A Geography Lesson for Bob Dylan and Fiat

Both Made in America

Not Exactly

Chrysler's Super Bowl commercial featuring Bob Dylan has generated significant controversy, with some claiming that Dylan "sold out" and compromised his anti-establishment principles by accepting money to sell automobiles.   (See here, here, here and here for stories or commentary on the topic.)  (John Mellencamp, it should be noted, spurred analogous controversy when he licensed his superb song "Our Country," to Chevrolet, which featured portions of the song prominently in several advertisements for its trucks.)  Perhaps because I am not an expert on Mr. Dylan's principles, this blogger found the content of the advertisement more intriguing and perhaps more controversial.  In particular, the advertisement, which began by asking "is there anything more American than America ?" was a straightforward and well-conceived argument that Americans should buy purported American cars, particularly Chryslers.  A self-described "obsessive Bob Dylan fan" blogging for the Washington Post put it quite well:  "Dylan [was] telling us, in as many words — America rules. Buy an American car. Specifically, buy this Chrysler." 

The advertisement is thus intriguing because Chrysler is, for all intents and purposes, an Italian company.  For more than two years now, Fiat, has owned a majority interest in Chrysler, an arrangement the United States encouraged pursuant to the ill-advised bailout of the failed and defunct firm in 2009.  (See also here.)    Moreover, in early January of this year, Fiat announced that it had purchased the remainder of Chrysler from the United Auto Workers.  Apparently unbeknownst to Mr. Dylan, Fiat is headquartered in Turin (Italy, not Georgia) and also incorporated in Italy.  The firm recently announced that it will declare the United Kingdom as its seat for tax purposes.  In short, Chrysler is no more an American company than, say, Volkswagen Group of America.  The latter, while incorporated in New Jersey and headquartered in Virginia, is a wholly-owned subsidiary of the Volkswagen Group,  incorporated and headquartered in Germany.  To be sure, Fiat still manufactures automobiles in the United States that display the Chrysler trademark. However, like many other foreign manufacturers, Volkswagen also produces automobiles in the United States, including at a billion dollar plant in Chattanooga, Tennessee that employs 3,200 Americans.  (Is there anything more American than Chattanooga?)  Would such cars suddenly become "American" if Volkswagen renamed them for a now defunct American company, e.g., Studebaker or Checker?  If not, then Chryslers are no more "American" than Volkswagens.  If so, then any company that manufactures cars via a wholly-owned subsidiary in the USA can characterize their cars as "American" and appeal to consumers' patriotism as Chrysler has done.  Perhaps next year's Super Bowl will feature several similar commercials touting the virtue of "American" automobile companies such as Toyota (which manufacturers cars in Kentucky), Honda (which manufacturers cars in Indiana), and BMW (which manufactures cars in South Carolina), to name just a few. 

This blogger hastens to add that he is a big fan of free trade and would gladly buy a Fiat, for instance, if such a car otherwise satisfied his needs at a reasonable price.  Moreover, in a free society, individuals should feel completely at liberty to purchase cars wherever they are made and without arbitrary interference by the State.  Such freedom includes the freedom to confine one's purchases to "American" cars out of a sense of patriotism or obligation to one's fellow citizens who own American companies and work for them.  To make such choices, however, Americans and citizens of other nations need accurate information about the nationality of the companies from which they purchase.   Dylan's "Chrysler" commercial will likely do more to confuse such consumers than inform them.

 

Would Clint Eastwood Bail Out Super Bowl Losers, Too?

Bad Product = Low Sales

Did Not Receive A Half Time Bail Out

A Chrysler Super Bowl commerial featuring Clint Eastwood asserts that it is "halftime in America" and that firms like Italian-owned Chrysler are leading an industrial resurgence in the USA.  According to Eastwood:

"Detroit’s showing us it can be done. And, what’s true about them is true about all of us. This country can’t be knocked out with one punch. We get right back up again and when we do the world is going to hear the roar of our engines."

Oddly, Eastwood did not mention that American consumers delivered a knock-out blow to Chrysler, because of the poor products the company offered, like the Dodge Dakota pictured above.   Simply put, Americans preferred cars made by Ford, Toyota, Volkswagen and Honda, for instance.  (See this article in Forbes, which includes the Dakota and other Chrylser products among "the worst cars on the road.")  Then, American taxpayers bailed the company out, to the tune of $1.3 Billion, according to the Department of the Treasury.  (This does not include another $12 Billion in low-interest loans that the company received.)  During the same period, of course, 400,000 other businesses failed and received no such corporate welfare.  It's much easier to "get right back up again" after someone writes you a check for $1.6 Billion.

By contrast, when the New England Patriots underperformed last evening they lost.   There was no half time bailout for Tom Brady et al.  (Nominally, the Patriots were leading, but they were obviously struggling.)  That's the way competition is supposed to work in a free society.   Eastwood should know better.

