Does the U.S. need an auto industry?

by on April 30, 2009 at 2:28 pm in Economics | Permalink

Here is the symposium, I was in a Bryan Caplan and Don Boudreaux sort of mood when I emailed in my answer:

I’m an economist not a business forecaster, so I don’t have any particular predictions about Chrysler and G.M. We do know that Ford is likely to survive.

More important, there are some very efficient Toyota plants in the United States. That too is part of our domestic automobile industry and those plants employ a large number of American workers.

You might think that Toyota is different because it is a Japanese company rather than an American one. But in fact Toyota is a publicly traded company, as are most of the other major automobile makers. That means any American can, any time he or she wants, buy some Toyota shares and make Toyota more of an “American company” and less of a “Japanese company.”

Have you gone out and bought those shares? Maybe not. Maybe that means you don’t really care about whether Toyota is a Japanese or an American company. If you have bought Toyota shares, maybe it is simply because you thought that the company was a good investment. That’s O.K., there is nothing wrong with those attitudes. In fact those attitudes are a sign of your rationality.

Our automobile industry could be much more “American” if we really cared to make it so. But we don’t. Our behavior as investors and consumers is usually more rational than the claims we offer up in politics and in public discourse.

Rick April 30, 2009 at 2:41 pm

Well said.

That puts a whole new perspective on the subject.

Rick

Gabe April 30, 2009 at 3:05 pm

Nice letter. I’d also add that Kia, Hundai, BMW and Mercedes Benz all
have added factories in the Southeastern US in the last 15 years. They
went to states that have a lot less mafia style unions in power.

The states without mafia-connected unions seem to be treated as less
important in the debate about auto-bailouts. I wonder why?

Leigh Caldwell April 30, 2009 at 3:08 pm

Of course when people’s interests are at stake, rationality increases. But claims in public discourse are often nothing to do with decisions we make ourselves: instead they are aimed at influencing decisions of other people.

It might not be rational for an American auto worker to buy GM or Toyota stock, but it could be rational for him to influence other voters – so that the government steps in and protects his job. It’s a simple agency problem.

Thus, there’s probably nothing irrational about making political or public claims. What’s irrational is listening to them.

Silas Barta April 30, 2009 at 3:16 pm

You might think that Toyota is different because it is a Japanese company rather than an American one. But in fact Toyota is a publicly traded company, as are most of the other major automobile makers. That means any American can, any time he or she wants, buy some Toyota shares and make Toyota more of an “American company† and less of a “Japanese company.†

Are you sure about this? Doesn’t Japan, like most industrialized countries, have restrictions, or at least oversight and additional paperwork, on how much of her corporations can be owned by foreigners? This would seriously contradict your claim that Americans can, at *any* time, make Toyota more of an American company.

I’m SURE you would research something like that before making such a broad statement, right? You wouldn’t spout off on an issue out of complete ignorance … would you?

Sol April 30, 2009 at 3:31 pm

dmo, you may be right that Toyota doesn’t design as many cars in the US as the Big 3, but it definitely does do design work here — several of my friends are engineers for Toyota here in Michigan. (And it’s not just Toyota, my brother-in-law in Ohio designs brakes for Honda.)

David R. Henderson April 30, 2009 at 3:51 pm

To Silas,
I have American friends who have shares in Toyota and Honda.
Best,
David

Tom April 30, 2009 at 3:57 pm

“Are you sure about this? Doesn’t Japan, like most industrialized countries, have restrictions, or at least oversight and additional paperwork, on how much of her corporations can be owned by foreigners? This would seriously contradict your claim that Americans can, at *any* time, make Toyota more of an American company.”

I see no contradiction whatsoever. As long as Toyota offers its stock for purchase to Americans, any additional purchase by Americans will make the company more American than before the purchase.

Silas Barta April 30, 2009 at 4:10 pm

@David_R._Henderson: That’s great. But Tyler_Cowen quite clearly said that Americans can make Toyota arbitrarily more close to being American “anytime” if they wanted to, which is false. The fact that you know Americans who own shares in Toyota is irrelevant. The fact that the Japanese government has veto power over excessive foreign ownership means that Toyota cannot, as Tyler_Cowen was trying to claim, transition to becoming American merely by virtue of share purchases by Americans. America does not have veto power over ownership the way Japan does.

Tyler_Cowen shows no evidence of having checked the veracity of his statement before boldly declaring his armchair insight that corporations can switch nationality through the stock exchange.

giesen April 30, 2009 at 4:33 pm

Still debating the spectre of an imagined public perception of the auto industry…

MikeDC April 30, 2009 at 5:04 pm

How long will Ford survive if it’s competitors are continually subsidized by the government?
How much better would its prospects be if Chrysler and GM had been left to their own devices and died already?

Is it likely that Ford will get the same kind of handouts in a couple years if it ends up needing him because reorganization under a government umbrella ends up allowing them to shed “legacy costs” that Ford can’t?

