Too Big To Fail: Auto Industry Edition

Hi again. Since all I do everyday is apply to jobs, watch news, and read the NY Times, I have a lot of time on my hands. I also spend a lot of time thinking about the news. Recent news has focused on the Democrats' plan to bailout the auto industry. No doubt this comes at the urging of the auto workers' unions, who are probably looking for payback for their support of Obama.

I am of two minds about the auto bailout, but leaning toward permitting car manufacturers to fall on their faces and let the market sort things out. The other side of me says that there's no need for such draconian measures, and a thoughtful, well-crafted government intervention could stave off many problems. Thanks to our two-party system of republican government, we'll get neither a pure market solution nor a well-crafted government solution.

Instead, we'll get a bill that spews money at a dying industry, and this bill will temporarily breathe some life back into U.S. auto manufacturers, but that will only delay the inevitable. I think it's is a bad idea. Here's why:


Throwing money at car manufacturers is akin to administering flu shots to dinosaurs at the same time as the asteroid enters the upper atmosphere. Sure, the dinosaurs won't get the flu, but, really, there are bigger concerns on the horizon. Same for the car companies: lack of money isn't the problem, and giving them a revenue injection won't fix the real problem. The real problem is they are going extinct.

Now, I'm not raising the global warming flag, and talking about banning cars for the good of mankind. We're too tied to cars to give them up entirely. But the modern auto industry itself is doomed. Let's look at some facts: cars operate via an internal combustion engine, which is 19th century technology. They are assembled and sold based on Ford's business model, which is an early 20th century invention. Both the product and the methods by which it is manufactured and sold are outdated.

The product - the car - is outdated because it's efficiency is rapidly becoming less than its cost. When measuring the total cost of cars' existence - product price, insurance, maintenance, accident-related litigation, environmental impact, loss of life, etc. - it becomes clear that the benefit of the automobile will soon be outweighed by the cost, if that is not already the case.

The business model is outdated too. There's nothing wrong with assembly-line production - that's not the issue. The problem is that the business model for building cars was originally predicated on abundant supplies of steel and energy, each of which is shrinking and/or disappearing and driving up the cost of production. Similarly, cars were originally designed to be almost disposable, and American cars are still nearly disposable. It's an inherent part of the system - if you build cars that never break down, eventually no one will buy new cars. You need people to need new cars to keep up your business. But again, as resources shrink, that model becomes less viable.

So, what we have is an industry that is croaking its last breaths, because the world is moving on without it. But in the name of protecting jobs and American industry, the government is seriously considering propping up this industry, thereby perpetuating rather than solving the underlying problems driving auto manufacturers into the ground.

But if there's no bailout, what will we do? What will happen to all those jobs, not just in auto manufacture, but in parts manufacture, mechanics shops, tire places, auto accessories, and all the thousands of other jobs that these jobs support? And don't forget the oil industry, what will happen to them? Surely the auto industry is too big to fail? We can't let this big a chunk of the economy collapse, can we?

Well, that's why I'm of two minds. One part says yes, let it fail. It might not be so bad. Let's say GM collapses, totally and completely. What will happen? Well, a lot of people will be out of work. But GM owns lots of assets: factories, r&d labs, offices, raw materials, a trained labor force, etc. If GM breathed its last, it's almost certain that another company would swoop in and buy up these assets, open another car company, and put those employees back to work. I nominate Porsche. They just raked in a billion dollars by cornering the market on Volkswagen stock and then short-selling it. Clearly, Porsche knows how to run a business, and they make a good car too.

And if it isn't Porsche, it would be someone else that buys up GM (or Dodge, or Ford, or whoever) and takes it over. This wouldn't solve the long term problem of the automobile's looming demise, but it would at least mitigate some of the short-term harm. It would also have the added benefit of putting people that know how to build good cars and run a profitable company in charge, and a rising tide raises all ships. Domestic competition would increase, automobiles would evolve into the next step in transportation technology, and we'd all live happily ever after.

However, the collapse of an American auto giant is likely to be painful, even if only in the short-term. So that's where the other side of my indecision comes in: if we can see this collapse coming, and we know that our goal is to move to the next step of transportation technology, why endure such pain? Let's skip the middle man and put our own companies on that path now.

I guess the short answer is that it's really, really hard to do that. First of all, there's no ready-made technology to shift to. We stopped using horses because the car was invented. There's no parallel here - we still need someone to come up with the next big idea to replace the car. Second, it costs a lot of money to shift paths from one way of doing business to another. New designs must be made, new materials procured, factories must be refitted or new ones must be built, and the new cars have to actually be better than the old ones. That is all costly and hard to achieve. Plus, because a bailout will have to come from the government, it will necessarily be full of compromises, attached strings, and pork, all of which may throw off the whole program.

So, which is it? Both options are jagged little pills. I can't decide. Thankfully, I don't have to. That's why we hire smart people like politicians to do the thinking for us. They'll make sure it's all ok. The end.