Krugman: Car Industry is Doomed
I imagine these remarks from Paul Krugman will attract a lot of discussion:
“It will do so because of the geographical forces that me and my colleagues have discussed,” the Princeton University professor and New York Times columnist told reporters in Stockholm. “It is no longer sustained by the current economy.” [...]
Speaking to reporters three days ahead of the Nobel Prize ceremony, Krugman said plans by U.S. lawmakers to bail out the Big Three automakers were a short-term solution, resulting from a “lack of willingness to accept the failure of a large industry in the midst of an economic crisis.”
He clarifies on his blog that he doesn’t mean no cars will be built in the United States, but rather “that the concentration of the industry around Detroit would disappear.” One thing here is that as best I can tell none of the five countries — US, Japan, Germany, France, Korea — with substantial auto industries are willing to let their national favorites fail. And yet there seems to be substantial global overcapacity in car manufacturing. If a few of the existing firms are allowed to fail, then the survivors will be in good shape. But if nobody fails, then all the firms worldwide will be left suffering because of overcapacity problems, all potentially drawing bailouts and subsidies indefinitely.
76 Responses to “Krugman: Car Industry is Doomed”
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December 8th, 2008 at 8:48 am
And yet there seems to be substantial global overcapacity in car manufacturing.
I have seen no evidence to this effect. In the short-term we have a reduction in demand, so yes utilization is low, but there is no reason to expect that we will see a permanently lower level of developed-economy auto sales going forward.
December 8th, 2008 at 8:52 am
It’s possible that Krugman thinks our present form of “free” trade will survive a depression, or is unwilling to give up on it because of his ideology. If you ever want to correct the trade deficit however, you better figure out how to produce cars internally, and hopefully using a lot of the present infrastructure.
December 8th, 2008 at 8:53 am
Ahem, Krugman didn’t say what you think he said. link
December 8th, 2008 at 8:57 am
I would try to respond to that, Tim, except I think Krugman already gave it a good shot 11 years ago:
http://www.slate.com/id/1922/
In essence: the trade deficit is just a number, and it ought to be the least of anyone’s worries.
December 8th, 2008 at 8:58 am
So Krugman is apparently now on board with Bush and the conservatives? What else does an argument for their pending failure imply?
http://www.sunstateactivist.org/ssablog/
December 8th, 2008 at 9:01 am
According to Wikipedia, Italian-based Fiat builds slightly more cars than the top Korean company, Hyundai. This page shows some of the complicated relationships between various nameplates and ownership groups, but doesn’t show the production volume of subsidiaries and divisions separately from their parent companies:
http://en.wikipedia.org/wiki/Automobile_Industry
I had missed that Jaguar and Land Rover were now Indian-owned. As for Swedish makers, Ford owns Volvo and GM owns Saab.
December 8th, 2008 at 9:03 am
Why exactly should we in the midwest take it in the shorts so we can spare more money for bailing out Wall Street and making bird shredders for the left coast? Krugman and his ilk have shilled for “free trade” and the benefits have accrued to the consumers on the coasts and the costs have been borne by the producers in the hinterlands. Now the whole thing is coming off the tracks and we’re shoveling money into the Investment Banks in New York City and upside down homeowners on the coasts. For the love of God, the cost of bailing out the whole damn auto industry is probably less than we’ve put up on AIG alone. But of course the auto execs have to grouse and genuflect to get a 34 billion dollar loan while the banks that created the crisis get a $250 billion dollar gift (and get to outsource the begging to government officials).
December 8th, 2008 at 9:03 am
This is what Krugman was actually talking about- the decline of the forces that historically caused US manufacturing to be concentrated in the Midwest.
December 8th, 2008 at 9:08 am
Krugman and his ilk have shilled for “free trade” and the benefits have accrued to the consumers on the coasts and the costs have been borne by the producers in the hinterlands.
Excellent parody of a functionally retarded protectionist! Can you do an impression of physiocrat with bipolar disorder?
