Wednesday, January 7, 2009

Moving Closer to a Planned Economy, Comrade

Governments are starting to do scary things with the auto and financial sectors. As Terence Corcoran of the National Post points out, there are risks in the auto bailouts (the web page with this article has disappeared since the time of writing).

Our current financial mess was caused by banks lending money to people who couldn’t pay it back. It’s ironic that governments are now pressuring banks to lend money to individuals more liberally. The thinking seems to be that banks should lend money to people who are poor credit risks so that they can buy bad cars. That should solve our problems.

The only way I can see for the banks and car companies to be run any worse would be to have the government taking an active role. Any step toward a planned economy is a bad step.

The role of government in the economy should be to set the rules, enforce the rules, and reign in market participants who wield too much power. If the government wants to encourage greener cars, it should do this by creating tax incentives. By propping up the big three car companies directly, the government is making life more difficult for new aspiring car companies. These companies exist and are much more likely to produce green cars than the big three automakers.

The basic problem with the big three automakers has little to do with the recent financial bubble. They make bad cars. Asian car companies make much better cars. It’s that simple.

General Motors, Ford, and Chrysler are too bloated and uncompetitive for it to be realistic to save all their employees’ jobs. Parts of each (or all of one) should go, but that is unlikely to happen. Much more likely is for us to step closer to a government-planned economy.


  1. Although I don't disagree with your points, I marginally support a bailout for the automobile industry. I think the shock waves of a failure of one of the auto companies would hit the economy very hard, and in unexpected ways.

    The auto companies have actually trimmed a LOT of jobs in the last several years. I don't think they make good product, but they do employ a lot of people. People are what keeps the economy going. Manufacturing gives good jobs, and there are a lot of jobs that directly rely on the auto industry.

    Also, perhaps the credit crisis has been a major factor in auto company's latest woes, and once credit starts flowing again, we will have a recovery in their sector such that they can break even financially. Consolidation and shrinking would probably help things too, and hopefully we do see this industry gradually shrink.

    I heard one commentator say "well, by calling this a bridge loan, it does imply there's something on the other side of the bridge". I sure hope so.

    Long term, if they can't stand on their own feet, they should fail. I'm hopeful they will just shrink enough that they break even. That will mean a lot of gradual job cuts and plant closures.

  2. Gene: I'm not actually against a bailout of the auto industry. To let all three companies fail at once would be so devastating that it can't be allowed to happen. However, to allow them to continue on their present course is insanity. They have been slowly failing for years. If there aren't big changes to try to better compete with Asian car companies, there will be no "other side of the bridge." I agree that if they fail, it must be allowed to happen gradually. But, I would prefer to try to save the American car companies by having them make a realistic attempt to compete by making better cars rather than just advertising more.

  3. Yes, you've put forth some crucial points, and the auto companies have been humbled, and they definitely needed that. GM's market share has really contracted from their 50% many years ago. Undoubtedly their success caused hubris.

    I drive an old Ford Taurus, and I am unimpressed with a design flaw in the head gasket that caused huge repair expenses. The radiator leaks like crazy in cold weather. I'll stop now, since this isn't an automotive blog.