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.