December 8th, 2008 at 9:22 am
Regardless of whether Krugman was advocating for a failed Detroit auto industry, I don’t see why we should accept a failure of an American industry in the midst of an economic crisis. There is nothing inherently anti-globalization with producing cars in the United States. Nations with reduced diversity in the economies are more exposed to failure. We ought to have a manufacturing base for jobs and the possibility of war alone.
Regarding the demand of cars, from a personal standpoint I have realized that it simply doesn’t make any sense to buy new cars every 3 to 5 years. If this is a model, or at least an assumption, that the American industry is banking on, they ought to rethink that.
December 8th, 2008 at 9:24 am
The one question I have, that no one seems to be addressing is, assume we save the auto industry from failing – this will not save us from our current recession or possible depression. Who will be buying the cars the big three (and their international competitors) make in this economic climate?
Just sayin’
December 8th, 2008 at 9:27 am
In essence: the trade deficit is just a number, and it ought to be the least of anyone’s worries.
Yes, because running a gigantic trade deficit and relying on financial services has proved such a success.
December 8th, 2008 at 9:30 am
Adrock:
As many have observed, there is a successful American auto industry out there – it’s just not run in Detroit and goes by some funny-sounding names like Hyundai and Toyota.
Now, granted, the supply chain consists of real American suppliers who will all but certainly fail if the Big Three go down. But that sounds like an argument for bailing them out instead of bailing the Big Three out, at least to me.
batojar:
Hear, hear – a great question.
December 8th, 2008 at 9:36 am
Tim H.:
And running a trade surplus sure worked out well for Russia. A sample size of 1 isn’t going to prove anything. Arguing from anecdotes is fun but empirically pointless. The point of Krugman’s story is that the trade deficit is just a number, and focusing on it at the expense of economic fundamentals is silly. Imports may exceed exports, but that does not tell us anything about the fundamentals of an economy.
If exports exceed imports, what does that mean? It doesn’t tell us anything about the workings of the economy. If the island of Banana Paradise sells bananas and doesn’t import anything, it has a trade surplus, but its people are almost surely worser off for only having bananas to eat and no new capital with which to develop their banana-growing industry.
December 8th, 2008 at 9:39 am
I’m fascinated there is little talk of comparison to the failing of the British auto industry.
It’s all just a little bit of history repeating.
December 8th, 2008 at 9:42 am
And yet there seems to be substantial global overcapacity in car manufacturing.
Really? About half the world’s population lives in the rising countries of China and India, and those people have just started buying motorized personal transportation vehicles.
Hopefully, those countries will all address their environmental problems and human congestion problems with national policies that build viable and convenient public transportation options in the most densely populated areas. And hopefully, technological improvements will give them (and us) personal transportation devices that help us decrease our carbon footprints. But there are going to be a lot of people buying a lot of devices of some kind for moving themselves around speedily, independently and efficiently. The opportunities in this area are tremendous. So I’m not buying the overcapacity argument.
December 8th, 2008 at 9:44 am
Geez, it’s like letting foreign corporations circumvent our own labor laws on our own soil was a bad idea.
Don’t get me wrong, Toyota and Hyundai made some very smart planning and engineering decisions too (eg: focusing on quality sedans instead of pouring the lion’s share of their resources into light trucks & SUV’s). But surely Kentucky plays as much of a role in Detroit’s collapse as the big developing economy manufacturing centers do.
December 8th, 2008 at 9:47 am
Listen, Just Dropping By, if you’re going to call someone a retard, just call them a retard. Dressing it up in a feather boa like you’ve done only makes you look like a weasel.
Yes, we can see you have a college education, but your dazzling undergraduate display doesn’t distract from the fact that you’re calling someone a retard. I just shows that you’re putting that education to poor use, as decoration for your retard jokes.
December 8th, 2008 at 9:52 am
Dan K — I can’t speak to China, but India is already facing pretty serious congestion problems. (See for example: http://www.triz-journal.com/archives/2008/06/06/)
More cars are not exactly attractive in that situation. OF course, they could massively improve their highway capacity with an Eisenhower Interstate System-like investment in highways, but that’s a really big long-term investment. It’s not at all clear that it’s a long-term bet that makes sense given the uncertainty of the oil supply and the very high likelihood of international action on climate change.
