How the Government Ruined the Detroit Auto Industry

By Joshua D. Glawson | United States

The rise and fall of the Detroit automotive industry is a classic example of the problems of cronyism, labor unions, and corporate welfare. Thomas H. Klier, who is the author of “From Tail Fins to Hybrids: How Detroit Lost its Dominance of the US Auto Market,” points out some key concerns with the decline of the auto industry. However, Klier fails to demonstrate the imperative issues of US government marketplace meddling and power-drunk control, and how the government was the biggest driver for the auto industry’s demise and crash.

Klier begins his narrative with determining there are three distinct phases that made up the decline of the US auto market: One, The 1960s’ foreign imports; Two, the 1979 oil crisis; Three, the 2008/2009 Great Recession.

First, a market, in order for it to be the healthiest and most productive, is best left alone with little-to-no government involvement. A market thrives on competition, supply, and demand, while freely and voluntarily exchanging goods and services. When the US government involves ‘itself’ in the business of others, it automatically stunts the growth and capabilities of that industry.

After the gas-powered automobile was invented in Europe, Americans had gained an edge in the market with lower wages and overhead compared to that of Europe. By 1899, there were already over 500 automaker companies in the US. However, this created a saturated marketplace, and after WWI by 1929, there were only 44 companies making gas-powered automobiles in the US. The Great Depression would then finish off the remainder of these, dwindling that number down to an even fewer number which would eventually make way for the US “Big Three,” i.e. General Motors, Ford, and Chrysler. The Progressive Era, from the late 1890s to the 1920s, ushered in more government involvement in all industries, including that of the automotive industry.

By 1933, President Franklin D. Roosevelt (FDR), established the National Industrial Recovery Act (NIRA) which was intended to give a coercive protection of these various special industries and workers, including that of the automotive industry. Not only did this Act provide economic protection to various industries, but it also subsidized, fixed prices, and destroyed market competition. FDR’s protectionism and cronyism led to the development of the United Automobile Workers’ Union (UAW).

Of course, as any labor union will proclaim, this coerces the market to higher prices in order to pay workers higher wages. Labor unions also restrict the flexibility of the company because once a labor union is established, there is more bureaucracy, red tape, fees, and fields where only the “specialized” laborers are allowed to do their part. This essentially drives out competition through a coercive government monopoly by fixing prices, and removing the flexibility of standard supply and demand, while only allowing certain political elites to arbitrarily determine what a “fair” price should be.

Simply put, if subject A, Jane, says she will only work for a certain price as determined by the government and labor union, but then subject B, Joe, says he will work for a lower price as to be more competitive, this would not have been allowed by law. So, along with many other economic factors, the prices of cars went up along with the subsidized pensions and wages of the auto industry’s workforce. In the 1960s, with an influx in imports due to more competitive pricing, the Detroit automotive market began to decline, as pointed out by Klier.

Klier is also neglecting the emphasis on tariffs, which choke markets. After WWII, any “benefits” the US had gained from the war had already begun to significantly diminish by the 1970s.

Second, almost since the very birth of the oil industry in the US in the 1800s, the US government has been involved in controlling who can and who cannot be involved via government cronyism. Examples of government tampering and controls of the marketplace, which includes that of the automotive and oil industries, are the Sherman Antitrust Act of 1890, heavy oil provisions to France and England in WWI, the Mineral Leasing Act of 1920, the 1928 Red Line Agreement, 1933 oil production quotas, 1933 oil import duty taxes, WWII rations, 1948 Marshall Plan, 1959 Mandatory Oil Import Program, establishing OPEC in 1960, 1967 Arab oil embargo, and so on.

Along with these coercive involvements in the marketplace, by the 1960s there were also laws implemented to force car manufacturers to have certain safety features, which also leads to increased costs. Nevertheless, oil and petroleum products such as gasoline were already strictly regulated, and slowly choking the auto industry. Today, the US oil industry “benefits” from over $200 Billion in subsidies, and countless regulations. Much like the story of ‘I, Pencil‘, which demonstrates the complexity of the marketplace, so too are the numerous subsidies that plague many industries and stages of production, especially that of the auto-industry- petroleum, oil, gas, plastics, metals, workers, manufacturing, import tariffs, export tariffs, foreign manufacturing, shipping domestically and abroad, etc.

Three, the economic crash or Great Recession of 2008, or others cite 2009, which assisted in the temporary downfall of the auto industry of Detroit, specifically, was again caused by government involvement. With a minimum of nearly 600 confirmed laws that regulate and set pseudo-standards for the automotive industry in the US, it makes it so that running a car manufacturing company, much less starting one, is nearly impossible.

Various states and the federal government have continuously provided subsidies to the Big Three of Detroit, and this negates the standard of measuring supply and demand. When people or companies are given “free money” they do not have to compete in the market the same way, and they do not have to concern themselves with their next dollar earned as someone who must work and compete for it. Finally, when the bailouts came for the Detroit auto industry, it was nearing $90 Billion.

Of course, subsidies do more than redistribute wealth from those paying taxes to those that are gaining the plunder. Subsidies, as previously mentioned, also cut supply and demand, while also driving out competition due to inability to compete with increased funding, and stifles creativity and flexibility in the marketplace as demands and desires increase. It makes the company receiving the subsidies lose interest in market needs because they are doing better with the easy money from the government.

Many will support subsidies because they believe it helps save jobs or makes things cost less, but in fact, that is an economic fallacy to assume such. A subsidy is still supported through taxes, which come from the citizens, and this proves to add to inflation and falsifying prices as it helps falsely prop a market. It also influences the GDP as it assists in purchasing and subsidizing products that many people may not actually want. GDP will reflect as being up, when in fact it was all junk coercively purchased off the dime of everyday citizens.

While I can agree with the author that certain stages are evident in the downfall of the auto industry, especially in Detroit, it was ultimately caused by government influence, laws, coercion, subsidies, and cronyism, not the marketplace itself.

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