Tuesday, December 16, 2008

Let Them Fail: Auto Industry Bailout Would Reward Irrational Business Behaviour

It has recently been calculated by the Center for Spatial Economics that the failure of the auto industry would immediately result in the loss of 323,000 jobs in Canada. This would be particularly disastrous for the already-devastated Ontario economy since approximately 87% percent of the job loss would occur in that highly industrial province. As a result, Ontario Economic Development Minister Michael Bryant has stated publicly that it would be irresponsible for the government to allow such a collapse to occur and so, joining a chorus of voices all across the North American continent, Bryant called for a bailout of the auto industry.

But is a bailout the truly responsible decision for the government to make? Would it serve the interests of the Canadian people and save the economy from the brunt of what promises to be a terrible recession in the long run? The answer is absolutely 'no'.

Canadians are being fed the tired bromide that the fluctuations of the free market are to blame for the current financial crisis and that governmental manipulations of the economy are how we are to best achieve the economic stability and security that we seek. This notion could not be further from the truth. The auto industry is failing because it has been chained by government restrictions for decades and, furthermore, because it has pursued and continues to pursue highly irrational business policies. Rather than being punished for their errors, which would occur naturally in a free market that would force them to adapt or else fail, state representatives are declaring that these businesses are simply 'too big to fail' and that more government involvement is the solution to a problem caused by too much freedom. These businesses cannot be allowed to fail, they say.

But, as Amit Ghate writes, the failure of businesses is not merely a normal occurrence in a capitalist economy, but a crucial phenomenon for the emergence of the highest quality ideas and products. Technological advancements have driven numerous industries completely out of business - Ghate offers typewriters as a relevant example - and these advancements, and the resulting industry failures, are healthy in a free economic system. So why are we hearing so much noise about the necessity of saving the auto industry?

The Big Three are failing because investors have no interest in risking their money on poorly run companies that are already forced to work within the confines of unacceptable governmental restrictions. These restrictions include labour laws that have required companies to submit to short-sighted and financially calamitous union demands as well as fuel economy laws requiring companies to produce small vehicles at extraordinary costs that have no chance of turning a significant profit. A popular mechanics article explains the real cost of these laws:

"It takes money to build more fuel-efficient cars and trucks—lots of it. Want a diesel engine? That’s a $3000-$5000 premium per vehicle. Tack on at least another $5000 for hybrid technology. Plus, new cars and trucks have to meet stringent safety standards, and that adds weight, which in turn lowers fuel economy. Try asking a consumer to forgo the leather interior and rear-seat DVD player in their minivan to save weight. I don’t think so. Not that consumers want pokey cars and trucks anyway: No, Americans like vehicles with good passing power and low-end torque. So automakers struggle to meet all these needs, and it’s still expensive."

Rather than campaign against these governmental intrusions, however, the auto industry has turned to their powerful lobby to attempt to coerce money from taxpayers who weren't willing to give it to them voluntarily. Rather than fighting against the real cause of their trouble, these companies have accepted even greater state involvement as the solution to their current state of crisis. Unsurprisingly, we've seen the entirely predictable consequence of this decision in the United States where the price of the auto industry bailout has been a commitment to produce more small cars that meet high fuel efficiency standards, thus guaranteeing the recurrence of the exact same problems the industry is currently facing. The auto industry is guilty of a complete evasion of the realities of their business. And we believe that this is behaviour worth rewarding?

The loss of Canadian jobs is a terrible thing. However, this wrong will not be righted by prescribing as the solution that which has been the main contributing factor to its current state of crisis. Consequently, the only rational course of action is clear: let them fail. When the government runs the auto industry, the auto industry fails. Let these companies go under and hopefully from their ashes will rise rational profit-seeking businessmen and women who will be able to produce stable long-term jobs for the people of Ontario. The bailout alternative is simply too self-destructive to accept as a viable option.

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