December 8th, 2008 at 9:58 am
“Ahem, Krugman didn’t say what you think he said.”
Matt doesn’t like cars, and is thus willing to repeatedly lie in his commentary about the auto industry.
Or in other words, Matt fully understood what Krugman said, and decided to lie about it.
Hopefully, once the transition is over and John Podesta can get back to minding the shop, he’ll fire the lying sack of shit. Matt may not like cars, the Midwest, and labor, but there is no reason CAP should be part of his trust-fund scumbag agenda.
December 8th, 2008 at 10:08 am
batojar, I think the question is who will be buying the cars that are developed in this climate and that are then sold when the global economy rebounds and demand begins to expand again.
My guess is that Detroit is well-positioned as a region to compete effectively in the next global economy if energetic action is taken to help the region transition out of moribund old economy patterns into something new. I understand the claims about old advantages of the Midwest in manufacturing that are no longer viable. But there must be regional development specialists who have looked at Detroit from a long-term perspective, identified its remaining regional strengths and competitive advantages, and its weaknesses, and can help us put together a plan for re-tooling the region around the engineering and manufacturing capacity that does already exist there, including the institutions of higher education that help supply some of these needs, and the still-functioning and vital communities that supply the foundation of human resources. When Obama comes in, hopefully these specialists are part of the discussion.
Americans are competing in a global economy now in which coherent and powerful state action subsidizes development strategies around the world, just as we did ourselves in the early history of the US. I don’t think we can just count on local perceptions of supply and demand, and the free market flow of private capital, to maintain our competitiveness.
My chief concern is that we should never just let regions die, and communities degenerate and turn into bombed out dust bowls or rust bowls, filled with every kind of social pathology, because we are enamored with the romance of “creative destruction”. Government has a role in engineering soft landings and in catalyzing and financing some … yes… planning that helps regions, and their people and communities, make relatively smooth transitions to a new economic order during dynamically changing and challenging times.
December 8th, 2008 at 10:18 am
And don’t forget the big tax breaks they got on top of that.
December 8th, 2008 at 10:19 am
Regardless of whether Krugman was advocating for a failed Detroit auto industry, I don’t see why we should accept a failure of an American industry in the midst of an economic crisis. There is nothing inherently anti-globalization with producing cars in the United States. Nations with reduced diversity in the economies are more exposed to failure. We ought to have a manufacturing base for jobs and the possibility of war alone.
Even if the three fail, we’d still have cars being produced in the U.S. Help the workers, not the car companies.
December 8th, 2008 at 10:23 am
It’s not at all clear that it’s a long-term bet that makes sense given the uncertainty of the oil supply and the very high likelihood of international action on climate change.
I take it as a given that, one of the things people will always want is the ability to move themselves across large distances and to expand their horizons and opportunities through that power to move. I also assume they will always prefer the freedom to move themselves where they want to go, when they want to go – and will never be content solely with options that require they move themselves only in large groups to places that the whole group wants to go. Smarter, better mass transportation options can take care of the large arterial flows of people in, out and around large, densely filled workspaces and shopping spaces. But mass transportation can’t handle the myriad, lightly traveled capillaries that in the aggregate make up a huge amount of the total human movement people participate in and demand. A road network is part of a broader transportation network, and should reflect a coherent national strategy. But I see no reason to doubt that as a place like India grows more prosperous, people will choose to use some of that prosperity to purchase the power to move themselves around extensively and independently.
Yes, we need to transition out of the oil era into something else. But I think it is a mistake to think that the end of oil will mean the end of personal transportation. Far from it.
December 8th, 2008 at 10:37 am
I think China should be on the list of countries with substantial automotive industries:
http://en.wikipedia.org/wiki/List_of_automobile_manufacturers#World_motor_vehicle_production
December 8th, 2008 at 11:01 am
Japan and the European governments are currently hearing, coming up with ways, or are already poised to help their own struggling auto industries. “Helping the workers” could only amount to bringing them onto the government’s teat until retraining or relocation can be accomplished. I’m not opposed to that in principle, but there are better ways that involved keeping an American-owned manufacturing base alive.
