How Capitalism Will Save Us (19 page)

I
n 2008, temporary assistance to the automakers was justified for two reasons: the number of jobs at stake and the fact that Detroit’s decline is not entirely a case of marketplace creative destruction. Government policies were partly to blame for Detroit’s problems.

Federal Reserve monetary policies that weakened the dollar were extremely damaging. They sent commodity prices soaring and substantially increased the price of gas. High gasoline prices killed the market for Detroit’s most profitable product, sport utility vehicles (SUVs).

There’s no question that Detroit is responsible for numerous mistakes. Many American auto offerings in recent decades have failed to excite consumers. Auto companies also acceded to crushingly expensive labor agreements that dampened productivity. But that is not the only reason these companies are in the trouble they are today. A relatively little-known irony is that GM and Ford do well selling small, fuel-efficient cars in foreign markets. They are unable to include those cheaper, foreign-made cars in their fuel-efficiency averages because the U.S. government, responding to pressure from politically powerful labor unions, requires that 75 percent of their models be made with at least 75 percent domestic parts to count in their Government Corporate Average Fuel Economy, or CAFE, averages. Thus, to meet government standards, automakers are forced to manufacture more vehicles here, forgoing needed profits.
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CAFE standards currently require fleet fuel efficiencies averaging twenty-seven miles per gallon for cars and twenty-two miles per gallon for light trucks. Originally enacted in 1978 in response to the Arab oil
embargo of the 1970s, CAFE standards are set to increase to thirty-five miles per gallon as a result of the Energy Independence and Security Act signed into law by George W. Bush in 2007. President Obama proposes to increase the cost burden of these regulations still further by raising CAFE standards to thirty-nine miles per gallon by 2016.

Of course, European governments get people to buy small, energy-efficient vehicles in a more direct way—they tax the heck out of gasoline. But American politicians know they can’t do that. So they try to achieve the same result via fuel-efficiency regulations.

The other problem, of course, has been excessive labor costs. Detroit exemplifies what happens when companies are kept from responding to Real World market pressures, when they’re forced by unions to pay for labor they don’t need and “legacy” –i.e., health-care and pension—costs they can’t afford.
Forbes
automotive editor Jerry Flint writes that while billions of taxpayer dollars have been poured into unionized Detroit manufacturers, nonunion automakers in other parts of the country—subsidiaries of overseas automakers like Toyota and others—are doing fine without bailouts. It took a while, Flint writes, for American “transplants” to learn how to manufacture here. But eventually they did.

Flint says it’s not only about money. Japanese and German companies that manufacture here also “put particular emphasis on teamwork and quality.”
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And the products show it.

Because government helped create the mess, a limited bailout to keep Chrysler and GM from collapsing could be justified. But that’s a long way from where we are today. GM and Chrysler have been forced into a government-managed restructuring, while Chrysler is being forced into a government-designed solution that entails giving itself to Fiat. Government and unions ended up owning substantial shares of both companies.

Instead of having companies reorganized in Chapter 11 bankruptcy, we have a third-world, Venezuela-like solution. The companies are being turned over to United Auto Workers. Senior creditors are having to give up far more than they would in Chapter 11. This trampling of contracts not only is a gross violation of the spirit of the rule of law but also sets an awful precedent for the future. Investors are going to demand far higher prices for capital, knowing that they now bear not only normal market risk but also a very real political risk. Or worse, they may make
fewer
investments than they would have otherwise. Long-term, the economy will suffer.

Putting aside the political reorganizations of GM and Chrysler, there’s the very real question whether those two companies will be viable with government and unions dictating how the companies will be run. Politicians love green cars. But consumers may not. Thus GM may turn out green cars that need subsidies of five thousand to seven thousand dollars per vehicle.
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And then there’s the Real World question: what do politicians, many of whom have not even worked in the private sector, know about successfully selling cars? In the spring of 2009, administration officials temporarily barred Chrysler from spending money on marketing. How does anyone sell anything successfully if they can’t market it?

The debacle of Detroit offers a painful Real World lesson about what happens when politicians and others attempt to micromanage a market and reduce the “brutality” of capitalism. They inevitably fail—and produce even more brutal consequences. In the case of the automakers, the effort to save Detroit from itself resulted in the needless spending of billions of the hard-earned dollars of countless taxpayers, and it wiped out
holdings of creditors and shareholders—not just equity funds but individuals who had invested in GM stock. It forced dealers to close and lay off employees. And it will still result in the loss of worker jobs. The new GM will be smaller, with at least 20,000 fewer workers. In 1970, at the peak of its power, GM employed 395,000 blue-collar workers. That number is slated to go to 38,000 after the reorganization.

Not only will Detroit jobs be lost. Many more jobs in the larger economy will never come into being, because of the higher taxes that will be needed to pay for this “rescue.”

B
arack Obama promised during his presidential campaign to create “five million new jobs that pay well and can’t ever be outsourced.”
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Shortly before taking office, he announced his solution to the mounting unemployment resulting from the economic crisis. His administration would generate or preserve 2.5 million jobs over two years by spending billions of dollars to rebuild roads and bridges, modernize public schools, and construct wind farms and other alternative sources of energy.