Wednesday, June 04, 2008

The truth about Janesville

The closing of the Janesville GM plant is certainly a blow for that community. GM and the other American auto manufacturers are certainly subject to criticism for failure to anticipate market changes that would reduce demand for SUVs and trucks. The rush on the left to find out who else is to blame for not preventing this reflects - once again - a misunderstanding of basic economics.

Jay Bullock, for example, can't resist blaming George Bush (although he lacks even a plausible reason) and (literally) everyone else for not saving GM from itself. His argument is, essentially, that GM shouldn't have built SUVs, it shouldn't have been allowed to build SUVs and consumers should not have wanted them. The underlying assumption is that someone should have done something to make sure that whatever was built in Janesville should never become unwanted.

That type of "industrial policy" is, of course, a recipe for economic stagnation. It would result in far fewer plants to risk one day being closed because it would necessarily require policies that restrict market changes and would require the government to interfere in the market, artificially manipulating supply and demand in a way that would stifle innovation and responsiveness to consumer needs and desires.

In Jay's world, the government would have acted to prevent GM from building SUVs so that now it would not have to stop making them and, as a consequence, throw people out of work. Putting aside the obvious, i.e., that in such a world, GM may have produced nothing in Janesville, the government has no particular expertise in determining what people should or not should not build and want. Rather, the market - through prices - best matches demand with supply.

Sometimes this results in companies going out of business and people losing jobs. Plants that manufacture film, paper checks, and audio or videocassettes are probably not doing well. But the government should not have decreed that they stop producing these things or prevented others from producing digital cameras, developing on-line payment systems or DVDs. As market conditions change or new products are developed, some companies and individuals will lose.

If there is a role for public policy here, it is in internalizing market externalities and helping persons in transition. While some may argue that SUVs or gas should have been more heavily taxed to reflect their contribution to air pollution, certainly no one in Janesville would have supported that. That would have reduced demand - which is precisely what higher gas prices have done.

But what happened here - as tough as it is for Janesville - is what ought to have happened. GM was slow to see changes in the marketplace and is now responding to those changes. It's not the fault of George Bush, the GOP, NAFTA, taxes in Wisconsin or the failure to manage the economy from Capitol Hill.

Of course, the closing (and the circumstances that compel it) are tragic for Janesville and GM. But the claim that we can live in a world where these things never happen is a false - and ultimately cruel - promise.


Michael said...

Jay's a smart guy, but he works for the government.

Folks who work for the government have a skewed perspective on how the rest of the world works.

As Ray says in Ghostbusters, "Personally, I liked the university. They gave us money and facilities, we didn't have to produce anything! You've never been out of college! You don't know what it's like out there! I've worked in the private sector. They expect results."

Anonymous said...

People love SUV's and will continue to drive them. After all, I think the Suburban has been around since the '30's or so.

It doesn't take a rocket scientist to see that much SUV growth came from women buying them and woman do not give up things that they like to easily.

The first thing that comes to mind for me is what would the gas price be if there wasn't so many restrictions on drilling for oil? Let's open it up to see.

Anonymous said...

a misunderstanding of basic economics

Boy, howdy. It's funny that neither you or Jay acknowledges one of the biggest factors in the rise and fall of the SUV - Rubinomics.

It's no coincidence that US gas prices fell to record lows in the late 1990s - when Robert Rubin implemented his "strong dollar" policy - and skyrocketed to record highs when that regime fell apart because of unsustainable trade deficits. The regime (which the Bush administration was too chicken to change because it helped keep inflation artificially low and voters artificially happy) also created a feedback loop wherein cheap oil increased demand for both gas and big cars, which eventually strained both domestic petroleum supplies and the processing and delivery system.

What's more, Rubinomics and the skewed exchange rate put US manufacturers at an even further disadvantage in the small car market (which is one reason why Asian central banks agreed to abet Rubin's policy by buying truckloads of US treasury notes). This reinforced the Big 3's turn toward its existing manufacturing, marketing and margin advantage - big-ass vehicles (most SUVs began life as an extended passenger shell jerry-rigged to a pickup truck chassis, including the Tahoes made in Janesville).

So that's the "free" market at work. In episode 2 we'll look at Rubin's role in creating the current credit crisis along with his partner in crime, McCain economics guru Phil Gramm.

