Tina K. Russell

November 21, 2008

Market failures

Filed under: Uncategorized — Tags: , , , , , , , , — Tina Russell @ 12:32 pm

UPDATE: The letter-writer responds in a comment below! How cool. Just so you know, people who are addressed, directly or indirectly, in my posts should totally leave a comment, because those comments are awesome.

Letters – Rescuing Detroit – The Great Debate – NYTimes.com
To the Editor:

I agree that letting the Big Three domestic automakers collapse would result in a catastrophic loss of jobs, but find the terms of your proposed bailout counterproductive (editorial, Nov. 15).

Companies as large and complex as automakers simply cannot afford to replace top management in the middle of a crisis. Doing so would also be pointless when the industry’s troubles stem primarily from the temporary spike in oil prices and the continuing financial crisis, not poor management.

After all, the Big Three did not specialize in trucks out of shortsightedness or social irresponsibility, but because that is what the market demanded.

Pah! I found that statement amazing. The trouble isn’t that they were following the market’s demands; the trouble is that they thought, arrogantly, that those demands would last forever. And, when the market stopped demanding SUVs and trucks the size of small moons, the automakers didn’t notice. Now they’re on the brink of collapse, and they want us to bail them out.

Forcing automakers that accept a bailout to produce only micro cars that get 50 miles per gallon would deprive Americans of the larger, sportier vehicles they prefer, while placing the rescued automakers at a competitive disadvantage when gas is cheap.

Oh, my Lord! Has this person seen an SUV dealership, lately? There’s one near my apartment, and its signs now shout loudly, “Fuel-efficient cars here!” (or somesuch) and hope the message is loud enough that you don’t notice row after row of gas-guzzling tanks. The SUV market is a disaster; nobody wants to buy a heavy car in this market. I give that SUV dealership six months, tops.

This brings me to the really depressing part of the bailout, and the whole act of legislating more fuel-efficient cars: it’s a failure of the market. No, not us; we want more fuel-efficient cars, we buy more fuel-efficient cars, and it just so happens that they’re made by foreign automakers (which, by the way, often have factories in the US). In a just world, in a world where the CEOs of the Big Three car companies had more than half a brain, we wouldn’t need fuel-efficiency standards; companies would simply compete on fuel efficiency until America produced cars that ran on little or—get this—no gasoline at all. It’s in vogue; everyone would want to buy a Chevrolet or a GM hybrid. It just so happens that they missed the boat; well, more accurately, they missed the boat, denied there was a boat, and are lobbying the government for their right to continue failing.

That’s the depressing part: we have to legislate that these companies make cars that people will buy. We have to demand that Detroit’s car magnates make money. Why are they so arrogant? Why not jump on the fuel-efficiency bandwagon when there’s so much money in it? I can only imagine it’s sheer obstinance, and if the jobs provided by these car companies are important enough for the government to step in and help the company out, they’re important enough for the government to step in, change the rules, and fire the management.

The federal government must help the Big Three weather the current financial crisis; they are truly too big to fail. But such assistance should not be used as an excuse to dictate the types of cars that Americans can drive.

Karl von Schriltz

Washington, Nov. 15, 2008

Ha! More like we have to force the automakers to make the cars Americans want.


  1. Tina:
    Thanks for posting my letter on your blog, even if it was to disagree with me! In my defense, I would note that small cars have perennially generated small profits for all automakers in the U.S. market, even the Japanese. Toyota loses money on every Prius that it sells, though it certainly gains in terms of positive publicity. For this reason, Japanese automakers have derived most of their profits in the U.S. market from mid-sized cars and SUVs (e.g., the Camry, Accord, Xterra, and Pilot), which are no more fuel-efficient than their counterparts from Detroit, and from the undervalued Yen, which inflates the value of their Dollar profits in Yen terms. Larger vehicles have always delivered larger profits in the United States because Americans prefer larger vehicles and are willing to pay a premium for them. They only embrace smaller vehicles out of necessity, when gas prices are high.

