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Does the U.S. need an auto industry?
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.
Posted by Tyler Cowen on April 30, 2009 at 02:28 PM in Economics | Permalink
Comments
Well said.
That puts a whole new perspective on the subject.
Rick
Posted by: Rick at Apr 30, 2009 2:41:14 PM
I don't think Toyota designs many cars in the US like the big 3 do. And where the headquarters and design work is done is where the best jobs are and where the funding for universities tend to be concentrated. If you look at engineering departments by geography you'll notice a relationship between the universities and the companies nearby. And there is a positive feedback. I think we can replace the jobs if the cars aren't built here - but we should really try to keep a couple companies that design their cars here.
Posted by: dmo at Apr 30, 2009 2:54:29 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?
Posted by: Gabe at Apr 30, 2009 3:05:04 PM
I don't know if they do, but if the Japanese government supported their auto companies, how does that affect the comparative advantage argument for why American car companies should fail?
Posted by: Michael at Apr 30, 2009 3:05:45 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.
Posted by: Leigh Caldwell at Apr 30, 2009 3:08:05 PM
Britain and Australia seem to do pretty well without their "own" auto industry for a large part (niche firms aside), and have even come to viscerally identify with outright foreign brands.
In the UK, some old Fords (like the Capri) are as coveted as classic MGs and Triumphs, and in Australia, people are as passionate about "Holden vs. Ford" as some Americans are about Ford vs. Chevy.
Posted by: JackTrade at Apr 30, 2009 3:15:25 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?
Posted by: Silas Barta at Apr 30, 2009 3:16:28 PM
The US has a thriving automobile making industry: Two-thirds of "foreign imports" are built in the United States in nonunion shops.
Not only Toyota but Honda, Nissan, Volkswagen, Mercedes-Benz, BMW, Huyndai, Kia, etc., all have successful manufacturing plants in the US.
What do they all have in common -- and have different from the crater that the Detroit industry has become?
The last two words in the first paragraph above.
Posted by: Jim Glass at Apr 30, 2009 3:29:09 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.)
Posted by: Sol at Apr 30, 2009 3:31:01 PM
Wrong. Think what are you buying with these shares. Ownership does not give control, remember? Neither does voting power mean that you have control as long as you cannot chain the productive part of the firm's stakeholders to the machines. Maybe this is the reason why Toyota is still better...
Posted by: deriuqer at Apr 30, 2009 3:40:47 PM
To Silas,
I have American friends who have shares in Toyota and Honda.
Best,
David
Posted by: David R. Henderson at Apr 30, 2009 3:51:05 PM
Honda does much of their design work in the US and it's been said a strong Yen could force the company to move entirely to Ohio, since they trail far behind Toyota in the Japanese domestic market.
It's also worth noting that most Americans ARE against the auto bailout. This is one issue that the populace happens to agree with right-of-center economists. The UAW exerts too much influence though for the US Auto industry to go through a restructuring like American steel companies did. Now it looks like Chrysler and GM will come out of it, but with the American taxpayer holding the bag for their legacy platinum benefits.
Posted by: MW at Apr 30, 2009 3:54:38 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.
Posted by: Tom at Apr 30, 2009 3:57:45 PM
In the event of a war, shares do not buy control. The military would like a hardware manufacturer that is headquartered and vertically integrated on its territory, whose executives as well as middle managers and workers are citizens of its country. In that scenario, the shares are just so many pieces of paper.
Posted by: David Wright at Apr 30, 2009 4:00:28 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.
Posted by: Silas Barta at Apr 30, 2009 4:10:41 PM
Well said. This brings up in my mind the fundamental question of libertarianism: Do states (nations) help or hurt the general quality of life in the world? If states only help to serve their own citizens' interests, do they do that at the expense of others, resulting in a net decline in the quality of life throughtout the world?
Posted by: dan at Apr 30, 2009 4:20:37 PM
Still debating the spectre of an imagined public perception of the auto industry...
Posted by: giesen at Apr 30, 2009 4:33:00 PM
We could use a decent car industry.
The fact that US autos are falling apart (on the macro and micro scale) indicates that buying Toyota stock might be foolish on the micro level.
Posted by: Andrew at Apr 30, 2009 4:49:55 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?
Posted by: MikeDC at Apr 30, 2009 5:04:55 PM
If we want a US auto industry, decapitating the mismanaged dead wood at GM and Chrysler to make room for innovative manufacturers like Tesla or Carbon Motors makes a lot of sense. Honda considered moving its headquarters to the US 15 years ago. One Honda is worth more than GM, Ford and Chrysler combined in terms of innovation and future growth potential.
Posted by: Fazal Majid at Apr 30, 2009 5:07:22 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.
Posted by: Fazal Majid at Apr 30, 2009 5:11:00 PM
"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."
Tyler never talked about switching nationality. He said we can make Toyota significantly more American.
Posted by: assman at Apr 30, 2009 5:19:47 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.
Posted by: Ethnic Austrian at Apr 30, 2009 5:25:35 PM
It is unclear how long Ford survives without the Federal government providing bankruptcy financing.
Chrysler has filed, and was able to file for reorganization because Obama approved the progress so far, the viability of the plan, and believes letting the court cram down terms on the remaining 30% of the debtors and on the 500 or so dealers who will have their franchise contracts broken by that government employee known as a bankruptcy court judge.
Obama's calculation is this is cheaper than liquidation. Listening to a story about FEMA trailers from Katrina, I think of the lingering cost of a total liquidation of Chrysler and GM, four years from now.
And a GM bankruptcy will require Federal financing while a government employee runs it, that bankruptcy judge again, because its doubtful anyone is going to take the risk of financing GM's operation while it works through its problems, or fails to work through them.
Without financing, GM's liquidation would fail to satisfy the secured debt - who is going to buy the pieces of GM when so many parts are intertwined with thousands of overlapping suppliers, each faced with bankruptcy.
And with GM taking down the same suppliers Ford depends on, can Ford survive.
Toyota has tried to build big trucks, and its trucks have gotten bigger, but Ford and GM dominate the big truck market. And while US cars are smaller than they were in 1970, they are still bigger than the rest of the world's cars.
So, the real question might be:
Does the world require a big car and truck industry?
Posted by: mulp at Apr 30, 2009 5:44:48 PM
What is this with the underscores? Shouldn't that read "Tyler_Cowen_shows_no_evidence_of_having..."?
Posted by: Eric at Apr 30, 2009 5:46:22 PM
