Hazlett in Financial Times: Something to Be Said for Failure

Congress ought not submit to pressure to bail out U.S. automakers says Professor Thomas Hazlett, proposing in a Financial Times op-ed that "Propping up today's US car manufacturers means beating down tomorrow's economic star."

Hazlett reasons that allowing auto manufacturers to compete is the most efficient way to discover and support the most viable businesses, and he cites the British Leyland subsidy of the 1960s in the United Kingdom as an example of how competition yields a superior result to that of government involvement in an industry.

The benefit of bankruptcy to the Big Three U.S. automakers, says Hazlett, is its effective restructuring of the ownership, management, structure and contracts of GM, Ford, and Chrysler, as they would be forced to produce lower cost, higher profit vehicles that consumers were willing to buy.

The anti-technology bail-out, Financial Times, December 5, 2008. By Thomas Hazlett.

"The real problem entailed by the auto-maker subsidies will never be discussed because it can never be seen. The opportunity cost of shovelling capital to companies such as GM is that companies such as Boeing or United Technologies or Disney or start-ups unknown will be unable to use it to fund their projects. Propping up today's US car manufacturers means beating down tomorrow's economic star. In an era of technological leaps, those emergent stars tend to be leapers. The bail-out puts the public's chips on the former, pulling stakes from innovative rivals.

"The UK ran this experiment in the 1960s, picking national champions that were to push the national economy to the cusp of global dominance. The government selected companies for protection and subsidy, including British Leyland in autos. BL sank so fast that it had to be acquired by the UK government in 1975 and over £1bn in public funds were pumped into that nationalised money pit by 1980. National champion? The unsubsidised Ford UK overtook BL in the British market. The Thatcher regime sold off BL, liquidating a failed experiment. Competitive car makers – private, unsubsidised and exporting – now dot the English countryside.

"There is something to be said for failure. The Brits paid, but learned, moving to a far more efficient economy. The US now seems poised to drive up its own learning curve, making an even more expensive commitment to public policy education. The $700bn bail-out voted by Congress to rescue failing banks has apparently funded great confusion: the state's responsibility for financial system liquidity, assumed a century ago, involves a public good. Where confidence in banks, which maintain reserves at only a fraction of their deposits, dissolves, runs occur. Institutions that were doing everything right (including maintaining the reserves prescribed by regulators) are put in mortal danger.

"The situation with respect to the Big Three is entirely different. Relatively high-cost, low-profit methods have been used to produce cars. Competing (Japanese or Korean) car makers, locating plants in different places, operating under different labour contracts and producing different sorts of cars, are not on the brink. Bankruptcy of one or more of the US firms would not dissolve the domestic auto industry and would not produce a run on the products of other firms. It would restructure the ownership, management, structure and contracts of GM, Ford, or Chrysler. Executives, workers and suppliers would reluctantly co-operate. They would prosper to the degree that they ended up producing products that consumers want to buy.

"Not a bad system. It surely beats the easier path – for the Big Three – putting other people's money at risk. That is the British Leyland model. Letting manufacturers compete, the expensive lesson learned from industrial policy, is the efficient way to discover and support the national champions that should emerge – whether they be in autos or software, Detroit or Sunnyvale."

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