Chrysler, Microsoft, and Industrial Policy

November 8, 1996 • Commentary

What kind of government would subsidize Chrysler and penalize Microsoft and Wal‐​Mart? Not one that should be trusted with an industrial policy, that much is sure.

In 1979 the Chrysler Corporation was going under, for a number of complex economic and marketing reasons that could be summarized as “no one wanted to buy their cars.” The Big Three automobile companies had grown fat and happy, facing little competition in the world’s richest market. Then American tastes began to change. Baby‐​boomers liked the looks and the reverse snob appeal of small foreign cars, and the energy crisis of the 1970s created widespread interest in more fuel‐​efficient cars.

The Big Three ignored the signs of discontent for too long. By 1979 Chrysler was on the verge of bankruptcy. The taxpayers came to the rescue, offering the company $1.5 billion in loan guarantees (of which it ultimately claimed $1.2 billion) to keep it in business. When the loan guarantees weren’t quite enough, the U.S. government also imposed “voluntary” quotas on Japanese automobile imports.

Together, the federal money and the restrictions on competition let Chrysler survive, of course, but only at the price of a less efficient economy. Every American car‐​buyer had to pay more because of the quotas. That was money he couldn’t use to buy something else, maybe something produced by an efficient American company. And the credit that was channeled to Chrysler was thus diverted from more creditworthy borrowers. We’ll never know who those borrowers would have been, but somewhere in America there are people who would have used that $1.2 billion in loans to build houses, start businesses, expand factories, hire more workers. Despite the government help, Chrysler’s payroll fell from 160,000 to 74,000 in just four years. In fact, Chrysler went bankrupt in all but name.

The chief characteristic of a capitalist economy is change. While Chrysler and other giants were struggling, small companies were being born. Most of those new companies failed; they didn’t serve customers as well as their competitors, and they didn’t have the political clout to get loan guarantees and import quotas. But some of the start‐​ups succeeded.

Two of the biggest success stories of the 1980s were Wal‐​Mart Stores Inc. and Microsoft Corp. Their founders, Sam Walton and Bill Gates, became billionaires. They got rich the only way you can in a free market: by producing something other people wanted.

Through the 1980s, giant companies were laying off employees in huge chunks, making front‐​page headlines; employment in the Fortune 500 fell by three and a half million. But Wal‐​Mart and Microsoft were quietly hiring. High‐​tech companies stay small. Even though the software industry is now the country’s sixth‐​largest industry, its biggest success, Microsoft, grew only from 1,000 to 5,600 employees between 1986 and 1992, which was still a lot better than IBM’s 200,000 layoffs. And about 2,000 of those Microsoft employees became millionaires through their stock ownership.

Wal‐​Mart, however, became one of the country’s largest employers. It grew from 62,000 employees in 1986 to 328,000 in 1992. Most of us never noticed; it’s front‐​page news when Sears lays off 20,000 people at once, but it’s never a big story when Wal‐​Mart hires 177 people every business day for six years.

So how did the U.S. government react to these tremendous success stories, to the story of a college dropout and a middle‐​aged man in Arkansas becoming the richest people in America? No doubt with awards, honors, presidential receptions, you say?

No such luck. In fact, the U.S. government’s response to the success of Microsoft was to launch a Federal Trade Commission investigation, later compounded by a Justice Department investigation, of whether Microsoft “has monopolized or has attempted to monopolize” markets for personal computer software and peripherals. Eventually Microsoft gave in and agreed to restrictions on its contracting and pricing policies in order to avoid long and costly litigation.

And in Arkansas, a judge ordered Wal‐​Mart to raise its prices to avoid damaging its competitors. Thanks a lot, Judge. Wal‐​Mart built its phenomenal success on having a wide selection of products at the lowest possible prices. The genius of Sam Walton’s system was not a new product, nor a single big idea. No, Walton’s system involved saving a penny here, a penny there, to create a distribution system that allowed his stores to sell for less than anybody else. Why should a man spend his life designing such a system if the government is going to come along and order him to raise his prices?

Antitrust advocates claim that big companies such as Microsoft and Wal‐​Mart (which were small companies just a few years ago) will cut prices to consumers, drive their competitors out of business, and then raise prices through the roof. There are a couple of problems with this scenario, notably the fact that it’s pretty hard to imagine eliminating all the other drugstores or software companies and the fact that no company has ever been able to implement this strategy.

And in these cases the facts indicate no such risk. When the FTC opened its investigation of Microsoft, for instance, the alleged monopolist controlled only about 10 percent of the MS-DOS applications business, which in any case is not the only operating system on the market. Its highly touted Windows program was installed on just 5 million PCs, or about 7 percent of the total. Microsoft did not have a single industry leader in the word processing, spreadsheet, and database markets. Some monopolist.

Meanwhile, in Conway, Arkansas, where a judge ruled that Wal‐​Mart was seeking to drive other pharmacies out of business, in 1987 there were 12 pharmacies. Today all 12 are still in business, and two more have opened. The profits of the plaintiffs in the lawsuit increased from 1986 to 1990.

Wal‐​Mart and Microsoft earned their billions the old‐​fashioned way–they gave customers what they wanted. Punishing them–and subsidizing market failures like Chrysler–is absolutely the reverse of the free enterprise system.

But those little forays into the marketplace are not enough for the Clinton administration. The very smart people in the White House think that they know how much pharmaceutical drugs should cost, what kind of cars Detroit should build, how information should be transmitted to our homes, how much Japanese consumers should buy from each of our industries, and how to “match the skills of the workforce against the things we have to produce in the next 20 years.” They’re spending $200 million this year–and planning to spend $744 million in 1997–on the Advanced Technology Program to subsidize high‐​tech, high‐​risk business ventures that the private sector won’t touch.

You can bet on it: If Clinton’s industrial policy gurus had been in charge for the last 20 years, we wouldn’t have Microsoft or Wal‐​Mart. We would have computers as big as a room, slide rules at every engineer’s desk, higher‐​priced and less‐​efficient stores, and less economic growth. People who reward Chrysler and punish Wal‐​Mart and Microsoft shouldn’t be given more power.

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