Tuesday, October 6, 2009

Ease of Doing Business at Home - Difficulty of Competing Internationally

“Saturn builds cars that Americans wanna buy!!”

I’ve seen this commercial very often in the last few weeks, but the guy in the clip did not really hit the nail on the head, now that Saturn will be closed. Apparently, Saturn did not make cars that Americans want to buy… (They were supposed to merge with “Penske”. Maybe it was George Costanza’s shoddy work on the “Penske file” that killed the deal…)

The Saturn brand was started as a way for American cars to compete with Japanese and European cars. In the commercial, the message is that what Americans now want in a car is fuel-efficiency, design, reliability and other things that are usually associated with foreign cars. By imitating these foreign cars, Saturn has claimed to also possess these attributes. However, just saying it, doesn’t make it so.

It has become blatantly apparent that the American car industry is uncompetitive. It is, however, not only the car industry that is uncompetitive. The U.S. manufacturing industry, about 7% of the economy, has been shrinking steadily for decades, and the size of it is now almost half of what it is in most other industrialized countries, as a portion of GDP.

There are several reasons for this, but one of the most important ones is that U.S. industrial goods cannot compete in the international trade arena.

It is quite easy to get a grip on the market dynamics of a domestic market; the market within just one country. For instance, if you raise the fuel efficiency standard on cars, cars will become more expensive, and in the short term, fewer people will buy them. That’s the easy bit.

Industrial products, and cars in particular, are for the most part dependent on international trade. When it comes to very advanced industrial goods, it is usually not possible to sell them in a single market and still be profitable; you need more customers, and industrial products almost always fit in to some type of chain of products that are dependent on each other.

For 30 or 40 years in the western industrialized world, a steady stream of legislation and industrial policies have followed much the same path. Legislation with respect to efficiency standards, safety standards, health care, vacation time and much more has followed the same trajectory in most industrialized countries: a significant increase in these standards and rights.

However, the exception is the United States.

As I outlined in my post about circular looting, (in the list to the right on March 19) I believe that the political system which allows large-scale corporate donations to politicians has created a “business-friendly” climate in the United States. This climate has been developing over the last 30 or 40 years, and has led to policies that make it as easy as possible for companies to turn quick profits in the U.S., at the cost of long-term perspectives.

Think of it this way: as U.S. automakers were making money selling gas guzzlers in the U.S. (while not being able to sell them elsewhere), automakers in Europe and Asia were being subjected to ever stricter regulations on efficiency standards, forcing them to develop better engines. In the U.S., on the other hand, the powerful industrial companies have stood in the way of any changes that might hurt their bottom lines in the short term.

This process also applies to a lot of other areas. European and Asian automakers had to deal with higher costs for vacation time, labor rights and taxes. This was by no means easy for these companies, but what this actually does in the long term is to make them more competitive.

The politicians of Europe and Asia developed this legislation because they thought it was the right thing to do. A cleaner environment and 6 weeks of vacation for everybody were simply seen as moral imperatives. They did not think of the eventual side effects.

Because industrial companies in Europe and Asia have had to fight much harder to remain profitable, they have developed better products and improved productivity and technology, while they have also had less of an impact on the environment and created better working conditions.

(Nowadays, it is widely known amongst economists that the previous estimates of American workers being more productive than others are not true. The PC revolution did increase this productivity, but it was later just inflated by Wall Street profits, which later turned out to be an illusion of productivity)

OK, I know what you’re going to say: the UAW has cost the American auto industry so much that they are the reason American cars are not competitive. I agree that there is some truth to that. The UAW is what I would call a “labor aristocracy union”. Such unions are very selfish (in the beginning very racist), and have no concern for society as a whole. That is very different from European unions, which would for instance fight for more vacation for everybody, not just autoworkers.

However, the over-reaching of the UAW does not explain the fact that innovation was stifled, and that such massive lobbying to stop any improvements was undertaken for decades. The auto companies also agreed that they should be the ones to pay for workers’ health insurance, which is something I disagree with. This stance comes from the anti-socialist movement of the early 20th century. Again, the companies chose this path themselves.

The short-term perspective of the American industrial sector which has involved fierce resistance to any environmental, safety or labor-related reforms, has brought the sector to its knees. In economic boom times, the American model works. In economic recessions, the weak will be taken to the slaughter.

This is the perfect example of what the Freiburg school of economics is all about: we need capitalism, but the framework within which capitalism exists can make it stronger, and make it function much better.

A “Freiburgian” would say: Saturn didn’t make cars that Americans wanted to buy, because the economic and societal framework surrounding the auto industry promoted a hunt for short-term profits.

Moreover, I advise that the winner-takes-all voting system should be destroyed.


Anonymous said...

The operating assumption on the economy in America today is that: "jobs are always a lagging indicator".

This is what someone told me this weekend when I suggested that things are going to get a lot worse. "No, they won't", she responded. If I'd paid attention in my economics classes I'd have discovered that jobs are the last thing to pick up when the economy changes, so we are fine.