I’ve been to the auto shows of late and there is simply nothing wrong with the American products. The gas crisis was partly a catalyst for that. Both GM and Ford were on the road to recovery before the financial crisis hit. If the companies and the unions need to make concessions than so be it. But they’ll need bridge loans to weather this. Hell, Honda and Toyota are vocally supportive of this as well to avoid supplier shock in the states.
December 8th, 2008 at 11:22 am
Matt had better watch out, else asking fundamental questions about the relationship between global capitalism and productive overcapacity may lead to quotes from the spectre of that 19th century guy.
December 8th, 2008 at 11:29 am
I’ve been to the auto shows of late and there is simply nothing wrong with the American products.
Nothing “wrong” with them except Americans don’t seem interested in buying them. This seems like a problem.
December 8th, 2008 at 1:08 pm
If Japan Korea and Germany want to subsidize American car consumption by helping out their auto industries, great. That gives us even less reason to subsidize our own auto industry–why pay extra for what people want to give us cheap?
December 8th, 2008 at 1:28 pm
It should be obvious that overcapacity is not a function of how many manufacturers there are but how much collective capacity they share. Some may indeed need to get smaller, GM in particular, and some, like Chrysler, may indeed go away. But the notion that the number of companies in and of itself is the problem, as opposed to the number of brands, models, and plants making those brands and models, isn’t in the least bit logical.
We are on the verge of a fundamental change in the way automobiles are powered and in the midst of a continuing evolution in safety systems. That means a massive turnover in the current fleet as greener, safer cars come to market that will no doubt continue for quite sometime. The number of cars sold will dip during this crisis then rise again, perhaps to a lower level than before, perhaps not, but the same number of companies can and, depending on how they are managed going forward, probably will survive.
December 8th, 2008 at 2:26 pm
DTM,
1. I don’t buy the “jobs” and “economic activity” arguments. Sure, you can always create new jobs by subsidizing an industry. Pay people to stand on their heads all day and that will provide “jobs” and “economic activity.” What we really want is productive jobs and productive economic activity that produces stuff useful for Americans. And if other people are willing to give us something at subsidized price, then it is more productive to use American workers to produce things which aren’t subsidized and take the margin as gift than to subsidize our own industry.
2. On the non-proportionality of consumer surplus distribution: I would think that every individual car consumer in the world will get an approximately equal consumer surplus as a result of subsidy. How is this nonproportional?
3. On the issue of improved production margins: Well, government-subsidized Japanese automakers will still be competing with government-subsidized Korean automakers (and so on). That will cut into the margins. If subsidies are needed to keep the companies afloat then profits are negative; hope for slightly less negative profits isn’t a reason to subsidize an industry.
I think it would be great for the US economy to lose its car industry and receive cheaper vehicles straight out of the wallets of German and Japanese hard-working citizens. I think it would be even better if we could import cheap food subsidized in Europe and elsewhere. Mercantilism does not make good economic policy. Let’s import as much as we can and export as little as possible. That’s the rule we apply as individuals when looking for a job: try to get as much wealth imported into your worth for the amount of work exported, and it applies just as well to nations as to individuals.
December 8th, 2008 at 2:58 pm
Realist, you say
But doesn’t the value of the dollar figure in here somewhere? And isn’t the value of the dollar relative to what we produce? Money isn’t necessarily wealth. Just look at the mess that’s been made by trading debt.
December 8th, 2008 at 3:37 pm
it’s done. Detroit Techno will outlive Detroit Cars. Plastikman is a stronger brand than Chrysler. Your children will more like know the name Juan Atkins than Henry Ford. Acid House will be a more viable US institution than Cadillac.
Dancing is better than driving anyday.
December 8th, 2008 at 3:53 pm
“And yet there seems to be substantial global overcapacity in car manufacturing.”
Seems to be, maybe. But I think the problem now is not overcapacity but that consumers were sufficiently spooked by the gas shock of the last year that they’re unwilling to buy another 6 or 8 cylinder gasoline vehicle – even at a discount. In other words they’re waiting not for prices on these cars and trucks (foreign and domestic) to fall further but for automakers (foreign and domestic) to begin producing a wide array and large numbers of hybrids so they don’t have to pay retail price for these cars or end up on waiting lists. My understanding is that most of these companies expect to do that retooling over the next couple years.
