Invest In America!

If economic slogans and mantras determined economic policy, then by far, the most idiotic and dangerous ideas would be enacted. ‘Invest in America’ and ‘Reduce our dependence on foreign oil’ are always the preface before some moronic policies are proposed.

As the Big 3 automakers were on the brink of bankruptcy and Washington was debating what to do, the Detroit Free Press head story was titled ‘Invest In America’; and it got worse from there. The opening lines read “You don't want an economic disaster on your hands. Not when you could have prevented it.” And what would the repercussions be? Well, “There will be economic hell to pay — not just in Detroit, but all across America, including in your state, in your district.” Sounds ominous. Economic hell, disasters, these are never good things.

If these guys were in advertising, they’d win. You’ve scared the hell out of me, I want whatever you’re selling, and I’m too busy pissing my pants to give a damn about the details. But if you’re actually interested in helping the American economy and not debating complicated issues by using feel-good slogans, then the truth is that the Big 3 need to collapse. They need to be liquidated. Equity must be put to zero, bondholders suffer write downs, and union contracts must be broken. If you actually care about having an auto industry, Ford, GM, and Chrysler need to go broke.

First rule of capitalism: produce something someone wants, at a price that someone will pay for it. As it stands, the American car companies aren’t producing what people want (sales were down over 40%), and they’re certainly not producing at a reasonable price (did I mention they’re going bankrupt?). So are falling sales the problem? No, they’re the symptom of the problem. The real problem that can’t be fixed by any bail out is that Americans have spent themselves into bankruptcy. The problem isn’t that Ford doesn’t produce cars that anyone wants (well to a certain degree), as shown by the fact that the Japanese car companies saw sales decline by 40% as well! This shows that Americans don’t have the $15,000 to drop on a car. Hell the United States has one of the highest car ownership ratio in the world, does everyone really need to buy a new car every year?

So how will a government loan to the Big 3 help? It won’t! Giving a loan with interest means that you expect the borrower to pay the principal and the interest. These companies can’t even pay the principal if they’re sales are down by 40%! The real reason for these loans is so that the Unions can top up they’re legacy benefits before the companies go broke, and that CEO’s can abandon ship when they’re stock options are worth a little more than now.

But what about all those job losses? The truth is that there is going to be job losses no matter what. But the more you put it off, the worse the repercussions are going to be. The reason for that is that when you have a company or market that isn’t and will never produce anything efficiently, and you keep subsidizing it the losses will get bigger and bigger, and all the wrong signals will be sent. Capital, which is scarce, will be redirected from profitable industries to unprofitable ones, and in the end, even more jobs will be lost.

The way to have a viable US auto industry is to change production from producing cars in America for Americans (who are now too broke), to producing cars for the rest of the world. The US has around 750 cars for every 1000 people whereas China has around 40 cars per 1000 people. The current model is broken and trying to piece the pieces back together is both costly and futile.