Fazal Majid April 30, 2009 at 5:11 pm

@David Wright:

GM owned Opel before, during and after World War II, yet Opel contributed quite effectively to the Nazi war effort, even after 1941, so clearly even ownership by an enemy is no obstacle to taking control of plants and design bureaux located in your country.

Ethnic Austrian April 30, 2009 at 5:25 pm

Didn’t non-american car companies set up shop in the USA due to protectionist pressure by Ronald Reagan? Once the domestic car manufacturers are gone, the bargaining power to exert such pressure disappears and so may the manufacturing plants of Toyota and BMW.

The promise that car manufacturing will stay in the US even without populist protectionism, is predicated on the assumption that the europeans and south east asians will not resort to such measures themselves. As a european, I can assure you that they will, if push comes to shove.

Eric April 30, 2009 at 5:46 pm

What is this with the underscores? Shouldn’t that read “Tyler_Cowen_shows_no_evidence_of_having…”?

Greg Ransom April 30, 2009 at 7:07 pm

I thought you were going to say that you’d defer to Obama on this, and tell us again that the Presidentis wiser and more knowledgeable than most everyone else. As you put it, “he understands economic policy better than do most professional economists.”

David Wright April 30, 2009 at 7:30 pm

Fazal and Sebastian:

The example of Opel during WWII is a good one, but it doesn’t erase the issue. Mere manufacturing capacity is easy to sieze. But knowledge and specialization is not. Suppose the U.S. had been buying all its tanks from Opel manufacturing plants in Germany designed by German engineers. The fact that Opel had a few car plants in the U.S. that the U.S. could sieze would hardly have mitigated the fact that the U.S. would have been cut off from its tank supply chain as factories in the U.S. were brought up to speed, and that Germany would have had detailed knowledge of design weaknesses and supply-chain bottlenecks. Idi Amin certainly learned it mattered that an Israeli engineering firm had built the Entebbe airport, even though it was on his soil.

To be clear, this is certainly not an argument that we need to maintain GM, Ford, and Chrysler at anywhere near the capacity they now have. But it is an argument that a nation whose place in the world rests to a large extent on its military capacity shouldn’t blithly pretend that its lives in post-national neo-liberal world shareholder-democracy.

babar April 30, 2009 at 8:27 pm

can someone bail out walking?

notkevinnealon April 30, 2009 at 11:02 pm

further to a couple comments:
in the eventuality of war, having a good manufacturing base that can quickly transition to producing the needs of the military is an important part of national security.

as stated by david wright and fazal, i don’t think that it is of any great concern what the parentage of the the plant is (be it japanese, korean, german or american) – only that it is currently rooted in your own soil.

Mike April 30, 2009 at 11:20 pm

Until millions of people realize these companies must compete with companies that do not have competitive domestic markets (like for example, Germany and Japan), we are going to have to put up with blowhards like Ransom talking about unions being the cause of the problems.

Unions are not as big of a deal as having to pay for decisions made decades ago by our corporate managers and economic elites. We setup these car companies to operate in the 50′s, then opened our markets in the 70′s to competition from foreigners while not insisting they use unions. This decision by our elites made the decisions made in the 50′s unsustainable, and the U.S. companies have done well despite laboring under huge odds stacked against them.

We should simply nationalize their pension plans. This would allow the car companies and unions to compete on current costs. It would have been cheaper than what we spent keeping these companies afloat for a few months.

capitalistimperialistpig April 30, 2009 at 11:42 pm

Is it really possible that an academic economist is so ignorant of history and biology that he can say this in good faith? I guess so, if he is libertarian wack.

I have one the cars made in one of these plants and most of the parts, design and engineering come straight from Japan. Even if Americans bought every share of Toyota (which the Japanese would never permit), it would still be a Japanese car company until and unless they moved the HQ and engineering to the US (something else the Japanese would never permit).

Japan’s auto plants are in the US only because of the government of the US held the tariff pistol to their heads. If American car companies go away, they will have little incentive to stay. As long as America has an auto industry, the Japanese and other plants are useful competitors. If American companies go away, they become a Japanese foot on America’s throat.

The time when Japan was the mortal enemy of the US is still alive in the minds of many who lived through it, including myself. There is nothing in history to suggest that such a time may not come again.

When the countries that actually make things find our existence inconvenient, it won’t help much to throw T-Bills and CDSs at them.

M.G. in Progress May 1, 2009 at 2:25 am

What a dumb question! Why don’t we first ask and reply to the question as to whether we really need autos at all?

I still contend that we serve better any national, including defense, interest with less cars rather than more. Very simple: less cars means less energy and oil are needed. Less oil means less reasons to go to war. What a strategic thinking is this?
It’s just simple green economics in the best interest of climate change as we may discover that fuel effciency is not enough.

http://mgiannini.blogspot.com/2009/05/does-world-need-auto-industry.html

dearieme May 1, 2009 at 7:48 am

“I don’t think Toyota designs many cars in the US like the big 3 do.” Do you mean to imply that US cars are actually designed? They are not the result of chalk sketches on the workshop floor?