As for the deflationary thing more generally: you had naysayers dissing the fairly positive post-Thanksgiving retail numbers. These are among the consumer spending numbers that by nature mostly exclude home and auto sales (the country is Greenwich, CT: most people don’t buy their wives or children houses or cars for Christmas). But the same people who were saying that the numbers weren’t as good as they seemed because people were getting stuff at a discount are some of the same ones arguing that we’re on the verge of deflation; this is contradictory. Obviously one of the principal features of deflation is that people put off buying stuff in the expectation that stuff will get even cheaper later. But here’s one indication that isn’t happening.
There’s a lot more to say about this stuff but the one thing you almost have to say is that opec countries aren’t making money at these oil prices which means a cut in production is likely to come in the next year or two.
December 8th, 2008 at 3:54 pm
oops the country is not Greenwich I meant
December 8th, 2008 at 4:25 pm
The US auto industry enjoyed the monopoly in the 50’s and 60’s. The 70’s came along and they started falling behind while the Japanese gained and eventually higher quality cars. The us auto industry has done very little to make themselves competitive. They should have learned in the 70’s that fuel efficient, quality cars was the vision to keep them in the forefront. I’ve never purchased a US made auto since 1980. I don’t care for the quality nor the design of any US autos. They lag compared to Japanese cars. The Japanese asked the US automakers to make imports with right handed drive but they cried that it was to difficult and costly. So the Japanese asked Mercedez Benz and they complied. I lived in Japan 15 years and saw imported auto….none were US auto. They were European. We missed the target everytime. While I don’t want to see them collapse because of the impact it will have, this demise was a result of the lack of foresight, vision and just pure greed at the top. When will the US get it right?? The US is not as good as people think it is and maybe it’s time we experience a humbling, eye opening collapse to make the US and the greedy, whining Ameicans to WAKE UP !!!!!!!!!!!
December 8th, 2008 at 4:49 pm
I think we’ll see some significant improvement in efficiency and alternative fuels in the next 5 to 10 years which will keep the auto industry going.
December 8th, 2008 at 7:22 pm
I think you are right but the us auto industry should have been reached this goal by now. Mitsubishi already has a sleek electric car and the company plans to sell about 20,000 in the next twelve months. I don’t see and quite frankly don’t expect to see any quick movement with US automakers soon. 5-10 years is too late…..if we wait that long again the Japanese and probably the European car markets will have a considerable headstart. We also see “cars of the future” at the Detroit auto show but nothing becomes of the display models………..
December 8th, 2008 at 7:28 pm
wiley,
The value of the dollar is relative to what we produce. However, we can get more than market price for our dollars if we produce things unsubsidized, sell them on the world market at market price, and use the resulting foreign cash to buy goods subsidized by foreign governments.
I’m not saying we shouldn’t export. I’m saying that the only purpose of exporting is to allow us to import. If other nations want to make it cheaper for us to import things than is justified by the value of what we export, we should encourage them to do so.
December 8th, 2008 at 7:37 pm
I agree trade is important but Detroit has to have a “paradigm shift” if they truly want to stay alive and become who they used to be. But mainitaining continued quality imrovement and visions for their own futue is what Detroit is good at.
What’s more, Detroit knows what it’s good at. For decades now it has railed against any Congressional attempts to mandate increasing fuel economy, and its single biggest success — the SUV — has been the vehicle which did an end-run round fuel-economy standards by classifying itself as a truck. The statement by Detroit says it all: If you try to force us to make more fuel-efficient cars, say the Big Three with monotonous regularity, we’ll lose money. We can’t do it. We don’t have the technology
December 8th, 2008 at 7:57 pm
Maybe we ought to have a decade of letting small businesses write off up to $100K towards the purchase of U.S. produced passenger-frame based vehicles, to counteract the last decade’s incentives to buy 6500 lb SUV’s and trucks for up to $100K off of taxes.
