10 presidents at my salary and that would be terrible. Yes, we are big. And because the industry is big, it accounts for 18-20% of the GNP. The auto industry is also the biggest employer and the biggest taxpayer. When it comes to bigness, the public at large is the final arbiter. It votes every day by buying a product or not buying it.

Isn't the attitude of young people toward bigness in particular negative?

I don't get mad at college kids. I used to do campus recruiting for Ford, and discovered that people are people—they're sensible. My job isn't to turn them completely to our point of view. Of course, the greatest view-changer in the world is the first day you've got to go out and make a buck. That's the day when you stop being a liberal and start being a moderate.

How does Detroit rate the new administration in Washington?

Jerry Ford will make a good, dedicated President, and I happen to be a great fan of Nelson Rockefeller's. Together they make a well-balanced team. But there's a new girl in town—inflation. Maybe unemployment will have to go up slightly, but we've got to reorder our priorities. I hope the Ford administration gets on with it.