Jay Bullock said...

Rick, your last two paragraphs are almost a paraphrase of my last two paragraphs. I don't think I said what you think I said. For example:

Jay Bullock, for example, can't resist blaming George Bush [...]
Well, no; I list him as a candidate for blame, but like everyone else I list, I suggest that his faults alone--and even in combination with the other candidates I suggest--are not what ultimately did in Janesville.

In Jay's world, the government would have acted to prevent GM from building SUVs so that now it would not have to stop making them and, as a consequence, throw people out of work.
Where did I say that? I suggested no such thing. I suggested no government remedies--no remedies at all, actually. And, yes, I think if any one of us had a time machine, we would have liked to have gone back to, say, 1996 and 1) bought oil futures and 2) presented GM with the hard evidence that its stubbornness in expanding its SUV fleet in the face of $100 oil was dumb. But not halt production by government fiat.

I do suggest, obliquely, that CAFE standards should not have been relaxed and should have kept increasing. That would not have stopped GM from ever making SUVs, but it would have forced GM to make more efficient SUVs as well as increase the efficiency of the rest of the fleet. In fact, if GM (and/ or Ford) had pursued efficient technology with the gusto of the Japanese for the last three decades, I bet 30 mpg SUVs would be the top seller today, and gas would be less than $3 a gallon.

Oh, and anon 11:38, since you asked: The effect of drilling ANWR, for example, would be about seven cents a gallon.

Anonymous said...

Jay said -

"Oh, and anon 11:38, since you asked: The effect of drilling ANWR, for example, would be about seven cents a gallon."

I think most people know that no one can predict what will be the full benefit of drilling for oil in the US until we actually do it. Nevertheless, I think it is better to bet on the fact that having more domestic oil production will help.

Moreover, it is ridiculous for us to forbid drilling off the coast of California and then see that just south of the border they (the Chinese) are drilling to tap the same pool of oil that we could be tapping.

GM is doing what they think they have to do and I cannot help but think that it certainly has to do with oil, or the lack thereof of domestic crude.

Anonymous said...

Jay makes his living off of taxes.
He hasn't a clue about the real world.
Large SUV's and trucks use more gas.
Gas is expensive.
Jay wants gas expensive.
Jay doesn't want us exploring drilling nor refining.
Jay wants his idea of America forced upon you.
Jay collects tax money and benefits.
If all of us collected like Jay does, we'd all eat pumpernickel and have electricity for only part of the day.
Social engineering and communism does not work. Never has never will.
Ted Kennedy didn't fly to Cuba to have his head examined.
Praise be unto Allah, over and out.

Jay Bullock said...

Anon 3:37: Well, maybe no one can ever accurately predict, but the feds--the Bush administration has been begging for permission to drill ANWR--says that drilling ANWR would drop the cost of a barrel by less than $1.50 (in 20 years), or about seven cents a gallon.

Rick Esenberg said...


The CAFE standards are government fiat. We couldn't have presented GM with evidence of $100 oil because it didn't exist and that's my point. If GM can't see what's coming, the market will - through prices - let them know. This doesn't mean that the goverment should have intervened in the market to let them and us know what was coming because the government doesn't do a very good job of knowing what's coming. Nor, it seems to me, is there something wrong with America's car culture or preference for individual transportation. I think that it is unlikely that our country will ever rely much on mass transit outside of densely populated areas. What I think will happen - over time - is that cars will be powered by something other than oil. But what that ought to be and how we move to it will be better determined by markets than top-down mandates. Ethanol is a exhibit A in the case for that.

Anonymous said...

Jay -

I'm not disagreeing with what they're speculating about in what may or may not happen in 10 years in the article, but had we stayed ahead of the curve and had more domestic production ten years ago we would be in better shape now.

I think the best way to reduce dependency on foreign oil is to have our own. I also think that converting coal is a very good idea when we have the largest coal reserves in the world, or so I've read.

If I were a foreign oil producer or automaker, I probably would support liberal efforts to (supposedly) protect the environment but stopping what we need to do. Perhaps Janesville would not be in this position if we had.

Anonymous said...

Writing to fast -

Perhaps Janesville would not be in this position had we ignored the propaganda and did what we needed to do.