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Government Motors?
It is fitting that this column is being published near April Fools’ Day, for the government is playing a hoax on Americans in basically nationalizing General Motors (now “Government Motors”) and Chrysler. For Chrysler this is the second bailout in a generation; the company should have been sleeping with the fishes long ago.
For all the tough talk about responsibility, the Barack Obama administration should not go into the automobile business (or the banking business, or the insurance business, or the mortgage business). We can be assured that the automobile industry in this country will be thoroughly politicized, the last thing the American economy needs now.
Beyond the consternation about the “loss of jobs,” we need to understand why GM and Chrysler are in their present fixes and why permitting them to experience bankruptcy – real bankruptcy – actually will save jobs. Second, we have to point out why saving these companies through government directives actually will damage the U.S. economy and make things worse, and potentially much worse.
While GM and Chrysler are at death’s door, we cannot say that for every automaker. Honda, Nissan, Toyota, and other companies with operations in the USA are doing fine, and while times are hard everywhere, they are not candidates for the undertaker.
Government critics of GM and Chrysler claim that they did not build the right kinds of cars: the small, fuel-efficient vehicles that people on the left want to force us to buy (when they are not trying to force us to take public transportation). The reason GM did not build those cars was that they could not make them profitably thanks to their labor contracts, which guarantee the highest industrial wages paid anywhere. (And that includes pay given to people who don’t work at all, per the United Autoworkers contracts.)
Unfortunately, GM and Chrysler (and Ford to a lesser extent) could not compete with other auto manufacturers when gasoline prices skyrocketed, which were brought about in large part because of concern about the strength of the rapidly inflating U.S. dollar. Furthermore, because of their bloated labor contracts, the Little Three (formerly the Big Three) had fewer profits squeezed out of automobile sales, which is a nice way of saying they were paying more for production than their foreign competitors. Start multiplying this times the numbers of cars sold and a definite pattern arises: Domestic companies were uncompetitive because they and their unions chose a higher cost structure.
One of the enduring myths in economics is that the higher the cost, the greater the wealth created. People still insist that Henry Ford “created the American middle class” when he doubled the pay of his autoworkers from $2.50 to $5 a day. That is nonsense. Higher costs do not create more wealth. Increased productivity does. On the other hand, higher costs imposed through government or coercive union contracts destroy wealth. The infamous UAW contracts required that the Little Three use more resources than were necessary to build cars and trucks, which meant those resources couldn’t be employed at their highest-valued uses, making everyone else poorer.
Even though the government is talking responsibility and even bankruptcy, nonetheless the market already has spoken on GM and Chrysler. At present the sum of the parts is greater than the value of the whole, which means these companies would be worth more by having their physical assets sold in a bankruptcy proceeding than kept together by government fiat.
By artificially keeping GM and Chrysler alive, the government not only is wasting scarce resources and forcing lower-income Americans to create “make-work” for higher-income people, it is also placing a hardship on those U.S. subsidiaries of foreign auto companies. Given the realities of American politics, I can imagine that sooner or later the government will take aim at those subsidiaries in hopes it can damage them in order to protect its “investment” in GM and Chrysler. Stay tuned.
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FROM Buy American? Sell American!
But the fundamental failing of Buchanan’s manufacturers-good/consumers-bad theory is that it contravenes the primary dictate of sound economics: Focus not on one party in the short run, but on all parties in the long run. We are not all the CEO of GM, but we are all consumers — including GM’s CEO.
A Modest Proposal
So now the question becomes: Why does “economic nationalism” demand sacrifice from you and me but not Mr. CEO? Why not have an “economic nationalism” that really puts the American nation — i.e., American consumers — first?
People often say that tariffs are “taxes,” but another way to look at it is that protectionism is price control. So, instead of controlling prices to make foreign products less affordable, why not control them to make domestic ones more affordable? In another words, instead of forcing our country’s consumers to “buy America,” i.e., pay higher prices, why not force its companies to sell American, i.e., charge lower ones? That’s how you fight “cheap imports” — with cheaper domestics, not expensive ones.
And the objection would be what — production costs? If we can blank out the factors that determine whether you or I can afford to purchase a product, why can’t we instead blank out the factors that determine whether a business can afford to make it? And since those include labor, here’s the best part: When American products are priced (by the coercive state, not the free market) lower than imports, all the jobs at GM — from company head to company janitor — will be protected. Honestly, what’s not to love?
The bottom line is this: If GM isn’t going to give each of us a free car, there’s no reason why we should give GM a free ride, i.e., a “level playing field” where their competition is priced out of our reach. Let’s not have any nonsense that that car represents impoverishing “consumption,” while that ride constitutes enriching “production.” If American CEOs don’t consider it their patriotic duty to charge lower prices, then it’s damn well not our duty to pay higher ones.
3 April 2009 at 10:45 am