William May 1, 2009 at 9:38 am

Silas Barta’s comments seemed to consist of assertions that Tyler might be wrong, rather than a statement about the actual facts. Here’s a high-up result from Googling “Japan company shares foreign”:

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2212

Despite the support shown by elected officials for increasing FDI in Japan, foreign investors still face a substantial amount of bureaucratic red tape, particularly with respect to protected industries. DI is principally governed by the Foreign Exchange and Foreign Trade Control Law, which specifically prevents foreign investors from acquiring a majority stake in Japanese companies within industry sectors classified as closely related to national security and public safety. This includes industries as diverse as aeronautics, defense, nuclear power generation, energy, telecom, broadcasting, railways, tourist transportation, petroleum and leather processing. … Industry-specific regulations that, for example, limit foreign ownership to one-third for airline and telecom companies, further constrain foreign investors.

So it seems that Silas’s point is right about several industries, but on the automobile industry specifically it looks like there are no restrictions. Do your research before posting, Silas!

Nick Owen May 1, 2009 at 10:35 am

The main reason to have a strong manufacturing base, as I see, it is for national security reasons. Our manufacturing capacity and capabilities made us the factory for the allies in WWII.

Silas Barta May 1, 2009 at 11:42 am

@William: Two things:

1) My main objection was that Tyler_Cowen doesn’t seem to have realized a reason he could be wrong, and didn’t bother to check up on it when he should have. I of course left room for the possibility he might have (uncautiously) guessed right.

2) I actually did research the issue after posting and it turns out that there aren’t any restrictions … *currently*. But the point is, the countries have the right, arbitrarily, to restrict foreign ownership, which does make a difference. So even if you tried to take the “logical” step Tyler_Cowen proposes as being what you “should” do if you want Toyota to be American, and tried to buy up all Toyota shares, you’d be in for a *big* surprise … especially if you believed Tyler_Cowen were correct.

assman May 2, 2009 at 1:47 am

“You might try reading a little history and biology, Dan. A better question, and equally relevant, is whether the world could be made safe for chinchillas if frogs had fur. States were created in the Darwinian struggle for existence, and those without them were killed out. Wishing them away is as effective as wishing away gravity.”

Gravity has basically always existed whereas states haven’t.

raivo pommer-www.google.fi May 2, 2009 at 6:24 am

Global recession took to the streets for Labour Day.

In Germany, on course for its biggest slump since World War II, Berlin police made 49 arrests as young demonstrators hurled bottles and rocks and set fire to cars and rubbish bins in the early hours.

Around 200 far-right extremists later attacked with sticks and stones a rally organised by trade unions in the western city of Dortmund, as well as police, who dispersed the skinheads with truncheons and took 150 into custody.

Some 484,000 people gathered for peaceful May Day rallies across Germany, unions said, but police were bracing for more pitched battles after nightfall with—and between—far-left and far-right groups.

In Turkey, security forces fired tear gas and water cannon in clashes with hundreds of May Day demonstrators in Istanbul that left dozens of people hurt.

Demonstrators threw rocks and petrol bombs at police and smashed the windows of banks and boutiques in the centre of Turkey’s biggest city. In Ankara, about 100 demonstrators also clashed with police, the Anatolia news agency reported.

Istanbul governor Mehmet Guler said 21 policemen and 20 demonstrators were slightly hurt and 108 mainly young people were arrested in the clashes.

faustus May 3, 2009 at 1:17 pm

japanese cars are “assembled” in the u.s. not made here… biggggg difference in that most labor spent and profits made are in auto parts. they buy none and make none in the u.s. and try buying a u.s. made car in japan but thats if you want a really big laugh.

sethstorm May 3, 2009 at 5:10 pm

Unless Japan wakes up and makes Detroit-inspired affordable muscle, no.

They can assemble the golfcarts from any place in the world, but they’re still Japanese designed and ultimately made for the world of small cars. Detroit however, makes affordable cars with some muscle to them with no such size/power restriction.

There’s still an audience that is quite fed up with underpowered cars for the dollar. Start making larger cars that don’t please the environmental activists for once.

thevoice@voicedup.com May 6, 2009 at 2:45 pm

We do not need GM and Chrysler, thats for sure. GM and Chrysler are having trouble because they cannot meet their obligations. This leads to less people (again, the market) willing to “deal† with GM and Chrysler. The buyer has spoken and has deemed much of what these two have to offer as not worthy of their investment. When GM and Chrysler lose a buyer, they go elsewhere, forcing the autos to reevaluate the options they’re giving to their consumer/buyer. This is the natural fear a business faces when dealing in a proper market. To reiterate, if this fear does not exist, why would the autos decide to change its ways now? Why give them more resources to squander on behalf of the American people?

evian June 4, 2009 at 2:44 am

Sometimes when one brand is famouse in the global people will be care about whether Toyota is a Japanese or an American company. But the most important thing is your attitude of shopping . http://www.yoytrade.com

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