Bailing Out the Big Three Repeats Britain’s Mistake
Uncle Sam's Support of American Auto Manufacturers is Doomed to Fail
A major reason for any kind of historical writing is to provide guidance for the present. As we read an account of the past, we may see similarities to the present and (we may hope) avoid repeating the same kinds of mistakes. In this sense historiography forms part of the collective memory of a society (which is one reason why history can be a very controversial subject). Sadly, many people lack this kind of perspective, while others who know about the past seem incapable of learning from it. Consequently, the same type of error gets repeated, often at great cost. It seems the U.S. political class, as represented by Congress and much of the commentariat, has done just that by trying to “save” the Big Three auto manufacturers. In doing this they will repeat a catastrophic series of mistakes made by British governments 30-40 years ago. It is worth recounting this sorry tale.
At one time British-owned auto manufacturers were world leaders. In 1952 the merger of Austin and Morris to form the British Motor Corporation (BMC) created the world’s fourth-largest producer of cars. By the 1960s, however, the British auto industry faced growing problems. The main firms had lost an increasing share of the market to foreign-owned competition both at home and abroad. The profitability of many firms was steadily declining. This reflected a number of problems, such as old-fashioned or low-quality products or those, like the iconic Mini, that were triumphs of design but whose production costs made them unprofitable. Also, the management of many firms was both incompetent and hindered by chaotic organization of sales and production. Most seriously, the industry was plagued by bad labor relations, with frequent strikes and disputes and rigid enforcement of job demarcation.
Faced with this, British governments intervened to encourage mergers and the takeover of the failing firms by the remaining successful ones. This led ultimately to almost all the remaining British-owned firms being brought into one firm in 1968 with the creation of British Leyland (BL) via a state-sponsored merger of BMC and Leyland Motor Company. The underlying problems were not addressed, however, and the labor relations and chaotic management in particular became even worse. In the early 1970s the Heath administration gave financial assistance despite having opposed aid to failing firms during the 1970 election. By 1975 British Leyland was insolvent and on the verge of going out of business.
To Nationalize or Not to Nationalize
At this point the British government had a choice. It could allow BL to go bankrupt, with many of its 40 plants closing and the remainder being sold off, or it could act to prevent this. The government decided to take the firm into public ownership. The idea was to invest several billion pounds in the firm, and several hundred million pounds were indeed put in. The taxpayers also took on most of the outstanding debt. This did not stop the losses, however. The firm (with various name changes) continued to decline while soaking up a steady stream of government money. Several parts of the business were sold off, and eventually the core (the old BMC) was sold by the government in 1988. It never made money and finally closed in 2005—during a general election. In other words, the British government (or rather the taxpayers) spent 23 years and a fortune trying to preserve an enterprise that went out of business anyway.
This was a classic case of trying to prevent the inevitable. The parts of the original firm that survived would almost certainly have done so in any event, as they were always profitable and would have found purchasers had BL been allowed to go bankrupt in 1975. Some might argue that at least jobs were preserved—for up to 30 years in some places. This is wrong for two reasons. First, the number of jobs actually preserved for that length of time was quite small because there was a steady loss from 1975 onward as a succession of managements made desperate efforts to keep the ship afloat.
Even more serious were the hidden costs of this bailout. All the money put into BL and its successors was capital that could have been employed profitably, creating work somewhere else. Instead it was simply wasted. The British-owned auto industry was essentially doomed by the mid-1970s. Trying to resist this did nobody any favors in the long run and simply prolonged the agony of re-adjustment to a painful and disruptive change.
Ominous Parallels
The parallels with the current position of the Big Three are not exact, but they are disturbingly close. The firms in question are also run down by a generation or more of bad management decisions, bad investments, and crippling wage, healthcare, and pension costs. It is not that auto manufacturing in America is unviable. Honda, Toyota, and others manufacture very profitably in the United States, just as Nissan does in the UK. There is nothing to suggest that giving the Big Three the massive amounts of money they want will do anything other than delay their demise and create a slow and lingering death rather than a swift one. In fact, so dire is the position of General Motors and Chrysler that even with assistance they are unlikely to survive as long as parts of British Leyland did. Meanwhile, all the money given to these firms will be money that could have been used to more effect elsewhere in the economy.
The U.S. political class is probably aware of this, even if it does not realize it will simply be repeating on a much larger scale what the British government did 30 years ago. They are motivated by two main concerns. The first is economic nationalism—the fear that if these firms and their suppliers go out of business, the United States will be weakened. The answer to this is straightforward, no matter how unpalatable it may be to nationalists: The aim of production is consumption, not national power and prestige. In the longer term policies that weaken productivity (which any diversion of capital will do) will actually reduce the power of the nation-state (if that is your main concern).
