Wednesday, March 21 , 2018, 10:17 am | Heavy Rain Fog/Mist 54º


The Daily Capitalist: Do We Need an Automobile Industry?

The proper question is: Do we consumers need GM? The obvious answer is no.

“Do we need an automobile industry?” was the question posed on CNBC Monday night, the day that GM filed for bankruptcy. I was watching it while doing my workout, so I was too tired to throw things at the screen. It’s the wrong question to ask.

GM, with a 101-year tradition, is a sad case. For 77 years (1931 to 2007), the pride of Detroit was the top manufacturer of autos in the world. Now it’s the second largest. But with $82.2 billion in assets and $172 billion in liabilities, GM is broke.

You can read all the articles about GM in the Wall Street Journal, The New York Times, Bloomberg and the usual media and get the details of how their reorganization will unfold. There is also a good article in Wikipedia on GM. It includes a neat table of current and defunct brands. A good article on its failures and successes can be found here.

We talk nostalgically about our first cars, and mine was a well-used 1955 Chevy Bel Air two-door, orange-red and white. Pretty neat, so I thought, as I drove off to my first year in college. I dumped it the next year and bought a used 1960 Volkswagen because it had a definite coolness factor that the Chevy didn’t.

In fact, I didn’t buy another U.S. car until my Suburban in the mid-1990s. Foreign cars just couldn’t squeeze in four guys, four bikes and luggage — inside — as we headed off to such places as Moab, Utah. Otherwise, I just couldn’t bring myself to buy U.S. cars, especially GM products. They were clunky, had poor aesthetics, were not particularly well made, didn’t drive well and were just not cool. I recall renting an Oldsmobile on vacation in Jackson Hole, Wyo., in 1987. When I pulled the door shut, the door arm rest came off.

I think my experience is typical and symbolic of the GM story.

There are three reasons for the failure of GM: bad management, bad products and the United Auto Workers.

GM was typical of a large bureaucratic organization that lost touch with the public. It started as a company founded by entrepreneurs who aggregated many brands into one comprehensive strategy. It worked. You started with a Chevy and (hopefully) ended up with a Cadillac. After World War II, the company grew larger and the management practices carried on from each brand were codified and bureaucratized. GM had a rigid management structure that was, to put it mildly, slow to change. If I hear Rick Wagoner or any GM CEO say, “It’s not our fault; we’re a great company,” one more time, I’ll buy a Honda just to spite them.

Their failure to react to competition is one of the hallmarks of a bureaucracy. When the first funny little Honda was imported in the late 1960s, they laughed a lot in Detroit. The future proved Honda right and GM wrong. People did want well-made, efficient and stylish smaller cars. Funny thing, that. What was the difference between Honda and GM? Soichiro Honda, entrepreneur, ran his company.

Like all large bureaucracies, they needed a brain transplant, but instead kept elevating the same types of corporate drones to lead the company. They just couldn’t see the problem. It reminds me of AT&T before the breakup. It didn’t have to compete during the monopoly days, and when the same people had to lead the company in an environment of fierce competition, they couldn’t do it.

My experience with GM cars is probably the same with most people in America and, as a result, GM lost its franchise. When you read the article on GM’s failure to adapt to the market, you will be saddened by its complete lack of understanding of what was happening to it. Every attempt to break the mold failed. The landscape changed and American buyers could actually see the difference in quality and helped raise Toyota, the standard of excellence in the automotive world, to the No. 1 spot in the world.

I can’t say that the UAW union caused the failure of GM. I will lay that at the doorstep of management who felt they could get away with high labor costs because they believed their machine would keep rolling on forever. But the unions have powerful bargaining power backed by federal legislation that has been strengthened over the years.

The UAW raised the labor costs of production so that at the end the cost of benefits to workers exceeded the cost of steel in each car. The UAW contract resulted in average labor costs including benefits of $74 an hour. Honda, a nonunion shop, pays an average of $44 per hour. We have all heard about the assembly line workers who made more than $100,000 with overtime. Don’t forget that you didn’t want to buy a Detroit car made on a Monday or a Friday.

The UAW now has learned a hard economics lesson: You can’t dictate wages to the market; the market dictates wages to you. I believe that unions, as advocates of socialism and welfarism, got what was coming to them. No wonder that union membership in America is at an historical low (only 12 percent of the work force). Michael Moore, are you listening?

Back to my original question: Do “we” need an automobile industry in America?

What the hell kind of question is that? I’m sure the person posing the question uses the term “we” as a reference to our government. The question assumes that the government has control over the automobile market and that “we” collectively as “society” can and should make decisions about which companies should survive and which should fail. Not only does this question beg the motives of the questioner, it demonstrates ignorance of basic economics.

The proper question is: Do we consumers need GM?

The obvious answer to that question is that we consumers already have voted on that subject, and it is clear that we don’t need GM or Chrysler. If we had needed them, we would have been buying their products instead of Toyotas, Hondas and BMWs. We the consumers are the ones who decided we don’t need GM. Game over.

Companies go out of business all the time. Why should GM be any different? Of course there will be hardships on workers, dealers and suppliers. But we have voted with our pocketbooks by giving our hard-earned money to manufacturers of better products. Why should we prop up a company that has failed to satisfy our needs?

You say we can’t let this company, so valuable to America, go down. All the jobs lost, the companies they drag down with them! What a loss to America!

Take a deep breath. We did it to GM! Accept that fact. All that is happening now is that the government is taking your $50 billion and directing it into a politically desired goal. It’s not about economics or helping consumers. Whether it is due to worker-voters in rust belt states, politically powerful unions getting their payback, or lobbyists of affected companies spreading cash around Washington, it’s a still a political decision, not an economic one. “Too big to fail?” There is no such thing. That’s just a jingoist slogan made up by people who want a government bailout.

But here is what is really wrong with the bailout: When the government takes $50 billion from your pocket and gives it to GM, what about the jobs and opportunities lost because that $50 billion didn’t get invested in things we really want and need? Because you can’t see these losses you don’t think about them, but they are real.

It comes down to one of the oldest lessons in economics: the seen vs. the unseen. This lesson was made famous by Frederic Bastiat in his 1850 book, The Law. In his Fallacy of the Broken Window, a boy breaks the tailor’s window and onlookers believe that he’s actually doing a good thing because now the glazier has work. What they don’t see is that the tailor is now poorer for the cost of the window. He was going to spend the money on a loaf of bread. But now the baker is out the profit he would have made on the sale of the bread and the tailor has no loaf. You can’t create wealth by destroying it. War is a good example of this. This is the basis of Keynesian economics.

This same rule applies to government expenditures. Government doesn’t create wealth, it spends wealth. When they take our taxes and spend it on GM, a politically desirable goal, what they don’t see is the market-decision based expenditures we would have made with the taxed money. Basically they are repairing the broken window.

My guess is that the government will never get our money back.

— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.

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