Travails of the Big Three

I’m not happy about the pending bailout of GM. Matt Welch also doesn’t like us giving tax dollars to America’s crappy car companies. Jeffrey Tucker isn’t happy either. However, I think Mr. Tucker draws the wrong conclusion. Politicians don’t want to bail out big corporations – they want to preserve UAW jobs. But the concept is right: politicians want to preserve lavishly paid jobs at the expense of the rest of us. He’s also right in predicting that GM will ultimately fail anyway.

There are many deductive economics lessons to be emphasized in the story of the Big Three’s collapse.

The most basic lesson is this: the customer is king. Customers decide which companies grow and thrive and which shrink and disappear. Millions of customers have chosen to buy Toyotas and Hondas rather than Chevies or Fords. The reason is simple: customers decided that Toyotas and Hondas are a better deal.

Behind this story is the difference in how these corporations operate. All of the car companies have big labor expenses, primarily split between factory workers and engineers. American Toyota and Honda factory workers are well paid, but not as well paid as Big Three workers. This allows Toyota and Honda to spend more on engineering – not just design engineering, but also manufacturing engineering. Over time, this show up in better products.

So, what would a bailout of the Big 3 accomplish? As long as their factory labor costs are out of line with the industry, it will be extraordinarily difficult for them to build competitive products. And, how many Americans care whether their vehicles are made by workers in Michigan rather than Texas or Tennessee? The bailout will only delay the inevitable and keep the government from spending that money on more important needs.

Is there no hope for the Big Three? They might survive as the Wee Three if the UAW can be persuaded to get their labor costs aligned with other auto workers. If government insists on helping, they could suspend CAFE standards for a few years – this would reduce costs and give them some breathing room.

These scenarios are unlikely.

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