Tuesday, February 03, 2009

Let the people decide

I found this article (GM, Chrysler suing taxpayers with taxpayer money) via Twitter and DIGG today and I felt that it was worth more than a quick response on either site.

Rather than react directly to the article I'm going to respond to the many various comments I've read regarding the auto industry as a whole lately (especially the big three US automakers).

Domestic Automakers Vs. Domestic Autos – There is a big difference between these two, a difference that is often overlooked or ignored. I happen to prefer driving Volkswagen cars. I like the way they drive, among a number of other reasons. I don’t however buy ‘forgien’ to stick it to the US automakers. It’s also not un-American of me to prefer and drive a German car.

The reality is that there is no such thing as foreign vs. domestic cars any more. It's a joke to think otherwise. For example, GM owns Opel, a European automaker and has been bringing over Opels, rebadging and selling them as Saturns, an American brand. Many of the BMWs sold in the US are built in Georgia (the state not the country). There lots of examples of this situation. Lots of 'foreign' automakers have large offices and factories here in the USA, just as Ford, Chrysler, and GM have factories all over the globe as well. It's just how it's done. Buying a Toyota takes no jobs away from Americans. Buying a Ford doesn't take jobs away from non-US residents.

If you want to stick it to the US automakers because of their politics, that's fine, but don't use it as an excuse for buying a Honda or a Volkswagen. Some auto workers who are losing their jobs because the US automakers screwed up and because the market is down are mad at people driving cars they didn’t make. They have a right to be mad, but the reality is that in many cases those cars they are growling at were probably manufactured, at least in part, here in the US.

(On a personal note, I know my car was not made in the USA, but Volkswagen is building a new factory in Chattanooga, TN to build a sedan specifically for the US market. VW is bringing in lots of jobs, helping the schools and the city as a whole. Hard to argue how that is bad for the US.)

Auto Regulations vs. Free Market – The article I reference at the beginning of this post talks, largely, about how California wants to set its own, stricter fuel efficiency standards, other states also want this, though I suspect they’d back down if California failed.

Arguments against it are that it creates an unfair environment for automakers and that only some automakers can meet those demands. I have to wonder, how is it unfair? Was it unfair that seat belts had to be installed or that airbags should be standard? The difference there is that those are safety regulations. It’s easy to quantify lives saved. It’s also easy to find people who have been directly affected by the lack of safety equipment to lobby for it.

Fuel efficiency hits our wallets and not equally. A $75,000 car is going to have roughly the same mileage as a $20,000 car, so the wealthier are less affected. When gas goes up to $4.00 per gallon, lower and middle-class people start getting pinched hard, especially those who had to move an hour, or more out of the city, to find affordable housing. The upper classes are considerably less affected. However, they are the ones who often have the control. Right or wrong, the wealthy are the ones in politics. Do they listen to the lower classes who want more fuel efficient cars? No. Why? Because doing so puts pressure on the automakers, who: 1) have powerful lobbies and 2) would not make profits for a short run, while they engineer new motors. That affects their stocks, their value and ultimately that has a greater impact on the wallets of the wealthy than $4.00 fuel. It’s more effective to try to make fuel cheaper than it is to make cars more efficient.

So why not let the market decide? If people want fuel efficient cars they’ll buy them from who has them, forcing other automakers to compete. Isn’t that what the Prius has done? It’s more or less created the Hybrid market. Hybrids are in hot demand these days, however so are Trucks and SUVs still. When the fuel prices were in the $4/gal range last summer demand for large gas guzzling vehicles went down. As soon as fuel prices dropped, the demand for large vehicles rose again. That shows that while there is a large portion of people out there looking for fuel efficient cars, there is still a very large group of buyers who really don’t care and just want as much size and utility as possible. Some of these buyers live in rural environments and really need and use those large trucks, but there is still a large percentage of {pick your favorite SUV driving stereotype} that loves a big vehicle though they have little to NO need for it.

Conclusion - Let the markets decide. I was against the auto bail-out and still am. I was against the bank bail-outs too (and look how the banks have abused it!). If a company cannot stay in business by its own business practices it should be allowed to fail. If there is enough consumer demand for a product or service either the remaining competing businesses will pick up the slack or a new player will be able to join.

The argument that if Chrysler failed that it would take down a bunch of parts makers seems a bit dubious to me, given the number of other manufactures still in business. The market falling out has done more damage than what one automaker would have done, in my opinion. The other automakers would have picked up the slack or the parts makers would reduce in number to match demand.

Market demand for fuel efficiency would also dictate the direction automakers would take. Companies like Toyota, which have fought to compete with US automakers in the large vehicle market, would (and do) focus on the smaller car market where they are already strong. This makes companies like Ford and GM compete or get out of that market. Where there is a need there will be someone to fill it. Companies like GM however seem to try to fill all needs at once, poorly. That business strategy is coming back to bite them now.

The market should be allowed to work, allowed to kill companies that are failures and reward those who made the right choices. It should be allowed to dictate how efficient our cars are. Let the people vote with their dollars on what car they want. The government should step away from this one.