December 8th, 2008 at 8:34 pm
Because shutting down the U.S. auto industry will result in the transfer of hundreds of billions of dollars of economic activity and millions of jobs to those other car producing companies.
And then, those noble non-union Dixie workers will probably have to compete with foreign-made Chevys imported by the new owners of GM. Perhaps even as loss-leaders. This isn’t just about the US factories. It’s about what happens to the global businesses, particularly in the case of GM, and the production lines in places like Brazil, where, although sales are currently shitty for everyone, they’re competitive across all sectors.
December 8th, 2008 at 9:06 pm
We also see “cars of the future” at the Detroit auto show but nothing becomes of the display models
Opel (i.e. GM) Insignia: European Car of the Year, 2008. Just beat the new Ford Fiesta. 40MPG in US numbers, or 35 for an automatic transmission. Meant to be coming to the US as the 2010 Saturn Aura. Low-emission diesel is going to make more sense in the mid-term, and GM/Ford already make them: but as Linus says, there’s retooling to be done, that just happens to coincide with the economic shit coming down.
December 8th, 2008 at 9:08 pm
Which is part of why the foreign brands with large investments in U.S. production lines (most notably Toyota and Honda) seem to be supporting a bailout.
They ought to get on the phone to Dick Shelby, then. Perhaps Mercedes in Tuscaloosa: isn’t as bothered, since it got a quarter-billion in subsidy and still makes its engines in Germany.
December 8th, 2008 at 11:47 pm
Ass-backwards. The industry has been concentrating around the Midwest.
The Big 3 had plants on the west coast, the northeast and in the south. They don’t anymore. The additional transportation costs don’t wash.
Overlay iron and coal deposits and the water and rail transportation grid. There’s your US and Canadian auto plant belt.
Those Southron maquiladoras are at a cost disadvantage that is paid for by labor and taxpayers both foreign and domestic. I’ll leave it to others whether it serves a greater social good.
Those plants will be gone after they’re fully depreciated.
Krugman is a boob.
December 9th, 2008 at 12:16 am
There’s a hell of a lot of excess industrial capacity outside the car industry, too. Not too long ago, industry running at full capacity couldn’t dispose of its full product even when everybody was maxing out their credit cards and tapping into home equity to replace everything they owned every five years. And we’ll never see that level again. That means that much of our plant and equipment is destined to become rust over the next ten years or so. And the industry we have, when we emerge on the other side of Peak Oil and all the other systemic crises of state capitalism, will look a lot like Emilia-Romagna.
December 9th, 2008 at 12:18 am
Dammit. “And we’ll never see that level of demand again.” Sigh.
December 9th, 2008 at 12:55 am
DTM:
1. On the long-term viability of US automotive competitiveness: Ok, if you think the “reasonable case” can be made that the companies will be able to return to profitability, you should loan to American car companies. If you don’t have enough money, try to make the reasonable case to others and start an investment firm for the purpose. I don’t happen to think that the government is smarter than the market in determining long-term viability off companies.
2. In a recession other firms/jobs won’t step into place:
Have the government use the money to hire people to do work on infrastructure until the economy recovers. Or, use the money to educate the people losing their jobs–creating productive teaching jobs and increasing human capital. I can imagine 1000 things better to do with money then subsidizing failing industries which would also have a stimulative effect.
3. On the costs borne to the US by shutting down the auto industry: What are the costs of reorganization you are referring to? The US car industry is currently unprofitable; just shutting it down would bring a net benefit.
Are you saying that if the US auto industry shut down it would make the car industries in all the other nations profitable again? So we should fight a war of attrition refusing to cut our capacity until some other nation is forced to back down?
December 9th, 2008 at 9:26 am
-One thing here is that as best I can tell none of the five countries — US, Japan, Germany, France, Korea — with substantial auto industries are willing to let their national favorites fail. And yet there seems to be substantial global overcapacity in car manufacturing
Exactly the same problem as the airline industry. When a prestige service becomes a commodity it’s a ‘last man standing’ contest.
I say we improve their competitiveness by providing all their employees with national health care.
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