Saturday, February 14, 2009

Should the U.S. Be Making Cars in 2525?

The U.S. is about to name a "car czar," someone to supervise automotive restructuring as a condition of accepting government loans. The automakers are supposed to submit plans next week to satisfy congressional overseers. Barney Frank, Nancy Pelosi, etc., in other words, are to preside over the reorganization of major American businesses. It is too easy to point out that these are the same people who gave use the housing mess. (Mark Steyn once mocked 1970s Britain as a place where "the government made your car." It is not so funny now.)

So instead, here is a good starting question. Should the U.S. still be making cars in the tear of Zager & Evans, 2525?

If your answer is "No," how do you answer if I replace "in 2525" with "next year," "in 5 years," "in 20 years," "in 50 years" or some other value? The only honest answer to every question is "I don't know," with the probability at some level close to one if we substitute "next week," and declining toward zero beyond that.

This means that there is some year that the U.S. should stop making cars, and that no one knows what it is. And so to decide this question we have a procedure. If companies can produce cars in the U.S. and sell them at prices that exceed the opportunity cost of the resources needed to make them, the answer is "keep going," and otherwise the the answer is "stop." This procedure is generally known as "the market."

It is possible of course to substitute an alternative procedure, in which elected representatives vote, in response to political pressure exerted by various factions, via votes, campaign donations, blackmail, or whatever tools they choose to employ, on providing money extracted from taxpayers either now or later (the latter, of course, don't vote) to car companies until, one day, they stop providing it. Note that it is no answer to say that the companies, like Chrysler in the 1980s, will use the money to become profitable once again. Ultimately, one day, the time at which Americans ought to no longer make cars will come.

Which procedure produces better results? Which procedure has us ceasing to make cars at closest to the right time? We trust the market procedure to answer when the question is, "When should a hair salon close?", "When should Americans stop manufacturing horse-drawn carriages?", etc. What is the difference here? Scale, surely. The automotive industry employs huge numbers of people. But why does scale make any different with respect to the ultimate question - should American resources be tied up in this end, or reallocated somewhere else? No one knows the answer to this question, but there is substantial reason to think the market process will do a better job than the political process. Indeed, the result generated by the political process, so far, is that American companies will be asked to preserve existing collective-bargaining agreements as much as possible, despite their immense cost. They will be expected to meet very expensive emission requirements. And they will be expected to sell the results at a price American consumers will pay. This approach does not inspire confidence.

Alas, the politicians get to write the laws, and the workers, consumers, bondholders, shareholders and the competitors to U.S. car companies, whether they make cars or not, must merely obey them. And therein lies all the difference. Not in what should happen, but in what will happen.



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