“Green” note – Cars make up a minor percentage of the overall pollution problem here in the US. I’m not suggesting that nothing be done but over regulation on autos will do much less than reasonable regulation on power plants and factories that spew tons and tons of particulates into the air.

Follow up note - I was a bit American-centric in my posting and failed to consider how auto pollution effects other countries, especially those without strong regulations. I remember now the pictures of the Beijing skyline before the Olympics, due largely to the number of cars. Also LA is pretty smoggy, so perhaps I underestimate the impact of auto pollution.


mattg said...

I think that the emissions issue is one in which some outside force is necessary to "nudge" the market in the right direction. Essentially, global warming (and is a "Prisoner's Dilemma" - http://en.wikipedia.org/wiki/Prisoner%27s_dilemma. Seeing as how a lot of wealth was created for 1st-world nations by consuming natural resources (resulting in pollution), other nations want their piece of the wealth-pie, too. The problem is that, even in the U.S., market forces are not set up to dissuade people from polluting or consuming unsustainably, until we abruptly discover that we have serious acute ecological problems or peak oil, etc. That sort of thing is not a nice, gradual transition. One day, we'd find out that there's a lot less oil left than we thought, and the price will spike from $3/gal to $25/gal or something like that. At least, that's one way it could play out. If this is a prisoner's dilemma, each person is going to want to "get while the getting's good," rather than work cooperatively.

This is why we have a government - to regulate things that affect everyone and that the forces of the market do not incentivize. Of course, there is another, less intrusive solution that I think might be better: big government gas taxes. If the gov't would add a tax to the fluctuating price of gas to stabilize it around $4/gal, we would be in a much better position to let the market work the rest of the way. $4 seemed to be about the "sweet spot" where a person driving a relatively efficient car on a moderate income noticed the cost of gas, but was not egregiously squeezed. But $4/gal gas sure did make those conspicuous consumers in their Hummers reconsider the impact of their choices. To counteract the regressive nature of the tax, the gov't could give a tax credit to lower income families so that the pain at the pump would be significantly less for them. (The bigger problem here is rising inequality and stagnant/shrinking wages for the middle/lower classes.)

I disagree that the pollution effect of cars should really be witten off much. Transportation-related CO2 emissions are almost equal to the amount of CO2 emitted from power-generation - http://www.epa.gov/climatechange/emissions/co2_human.html. That number includes planes as well, but its hard to say that we shouldn't be worried about the environmental impact of what we drive.

Len Mason said...

Why do you all think that people who have less efficient vehicles care less about the environment than you do? Most of you are either single, have no children, or both. We are forced into a minivan situation based on the dynamics of our family. We too were huge Volkswagen fans. I have owned one Beetle and three Jettas! But as the kids got older there was no more room. The five of us do not fit in our Jetta anymore. And if they wanted friends to tag along, forget it! We now own a vehicle that I never would have bought if I were single. I wouldn't need that much space. So for those of you "green" people who think we can all fit in smart cars, step out of the forest once in a while and take a look at reality for the rest of us.

Marc said...

@Len Mason - I fail to see where in my posting I attacked people for having a reasonable excuse for having a larger vehicle. Mini-vans and the like certainly have their utility, especially in a family like yours. However there a lots of families with one or two kids who really DON'T need all that space, no matter how they try to justify it. It's a "bigger is better" mentality.

mattg said...

Len, there are minivans with great fuel economies. 2007 dodge caravan gets 20 city / 26 highway. My camry doesn't really get all THAT much more. Pretty good for a people-mover. The idea is that higher gas prices would force automakers to pay attention to economy in many places they haven't yet. Because nobody would buy their vehicles otherwise.

Part of the problem with the american automakers is that gas was so cheap for so long that nobody paid any attention to fuel economy, and a good portion of their models used a lot of gas. When gas prices rose (very suddenly), it was too quick of a change for them to adapt. People felt the pain.

What I'm saying is the gas prices will rise. I really think they will. One way to keep people moderately happy is to make the changes gradual (albeit artificially), rather than sudden shifts in prices. I think the sudden shifts would cause a lot more pain than the gradual ones.

Len Mason said...

@Marc Maybe I am wrong, but as far as letting the market decide, your point seemed to be that people's purchasing power dictates their beliefs. It's just not true. Smaller cars are not the solution. And @mattg, taxing gas is not the solution. Regulating speculation is a good start.

Marc said...

@Len I may have over generalized on the point that those who drive big cars don't care about the environment and vice versa. I would argue however that trends seem to point that way. Many larger, less efficient, vehicles are looked upon as status symbols, saying, "Look at me. I have so much money that I don't have to worry about fuel prices or efficiency." They are marketed as such. For example, the Lincoln Mark LT (http://www.lincoln.com/marklt/home.asp) is a prime example. It's a 'truck' that's not intended for work. It's not even good for families such as yours. It's a status symbol that basically says to everyone under it, 'screw you!'.

Len Mason said...

@Marc Yes, I totally agree with you that perception is out there. I think your article is very well written.

The problem with generalities and media soundbites, is that if that is all the public hears, then that is what they come to believe and then vote for. And those of us who don't fit the generalities pay for it. So, in due diligence, I add the other side of the story.