    While it’s true that Japanese automakers offer a larger selection of fuel-efficient vehicles, it’s not because they’re more socially responsible — the Japanese aren’t known for being especially PC (watch Whale Wars) — or even more far-sighted. Rather, they invest more in the development of smaller, fuel efficient vehicles because such vehicles are profitable in the Japanese market. Compacts and subcompacts have always dominated the Japanese market because Japanese drivers have always had to contend with higher gas prices and less space. Japanese automakers can also charge more for small cars in their home market because they have the market all to themselves, with no import competition.

    So in my view, the different product mixes offered by American and Japanese automakers is a function of the different markets they serve, and not any superior foresight on the part of the Japanese. I think the latest oil shock and the newly-enacted increase in fuel economy standards are probably all the encouragement Detroit needs to adjust its product mix in favor of more fuel efficient vehicles, and they’re already moving quickly in that direction. I only hope that they survive to see the next economic recovery.

    Comment by Karl — November 22, 2008 @ 9:46 am

  2. Cool, thanks! I’ll edit my post to let people know you responded.

    Hmm, that’s very interesting. Yeah, I know a lot about Japan (I think so, at least!) and I know that, like any society, they’ve never been entirely motivated out of political correctness. (It _should_ be noted, though, that the idealistic works of Osamu Tezuka, and his perennial Astro Boy comics, helped motivate Japan to move out of postwar malaise and into a high-tech economy. Obviously, none of that would have been possible without the Marshall Plan, but Tezuka’s works are an important cultural backbone.) The idealized version of Japan, like any idealization, isn’t perfect—if I felt like it, I could name a host of problems with the society—but, you have to admit, they are pretty good at taking our ideas and making them better.

    I guess I feel a little bit paternalistic about this. I know we like big cars, but then gas prices go up, and a significant portion of the American populace is screwed because they depended on low gas prices. Then gas prices go down, in relative terms, and we forget there was ever a problem, and pretend that gas prices will never go up, or that they aren’t rising in the aggregate, or that the world’s supplies aren’t limited, or that gas-powered car engines aren’t a Henry Ford-era technology that we ought to be moving past in an era of global warming. (Cars are only a part of the problem, there, but that’s another post.)

    So, for me, the fact that companies start investing in fuel efficiency and electric cars only when gas prices go up is proof that we ought to be simply taxing gasoline at a minimum price so that we can be rid of the beast for good. I can imagine that if you’re a trucker or a park ranger, and your job depends on a heavy vehicle, you’d be a good exception to these rules. But, like other environmentalists, I just get angry when I see people driving polluting, four-wheel-drive monsters to their white-collar jobs every day. It’s not a fundamental right to do that; one of the prescribed roles of government, going back to the writings of Adam Smith, is to control for externalities. If it benefits one person to mess up the planet for everybody, that’s someplace where the government has a right to intervene, just as it would if your neighbor dumped toxic sludge onto your lawn.

    Additionally, John Stuart Mill, a ferocious opponent of government attempts to control people’s decision-making, addressed the subject of vice taxes in “On Liberty.” As he puts it, taxes are best levied on things that are non-essential, and a vice is, by definition, non-essential. As I see it, if our addiction to gasoline is harming us financially by making people dependent on a dwindling resource; if it is harming us economically because companies become complacent and refuse to innovate, refuse to take up America’s competitive advantage of intellectual resource and ingenuity to compete with Japan or China on merit, so as long as there’s cheap gas; if it is harming us environmentally by polluting our air and cooking the planet; it’s a vice, and it ought to be taxed like one.

    Sorry, that got off the subject. Anyway, any country can make a big freaking car, as we’re learning, but it takes entrenched engineering skill to make an efficient car. We still have a competitive advantage in smarts, and if companies don’t capitalize on that, we’re doomed. Why our companies aren’t doing so already, I don’t know, but it’s sad when we have to force them to do so.

    Comment by Tina Russell — November 22, 2008 @ 11:44 am

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