Chrysler, Microsoft, and Industrial Policy

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What kindof government would subsidize Chrysler and penalize Microsoft andWal‐​Mart? Not one that should be trusted with an industrialpolicy, that much is sure.

In 1979 the Chrysler Corporationwas going under, for a number of complex economic and marketingreasons that could be summarized as “no one wanted to buytheir cars.” The Big Three automobile companies had grownfat and happy, facing little competition in the world’s richestmarket. Then American tastes began to change. Baby‐​boomers likedthe looks and the reverse snob appeal of small foreign cars, andthe energy crisis of the 1970s created widespread interest inmore fuel‐​efficient cars.

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

Together, the federal money andthe restrictions on competition let Chrysler survive, of course,but only at the price of a less efficient economy. Every Americancar‐​buyer had to pay more because of the quotas. That was moneyhe couldn’t use to buy something else, maybe something producedby an efficient American company. And the credit that waschanneled to Chrysler was thus diverted from more creditworthyborrowers. We’ll never know who those borrowers would have been, butsomewhere in America there are people who would have used that$1.2 billion in loans to build houses, start businesses, expandfactories, 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 acapitalist economy is change. While Chrysler and other giantswere struggling, small companies were being born. Most of thosenew companies failed; they didn’t serve customers as well astheir competitors, and they didn’t have the political clout toget loan guarantees and import quotas. But some of the start‐​upssucceeded.

Two of the biggest successstories of the 1980s were Wal‐​Mart Stores Inc. and MicrosoftCorp. Their founders, Sam Walton and Bill Gates, becamebillionaires. They got rich the only way you can in a freemarket: by producing something other people wanted.

Through the 1980s, giantcompanies were laying off employees in huge chunks, makingfront‐​page headlines; employment in the Fortune 500 fell by threeand a half million. But Wal‐​Mart and Microsoft were quietlyhiring. High‐​tech companies stay small. Even though the softwareindustry is now the country’s sixth‐​largest industry, its biggestsuccess, Microsoft, grew only from 1,000 to 5,600 employeesbetween 1986 and 1992, which was still a lot better than IBM’s200,000 layoffs. And about 2,000 of those Microsoft employeesbecame millionaires through their stock ownership.

Wal‐​Mart, however, became one ofthe country’s largest employers. It grew from 62,000 employees in1986 to 328,000 in 1992. Most of us never noticed; it’sfront‐​page news when Sears lays off 20,000 people at once, butit’s never a big story when Wal‐​Mart hires 177 people everybusiness day for six years.

So how did the U.S. governmentreact to these tremendous success stories, to the story of acollege dropout and a middle‐​aged man in Arkansas becoming therichest 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 aFederal Trade Commission investigation, later compounded by aJustice Department investigation, of whether Microsoft “hasmonopolized or has attempted to monopolize” markets forpersonal computer software and peripherals. Eventually Microsoftgave in and agreed to restrictions on its contracting and pricingpolicies in order to avoid long and costly litigation.

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

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

And in these cases the factsindicate no such risk. When the FTC opened its investigation ofMicrosoft, for instance, the alleged monopolist controlled onlyabout 10 percent of the MS-DOS applications business, which inany case is not the only operating system on the market. Itshighly touted Windows program was installed on just 5 millionPCs, or about 7 percent of the total. Microsoft did not have asingle industry leader in the word processing, spreadsheet, anddatabase markets. Some monopolist.

Meanwhile, in Conway, Arkansas,where a judge ruled that Wal‐​Mart was seeking to drive otherpharmacies out of business, in 1987 there were 12 pharmacies.Today all 12 are still in business, and two more have opened. Theprofits of the plaintiffs in the lawsuit increased from 1986 to1990.

Wal‐​Mart and Microsoft earnedtheir billions the old‐​fashioned way – they gave customers whatthey wanted. Punishing them – and subsidizing market failures likeChrysler – is absolutely the reverse of the free enterprisesystem.

But those little forays into themarketplace are not enough for the Clinton administration. Thevery smart people in the White House think that they know howmuch pharmaceutical drugs should cost, what kind of cars Detroitshould build, how information should be transmitted to our homes,how much Japanese consumers should buy from each of ourindustries, and how to “match the skills of the workforceagainst 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 tosubsidize high‐​tech, high‐​risk business ventures that the privatesector won’t touch.

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