Should We Celebrate the Auto Bailouts?

$14 Billion FLOP

The President of the United States recently proclaimed the national "bailout" of Chrysler and General Motors a "success," despite the fact that the American Taxpayer will, by the President's own calculation, lose $14 Billion on the combined bailout. Among other things the President claims that the bailout saved a million jobs in the American auto industry and related industries by preventing the failure of the two firms. (For a transcript of the President's speech, go here.) The Washington Post has already announced that the President's speech was "one of the most misleading collections of assertions we have seen in a short presidential speech," and this blog does not find the President's argument convincing, for several reasons.

1. The President assumes that both Chrysler and General Motors, along with the jobs they support (between 100,000 and 150,000 American jobs), would have completely disappeared without the bailout. The President also assumes that hundreds of thousands of other jobs related to the automobile industry would have disappeared as well. Both assumptions are apparently incorrect. To be sure, both firms would have declared bankruptcy, but bankruptcy does not automatically lead to a firm's extinction. The whole point of bankruptcy is to facilitate the renegotiation of a debtor's obligations, in the hope that a streamlined firm will emerge from bankruptcy able to compete again in the marketplace. David Skeel, an expert on the laws of bankruptcy at the University of Pennsylvania Law School, contends in an Op-ed in Monday's Wall Street Journal, that "General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process." My colleague Nate Oman made a similar point in August, 2010 in an Op-ed in the Washington Times. Such restructuring, of course, might have led to a smaller company that focused more on more profitable brands and models that consumers actually wish to purchase, unlike the notorious Pontiac Axtec pictured above. But the company would have hardly disappeared. (Nor would such a company necessarily be any smaller than the bailed out version, as taxpayer subsidies do not increase the demand for GM vehicles.) Ditto for Chrysler which, as Skeel points out, owned the popular "Jeep" brand and is now controlled by Fiat. (Indeed, some readers will recall that Chrysler bought Jeep from then-floundering American Motors Corporation in 1987. AMC, in turn, had purchased Jeep from Kaiser Motors in 1970. AMC and Kaiser are long since extinct as corporations, but the Jeep brand, and the jobs associated with it, live on.) Any fair calculation of the number of GM and Chrysler jobs "saved" by the bailout would have to take into account the fact that, even without the bailout, both firms most likely would have survived. And, of course, if both firms had survived, then firms related to the automotive industry would have survived as well.

2. Even if both Chrysler and GM had failed completely, there is no reason to believe that all jobs supported by the two companies would have disappeared. The existence or not of GM and/or Chrylser does not alter the demand by American consumers for automobiles. Other companies with excess capacity, particularly Ford, could have ramped up production to meet that demand, hiring some of GM's and Chrysler's displaced workers as well as individuals who have never worked in the automobile industry before. (In fact, Ford announced earlier this week that it plans to increase its production by 50 percent over the next few years.) Ditto for American factories owned by Toyota, Honda, BMW, Volkswagen, Kia, Nissan and others. These firms, in turn, would have purchased parts and other inputs from firms that previously served GM and Chrysler. That, after all, is how free economies work --- firms that produce products like the Pontiac Aztec that consumers refuse to buy do not succeed, and firms that ARE producing succesful products thrive. (See here for "10 Cars That Damaged GM's Reputation" by Popular Mechanics). Thus, many of the jobs purportedly saved by the bailout would have survived, albeit at other firms.

3. The President's argument "proves too much," that is, would, if taken to its logical conclusion, justify policies that all or nearly all Americans would reject. Even in the best of economic times, thousands of businesses fail each year, taking countless jobs with them. In good times, however, business expansions and start-ups outpace failures, causing a net increase in employment. In poor economic times, of course, there are more failures and fewer start-ups and expansions to offset such failures, thereby resulting in the sort of large net job losses the economy experienced in this most recent recession. One might naturally ask why it was appropriate, during poor economic times, to expend $14 billion bailing out Chrysler and General Motors while at the same time refusing to bail out thousands of other businesses (and thus the businesses that supplied them) that failed during the same period. The answer, of course, is that any effort to bail out all such failing businesses, that is, to apply President Obama's logic across the board, would have bankrupted the nation. True enough. But then why choose to bail out Chrysler and GM, both of which most likely would have survived anyway? The fact that the bailout saved jobs in one particular sector, while other sectors were also failing, is not a good answer.

4. Finally, President Obama's argument ignores the concept of opportunity cost. As explained earlier on this blog, capital is scarce, and free societies rely upon free markets to allocate scarce capital between competing potential uses. Moreover, the capital has to come from somewhere, either higher taxes or borrowing in credit markets. There is no reason to believe that the national government is in a better position to determine the best use of scarce capital than private markets, where investors generally bear the long term costs and benefits of their investment decisions. Even if the expenditure of $14 Billion in scarce resources saved some jobs, there is no reason to believe that this particular allocation of capital was superior to that which private capital markets would have produced.