The second concern is for the many who would lose their jobs and the communities that would lose most of their employment. This comes down to an argument about whether concerns of this kind (which are serious and important) should be a matter for government action. Even if you think they should be, however, it does not follow that the right course is for Uncle Sam to support these firms financially. The example of Britain shows that the much more effective policy would be to let the firms be wound up and use the money to try to revitalize the local economy of places like Michigan. As people here in England watched the goings-on in Washington and Detroit, there was an overwhelming urge to shout, “Don’t do it!” Sadly, even if the folks in Congress had heard, I doubt they would have followed the advice of history.
Comment by Steve Hammer on 11 March 2009:
It was very interesting to read a brief history of the demise of the once mighty British auto industry. As an enthusiast in the 60’s and 70’s I watched and read about the failure of one old legendary name after another. More recently I have had the opportunity to own some of these legendary, but not very practical cars.
One area that was not covered was the possible alternatives that may well have bloomed had the capital, both economic and human, not been squandered in keeping those sinking ships afloat. It is not clear that Mini, Triumph or MG could not have made it as independent makers, were they not kept in the smothering fold of BL. Similarly, Jeep and Corvette are well placed to survive as independent makes as they both have loyal but somewhat atypical buyers. Should these successful parts of the larger failure be allowed to find their own niche or will we follow the road the British disastrously paved for us? In all the talk of auto bailouts very little time is expended on the creative destruction process and the successes that could come out of the “failure”.
Comment by FELTON WILLIAMSON JR. on 23 March 2009:
THE AUTOMOBILE INDUSTRY FIASCO
The condition of the domestic automotive industry is one of the clearest and best arguments for freedom and capitalism to hit the news in a long time. If you listen to the main stream media you probably would not come to that conclusion.
Just few years ago, General Motors was the strongest, most powerful company in the world. Now it is bankrupt! How could that happen while companies like Toyota and Honda thrive?
Once upon a time, an individual went into business with the reasonable expectation of the right to hire and fire employees at the individual’s discretion. Denying this right constitutes the use of force against the individual and moves society closer to a “totalitarian” government.
In the 1930s, labor laws were passed nullifying this right. Labor laws allowed employees to apply initiate the use of force against the employer. The employees were allowed to physically restrict traffic into the employer’s property, refuse to work, and prevent others from working in the employer’s facility. The employees (union) were given a government enforced monopoly on supplying labor to the employer. In effect, the union could “kidnap” the employer’s production facility and hold it for “ransom”.
The union leaders (“PEERS”, since the government had granted them the right to initiate the use of force against fellow citizens) held the power to destroy the automobile companies. The union leaders (“PEERS”) recognized that the politicians were the source of their power and programs which made the unions a powerful political force were initiated.
Economic conditions and a world war tempered the “PEERS” use of force for about ten years. After that, the near monopoly of the automotive industry allowed the companies to meet the “PEERS” demands and pass the cost on to the consumer. The labor cost of the “Big Three” quickly became two to three times the cost per hour of other workers with similar qualifications.
When the “Big Three” lost their near monopoly during the 1970’s energy crisis, their artificially high labor cost and the confrontational relationship with their employees made bankruptcy inevitable.
The automotive industry has always been a cyclical industry and has used the profits earned during the good times to carry it through the bad times. Because of the high labor cost and competition which eliminated the ability to pass on unlimited cost to the consumer, the huge profits the “Big Three” usually earned in good times evaporated.
When energy cost surged out of control, both the demand for automobiles and the product mix changed very quickly, both sales and profit evaporated. A labor contract that severely limited the savings available from production cutbacks and minimal profits from the previous up cycle caused the “Big Three” to face bankruptcy.
The departure from the principles of capitalism in the 1930’s made this disaster inevitable. The only question is, why did it take so long?
A case could be made for financial aid to the “Big Three” since the governmental policies are the root cause of the problem; however, financial aid without correcting the problem is just “throwing good money after bad”. The solution to the problem is to eliminate the “PEERS” ability to “kidnap” and hold the production facilities for “ransom”.
Given the political debt that the incoming President and Congress owe to the “PEERS” (union leaders) there is little chance that the source of the problem will be eliminated any time soon.
TO SOLVE THE PROBLEM, WE HAVE TO “THROW THE RASCALS OUT”.
Comment by Jerry Wells on 27 March 2009:
Throwing the rascals out can only mean by another 1776 Revolution.