Rationalizing the auto industry

In the political debate over how and whether to save GM and Chrysler, microeconomics has been forgotten.

Autos pretend to be a brand-driven industry, but are more like a commodity industry. Under conditions of overcapacity, the highest-cost producers of a commodity shut down, while the lowest-cost continue to make money.  These shutdowns are most efficient if they happen at the plant level, not the firm level.

It’s not clear that union-busting — currently demanded by the Senate minority in return for a rescue — is economically necessary or politically constructive.  Current GM workers are actually paid less than Toyota workers in the US.  GM’s higher costs result not from current staff, but retirement obligations, mainly retiree healthcare.

GM is in an interesting position:  they are uncompetitive mainly due to retiree benefits.  In fact, it barely exaggerates to say that GM is going broke due to the US healthcare system.  The system is not cost effective, and has become less so over time, to the point that it is beginning to bring down even very large firms.  Fixing the cost effectiveness of US healthcare would dramatically improve US competitiveness, profitability, employment — and could by itself save GM.

But that takes time.  In the meantime, if GM is to be saved, logically it should be done as a workout or prepackaged bankruptcy, in which retirement liabilities are nationalized and the oldest, highest-cost plants are shut down.  GM is competitive enough that, with these two changes, they should survive.  Without these changes, they’ll just fail again.  

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