Automakers That Can’t Compete Deserve to Disappear

This article is the second of a three part series.
Part I | Part II | Part III

I abhor paternalistic industrial policy, in which decisions about who makes how much of what are made in Washington think tanks and government offices by public policy “experts” who fancy themselves social engineers. That is a dangerous and condescending worldview, which seeks to homogenize individual preferences into some Orwellian conception of the “social good” or the “national interest.”

It has been suggested that I view GM’s fate as a matter of national indifference. That’s correct, because I have not made the mistake of conflating GM’s condition with that of the U.S. auto industry. Whether or not there are so-called “national interests” in maintaining a healthy auto industry (and I’m not convinced there are), I happen to believe that health comes through an evolutionary process in which the companies that have made the right decisions survive and grow, and those that have made bad decisions contract and sometimes even disappear.

It is not only fair, but efficient and wise that the market rewards companies that make better products at better prices with higher profits and larger market shares, while the companies that make undesirable products at high cost lose profits and market share.

Some disagree with that view by saying that we need a healthy U.S. auto industry to design and build the next generation of fuel-efficient cars. Well, that industry exists — at the moment. But its existence is threatened by a government that appears willing to tip the scales in favor of one company.

There are plenty of healthy auto producers in the United States, all of whom are facing contracting demand. The ones that are best equipped to survive the recession will emerge stronger. But we undermine the objective if Ford, Toyota, Kia, Honda, Volkswagen and all the others cannot compete on a level playing field with GM to come up with the next generation of fuel-efficient cars.

Some speak about the dangers of a “cost-obsessed management” hastily dispensing with the resources needed to make better and more innovative cars. But efficiency or cost obsession (as you dismissively call it) is the essence of competition.

And let’s not pin on those of us who favor market processes the sin of “destroying the productive capacity of our largest U.S. auto manufacturer and forcing thousands of suppliers out of business.” The managers of GM and the United Auto Workers did that all by themselves, by colluding in mismanagement and greed and then rationalizing their destructive behavior with the presumption that they were too big to fail and that the government would be there to clean up the mess.

Is GM really too big to fail? The question is right on point. Auto demand has plummeted in the United States over the last year. The market is contracting. Not every producer can cover its own costs and make a profit. The most efficient and worthy will survive.

Some only see only destruction in this process, but the creation will come from the greater opportunities, the greater scope for economies of scale and the greater incentive to make the right decisions that the surviving firms will face — unless policy interferes with the process.

Daniel J. Ikenson is associate director of the Cato Institute’s Center for Trade Policy Studies.