How do you explain to someone like this, that this time it's different?

Jacob said...

The fact that jobs are a "lagging indicator" does not change the fact there is no job growth, nor does it say anything about whether or not a recovery has been initiated.

You can't base assumptions about the present time on something that has not yet happened.

Anonymous said...

The assumption on jobs is built other recessions that we've had. So, I'm assuming that people who believe that jobs will eventually come back are basing this assumption on what has happened in previous recessions.

However, based on what you've articulated, this one recession (or is it depression) will be different in that these jobs will not return and in fact will continue to be lost for quite some time.

What do you think about the article in the NYT about the FHA running out of money. They claim they won't need a bailout. what do you think?

Anonymous said...

I found your site after you commented in the New York Times and linked to it. Very interesting stuff and I agree with most of what you write.

I'd say that from a macro-economic perspective it all comes down to whether the Dollar holds as the world's reserve currency - or not. If it does these financial dire straits can be reversed over time and the US economy will remain the most powerful in the world for quite some time. But if it doesn't, then the US economy and the working/middle class people of America are in for hardships that most cannot even begin to consider today.

In essence the US has been living way beyond its means for quite some time. And this has been possible because of the role of the Dollar as the worlds reserve currency, facilitated by its role as the "petro-Dollar". Any other nation would have hed to make adjustments way sooner. To consume more than you produce can only be maintained for a short period, unless there is some factor giving you an edge. The US's edge has been the role of the Dollar.

Will the Dollar fall? I don't know. But there are increasing signs that it might: The spiralling US debt. The gold price that's reaching new highest levels almost every week. The recent talk of a "currency basket" to replace the Dollar as paymeny for oil. The chinese urging their citizens to save in precious metals instead of in currency. Etc.

Of course there are also very strong interests that are best served by the status quo.

If I may post a request I'd like to hear your opinion on this.

Marcus - Sweden

Jacob said...

Marcus, I completely agree with you. It is often said that macro-economic models don't apply to the U.S., just because of the Dollar.

Like you said, if the Dollar holds its position, we're probably going to be fine, but if it doesn't, macro-economic models DO apply, and we're screwed.

It's easy to see parallels to Britain when the Pound lost its position as the world's reserve currency. The result was a slow and steady decline, but there's no reason to think that America's decline would be slow, in my opinion.

But it gets worse. Even if the Dollar holds its position, the U.S. has been spending, placing bets, on a recovery that, in light of the bets, would amount to an economic miracle. For instance, for the U.S. to bring back the jobs that have been lost recently in 2 years, the job creation would have to be faster than it was during the economic miracle times of the 1950s.

It's just not going to happen. What has improved? Where is the growth going to come?

Sweden and Germany are some of the only countries that have had a reasonable and intelligent approach to this crisis.

Jacob said...

Marcus, I'll try to write about the Dollar, but it's hard to find the right angle, since the whole world economy is linked up to it...

Anonymous said...

I'm still not sure why you think new jobs in new industries won't be created.

I read articles like the one below, where U.S. companies have developed new drilling technology to find gas and I think to myself, well...maybe jobs in banking and finance will disappear, but other more important jobs will be created.

Link below:


Anonymous said...

Jacob, some of our banks have behaved incredibly irresponsible also. They have been making huge bets in the Baltic states, lending in Euro to people who earn a living in another currency. Their currency has weakened against the Euro and suddenly their loans have become much more expensive, risking them defautling on those loans. If any of those banks fall aas a consequence, and they might, we're probably going to have to back them with public funds, and that might be very costly. The bankers responsible have been cashing in large bonuses, as per usual.

But overall I agree our Finance minister and our Riksbank (Our FED) have been responding very well to this crisis. We also have our currency floating so it responded automatically by devaluing which some moan and whine about but which saves jobs and increases competitivenes in our export dependent economy. If we were in the EMU we'd not have this financial tool but would be stuck with whatever the European Central Bank decided, for better and worse.

I look forward to your analysis on the Dollar. And, agreed, it's not an easy topic to write about. For one, I'm not sure the future is even in the hands of the FED but might be more in the hands of those nations with significant Dollar reserves. Will they be willing to continue to place their trust in the Dollar to avoid devaluing their reserves? Or will they lose trust, bite the bullet and move away from the Dollar?

Marcus - Sweden

Jacob said...

Yes, the case of Swedbank, SEB and Nordea is interesting, because there are some political parallels with the U.S.. The subprime boom was in many ways meant to support home ownership for poor, minority Americans, hence bringing them in as fully-fledged members of society (at least that was the conservative dream in the pursuit of a bona fide ownership society, a la Reagan and Thatcher.

Swedish politicians in particular supported efforts to bring poor eastern Europeans back into the European fold, through business and investment. I wish they hadn't done this by having banks give personal loans for buying property, but supported long-term development more. Simply owning property doesn't solve a lot of problems in society, in my opinion...

I think now that the best way to come at the current Dollar problem is to look at the world as a place where the centers of gravity are shifting. I will elaborate

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